Workers’ compensation provides an exclusive remedy against employers for work-related injuries. But does that exclusivity apply to claims against the employer’s landlord when the landlord is a related entity? This was the question addressed by the Vermont Supreme Court recently in Arnold v. Palmer, 2011 VT 8. It highlights the potential for claims against landlords and other parties that plaintiffs’ attorneys would do well to consider.
The plaintiffs in the case were the survivors of Steven Arnold, who had worked for many years at a funeral home. His duties included embalming bodies in a basement room. Over the years, a ventilation system in the embalming room failed, leaving Mr. Arnold exposed to toxic chemicals, including formaldehyde, which caused him to develop cancer. Mr. Arnold pursued a worker’s compensation claim against his employer, and the claim settled shortly before his death. His survivors then sued the lessors of the funeral home property on a theory of premises liability.
The question before the Supreme Court was whether the defendant landlords were “statutory employers” for purposes of Vermont’s workers’ compensation statute. If they were, the claim was barred by the statute’s exclusivity provisions. The definition of such an employer, found in 21 V.S.A. §601(3), includes “the owner or lessee of premises or other person who is virtually the proprietor or operator of the business there carried on.”
The Court determined that the lessor entities (there had been several over the years) were not “virtual proprietors” of the funeral home business and therefore not entitled to the exclusivity bar. This is interesting because of the very close relationship between the funeral home company and the lessors.
At the time of Mr. Arnold’s death, the funeral home director owned 95% of the shares of the funeral home company and was the sole member of the LLC that owned the building. The defense focused on this identity of interests to argue that the lessor was a “virtual proprietor” because its principals and owners were virtually identical to those of the employer. The Court rejected this reasoning and used a “nature-of-the-business” test to determine that the lessor was not a virtual proprietor. It determined that the lessor’s sole business activity was leasing the building to the funeral home. Because that particular activity was obviously not part of the funeral home’s business, the lessor was not a virtual proprietor or statutory employer, and the claim was not barred.
This approach appears significantly to extend the reasoning of prior Vermont case law on a landlord’s liability for work-related injuries to a tenant’s employees. In Vella v. Hartford Vt. Acquisitions, Inc., 2003 VT 108, 838 A. 2d 126, a commercial landlord leased space to a busing company whose employee was injured in a fall. As in Arnold, the Court used the “nature-of-the-business” test to determine that the lessor was not a statutory employer. Unlike in Arnold, however, the Court made much of the fact that the two companies were entirely unrelated. “In this case,” the Court stated, “it is undisputed that defendant is not in the busing business. Rather, defendant is a commercial landlord and a distinct, separately owned corporation that leases space to Premier, but otherwise has no ties to Premier and no supervisory control or authority over Premier or its employees.” Vella, 2003 VT 108 at ¶ 8.
The absence of such an analysis in Arnold is a small but potentially important difference. The Court’s deference to the technical separation between the lessor and lessee entities means that the workers’ compensation exclusivity bar may not apply to even very closely related entities. As a result, premises liability claims may be brought against landlords for work-related injuries even where the employer is only technically a separate entity from the landlord. This is the case in many small to mid-sized businesses in Vermont, where title to the real estate is held by the company’s principals or their separate business entities. Attorneys should bear this in mind before dismissing potential claims as barred by the exclusivity rule.