Workers’ compensation and personal injury lawsuits

If you are a personal injury lawyer or you defend injury claims, you most likely have encountered cases involving a worker injured on the job. One thing that makes these cases unique is the availability of workers' compensation. In California, employees injured on the job are entitled to workers' compensation without regard to fault. In exchange, the worker gives up his or her right to file a civil suit against the employer or any co-employee. See Labor Code Sections 3200 et al.

While the exclusive remedy rule tends to keep these cases out of civil court, in some instances, the worker has a viable tort claim against a third party. For example, a worker may be injured due to a condition of the premises, a defective product, or due to the negligence of another contractor. It may make sense to proceed on two tracks -- filing a workers' compensation claim while also filing a civil lawsuit. Understanding the interplay between workers' compensation and the civil justice system is vital to any lawyer handling these cases.

Employee's Right to Pursue a Third-Party Civil Claim

Generally, an employee cannot file a civil lawsuit against his or her employer or co-employee for negligence. This is due to the "exclusive remedy" provisions of Labor Code Sections 3601 and 3602. While the employee cannot sue the employer, Labor Code Section 3852 preserves the employee's right to bring a civil claim against an at-fault third party: "The claim of an employee ... for compensation does not affect his or her claim or right of action for all damages proximately resulting from the injury or death against any person other than the employer."

Employer's Right to Reimbursement for Benefits Paid

An employer that pays workers' compensation benefits is entitled to seek reimbursement from an at-fault third party. Labor Code Section 3852. This is done in one of three ways: (1) bringing an action directly against the tortfeasor (id.); (2) intervening or joining in an action brought by the employee (Labor Code Section 3853); or asserting a lien against any judgment or settlement obtained by the employee (Labor Code Section 3856(b)). See Duncan v. Wal-Mart Stores Inc., 18 Cal. App. 5th 460, 469 (2017).

Duty to Notify and Involve the Employer

Labor Code Section 3853 requires the employee to notify the employer of any third-party action initiated by the employee. When the complaint is filed, the employee must serve it on the employer, and file proof of service with the court. Further, the employee cannot settle his or her claim (with or without a lawsuit being filed) without first notifying the employer (Labor Code Section 3860). In addition, when the employer has asserted a lien, the employee cannot resolve the entire case without the employer's consent. The employee can, however, resolve his or her personal injury claim exclusive of the lien. See Labor Code Section 3859; Dorroh v. Deerbrook Insurance Company, 223 F.Supp.3d 1081, 1089-90 (E.D. Cal. 2016). As a practical matter, however, most defendants will resist settling the plaintiff's claim without including the employer's reimbursement claim. Still, there are reasons a defendant might do so (e.g., when the defendant is particularly worried about the employee/plaintiff's claim distinct from the reimbursement claim, when there is significant employer or co-employee fault, when the employer is being "unreasonable", or when the employer is not particularly prepared or motivated to pursue the case alone).

Employer's Obligation to Contribute to the "Common Fund"

If the third-party recovery is procured solely by the employee, such as when the employer files a lien and sits back waiting for the employee to obtain a settlement or judgment, or files a complaint in intervention but does nothing more, the employer is required to contribute to the attorney fees and costs incurred by the employee. This requirement is based on the equitable principles embodied in the "common fund doctrine" (i.e., a passive beneficiary of a common pool of funds secured by another party should contribute to the costs associated with the recovery). See Quinn v. Warnes, 144 Cal. App. 3d 309, 311 (1983), codified at Labor Code Sections 3856(c) and 3860(c). The required contribution is enforced by the trial court, which deducts a reasonable attorney fee and proportional costs from the employer's reimbursement claim. See Labor Code Sections 3856(e), 3860(e). For example, if the employee's attorney charges a 40 percent contingency fee, the lien might be reduced 40 percent plus a share of the costs incurred in pursuing the third-party claim.

Any reduction of the reimbursement hinges on the role of the employer in the recovery. Importantly, if the action that leads to recovery is "prosecuted by both the employee and employer," fees and costs are not allocated. The employer and employee pay their own costs and fees out of their respective portion of the recovery, before the reimbursement is paid. See Labor Code Sections 3856(c) and 3860(e). As long as the employer's lawyer takes an "active" role in the recovery, the employer's reimbursement claim will not be reduced. See Hartwig v. Zacky Farms, 2 Cal. App. 4th 1550 (1992); Kavanaugh v. City of Sunnyvale, 233 Cal. App. 3d 903 (1991); Walsh v. Woods, 187 Cal. App. 3d 1273 (1986); Kaplan v. Industrial Indem. Co., 79 Cal. App. 3d 700 (1978).

Employer/ Co-Employee Fault

The employer's right to reimbursement will also be affected by any employer and/or co-employee fault.

In Witt v. Jackson, 57 Cal. 2d 57 (1961), the California Supreme Court held that an employer is barred from seeking reimbursement for benefits paid when the employer is at least partially at fault for the worker's injuries. To avoid a "double recovery" by the plaintiff, the injured employee's damages "must be reduced by the amount of workmen's compensation he received." Id.

In Li v. Yellow Cab Co., 13 Cal. 3d 804 (1975), the California Supreme Court abandoned the doctrine of contributory negligence in favor of a comparative fault system. Thereafter, an at-fault plaintiff would no longer be barred from recovery; rather, the plaintiff's recovery would be reduced by the degree to which the plaintiff was at fault. Each defendant remained jointly and severally liable for the plaintiff's damages reduced for any plaintiff fault.

Following Li, the question was whether an employer's right to reimbursement would be impacted, if at all, by the new comparative fault rule. In Associated Construction & Engineering Co. v. Workers' Compensation Appeals Board, 22 Cal. 3d 829 (1978), the California Supreme Court answered this question. Specifically, the court held that a concurrently negligent employer's reimbursement claim is not totally barred. The employer may obtain reimbursement for any amount of compensation paid which exceeds the employer's proportional share of the injured employee's civil damages. Thus, for example, if the employer was found 20 percent at fault for the plaintiff's civil damages and the damages totaled $100,000, the employer could recoup the cost of any benefits provided in excess of $20,000. On the other hand, if the employer's share of the civil damages equaled or exceeded benefits paid, the employer could not recover. Again, to avoid a double recovery, the third-party defendant remained entitled to a credit for the amount of benefits provided by the employer up to the employer's share of civil damages. Any benefits paid beyond that were reimbursable to the employer.

Joint/Several Liability Issues

In American Motorcycle Association v. Superior Court, 20 Cal. 3d 578 (1978), the California Supreme Court considered whether to retain joint and several liability after it adopted comparative fault in Li. If plaintiff fault could be compared to that of a defendant to adjust liability, why not allocate fault among tortfeasors? The court ultimately elected to retain joint and several liability, reasoning that culpable defendants, rather than the injured plaintiff, should bear the risk of inadequate contribution by others responsible for the harm. Id. at pp. 588-90.

In 1986, California voters approve Proposition 51, aimed at addressing the perceived inequities of joint and several liability (the so-called "deep-pockets" problem). Under the then-existing system, a defendant would be 100 percent liable for plaintiff's total damages (economic and noneconomic) reduced by plaintiff fault, even if the defendant was found only 1 percent at fault. To mitigate this potentially harsh result, Civil Code Section 1431.2 provided that "the liability of each defendant for non-economic damages shall be several only and shall not be joint." In other words, the new law eliminated joint and several liability for noneconomic damages.

In regards to workers' compensation, the question then became whether the elimination of joint and several liability for non-economic damages would affect employer reimbursement claims and third-party credit rights. If a defendant is only severally liable for non-economic damages, the employer's right to recover benefits paid against the defendant might be restricted (e.g., if the benefits are considered at least partially non-economic damages). Also, since each defendant was now only liable for its share of non-economic damages, it no longer made sense to provide a credit against a defendant's non-economic damages for benefits paid for by a different entity or person.

In Torres v. Xomox Corporation, 49 Cal. App. 4th 1 (1996), the court addressed the issue of whether a third-party defendant could assert a full credit for workers' compensation benefits paid. Following the analogous method for determining credit for pre-trial settlements, the court held that workers' compensation benefits must be allocated between economic and noneconomic damages. The defendant is entitled to a credit only for the "economic" portion of benefits paid, determined by the ratio of economic damages to non-economic damages determined by the trier of fact. Id. at 7. Thus, if 50 percent of the damages awarded by the jury are economic damages, the defendant is entitled to a credit for 50 percent of the benefits paid.

In Salice v. Performance Cleaning Systems, 50 Cal. App. 4th 221 (1996), the court utilized the same approach as Torres (allocating workers' compensation benefits between economic and noneconomic damages based on the jury verdict). Salice also addressed a related issue of whether workers' compensation benefits could be credited against noneconomic damages: "As pointed out in the Hoch case, respondent is entitled to no deductions from noneconomic damages, since those damages represent its full share of responsibility, and would not change under any theory. (citation)." Id. at 238.

Thus, following Torres and Salice, only the "economic" portion of benefits received by an employee (as determined by the ratio of economic damages to non-economic damages allocated by the trier of fact) will be credited against the third party's liability, and even then, only against economic damages.

Employer's Right to a Credit Against Future Benefits

An employer can assert a credit against future workers' compensation benefits for the amount of any civil settlement or judgment recovered by the employee. Labor Code Section 3861. Procedurally, the employer applies to the Workers' Compensation Appeals Board for credit. Thus, it is imperative that the lawyer representing the employee understands the potential benefits at risk before entering any settlement or proceeding to trial.

In some instances, future benefits can be substantial including when the employee needs lifetime medical care. Also, in general, a dollar of workers' compensation benefit is more valuable to the employee than a dollar recovered through a third-party claim. This is because attorney fees are typically higher in the civil case.

Of course, future benefits can be addressed in the context of third-party settlements. Typically, though, the plaintiff will need to offer something to the employer to protect these benefits. In addition, of course, if the workers' compensation case is fully resolved (e.g., the employee/applicant has entered a "compromise and release" of all workers' compensation claims), there will be no future benefits against which a credit can be asserted. This avoids the uncertainty surrounding the impact of a potential settlement. But remember, any money paid by the employer to resolve the workers' compensation case before the civil recovery occurs will simply be added to the employer's reimbursement claim.

Other Considerations

Coordinating with applicant's counsel. For a number of reasons, counsel for the employee should attempt to coordinate closely with the employee's workers' compensation attorney (the applicant's attorney) in cases where the employee has separate counsel. First, the evidence developed in the workers' compensation system will often be admissible and potentially important in the civil case. For example, the employee will likely have treated with workers' compensation-approved medical care providers. The applicant's attorney will have a role in advocating for appropriate care, including with care providers who may eventually weigh in during the civil case regarding the employee's injuries and future care needs. Second, as noted above, the payment of workers' compensation benefits can impact the employee's recovery in the civil suit, and vice versa. The attorneys should work together to maximize the client's total recovery. Third, of course, it is a matter of basic professional courtesy for the plaintiff attorney and applicant attorney to keep each other apprised of developments in their respective cases. It really should be a joint effort.

Purchasing the workers' compensation lien. One option for both the defendant and plaintiff is to attempt to purchase the workers' compensation lien or settle the reimbursement claim separate from the personal injury case. Typically, the employer is eager to resolve its claim. Often the claim can be purchased at a pretty steep discount. For the defendant, buying the lien limits the defendant's potential exposure. It also eliminates the plaintiff's need to satisfying a lien, which could potentially make settlement more tenable. The employer's motivation to resolve the lien will likely be determined by the strength of plaintiff's theory against the third-party defendant, the costs associated with remaining involved in the case, and the potential employer/co-employee's "fault." Either way, whether you represent the plaintiff or defendant, it's always good to engage the employer early to give yourself a better sense of the potential for a settlement which includes the employer.

Relations with the employer and/or the employer's Lawyer. As the plaintiff's lawyer, you will likely need the employer's help and in turn will want to help the employer. The employer may have valuable information to help prosecute the civil case. The employer may be able to secure important evidence or witnesses. In addition, the employer is typically aligned with the employee regarding liability -- both want to maximize the third-party defendant's fault and minimize the employer's fault (i.e., unrecoverable fault). Hostility between the plaintiff lawyer and the employer will not advance these interests and may in fact hurt them.

Trial considerations There are also trial considerations. For example, do you want the workers' compensation subrogation case to be tried with the civil case? If the employer remains in the case, the jury will be informed that the employer is seeking reimbursement for benefits paid, thus bringing collateral source benefits before the jury. You may or may not want the employer's lawyer involved in presenting the case. While the subrogation attorney will be largely aligned with the plaintiff and motivated to help the plaintiff obtain the biggest damage award possible while mitigating employer/co-employee fault, the employer's lawyer may not be very adept at presenting the case at trial. The employer's attorney might "screw up" the plaintiff's case. On the other hand, the employer's lawyer may be great at trial or may have experts or other resources helpful to the plaintiff. Regardless of whether you are on the defense or plaintiff side, you'll want to consider whether having the employer involved at trial is a good thing.

Conclusion

Whether you are a plaintiff's lawyer, an applicant's lawyer, liability defense or workers' compensation subrogation lawyer, it is imperative you understand the interplay between the workers' compensation system and third-party personal injury claims. As discussed at length above, there is a lot to consider.

For the plaintiff's lawyer, deciding whether to pursue a third-party case will hinge in part on how that case might impact the client's workers' compensation case, and the client's prospects for a reasonable net recovery in the civil case after considering the potential reimbursement claim and employer/employee fault (i.e., fault that represents unrecoverable liability). Also, coordinating the civil case with the applicant's attorney is critical since evidence in the workers' compensation case can become important in the civil case, and the workers' compensation case and civil case can dramatically affect each other.

For the third-party defense lawyer, understanding how the workers' compensation case and subrogation rights can affect the plaintiff's civil case will give you an advantage in trying to resolve the case. For example, you may have an opportunity to buy the workers' compensation lien cheap, thus improving the chance of settlement while limiting your client's exposure.

And for the subrogation attorney, understanding third-party liability issues and the rules affecting subrogation rights, especially where there is considerable employer and/or co-employee fault, will be important in your decision making. Because there are so many tricky issues in these cases, often a global settlement is the best way to control your risk and avoid a big mistake.