“Absolute” No More – Effectively Challenging Workers’ Compensation Liens

Resolving a workers’ compensation lien is a frequent hurdle for attorneys attempting to settle third-party personal injury claims.  By statute, employers have a right to be reimbursed for workers compensation benefits provided to an injured employee if there is a third-party recovery.   Thus, employers that provide workers compensation benefits to an injured employee have an automatic lien against any financial recovery in a personal-injury lawsuit involving the same injury. In light of this statutory subrogation right, settlement demands made by plaintiffs normally incorporate the amount of an outstanding workers’ compensation lien and the lien amount is normally stipulated to as a component of damages at trial.

Because employers are entitled to be reimbursed for workers’ compensation benefits, there is a logical incentive to assist (or at least cooperate with) employees pursuing personal injury claims. After all, the employer can only be reimbursed if its employee prevails.  Because of this inherent incentive, plaintiffs’ attorneys often take for granted that employers will be cooperative during the course of litigation.  There is an expectation that the employer will assist in producing fellow employees for deposition, turn over relevant documents and appropriately comply with subpoenas.

Despite an employer’s financial incentive (and arguably moral obligation) to cooperate during litigation of its employee’s personal injury claim, it does not always happen.  For a variety of reasons employers sometimes take a more obstructive position.   In my experience, employers are more likely to adopt a more obstructive position when the lawsuit is against a third-party vendor or company with which the employer has an important, long-standing business relationship.  Whatever the reason, no matter how uncooperative an employer may be during litigation, it is safe to assume that if the plaintiff does recover in spite of the employer’s obstructive conduct, the employer will nevertheless expect reimbursement for its lien.

It naturally seems unfair that if an employer actively obstructs an employee’s personal injury claim by, for instance, refusing to turn over key documents or attempting to prevent the deposition of co-employees, it should nevertheless be entitled to reimbursement of a lien if there is a recovery.  After all, if an employer takes affirmative steps to hinder an employee’s chances of recovering in a personal injury claim, why should it get the financial benefit of any such recovery?  Yet, even when employers do obstruct an employee’s personal injury claim, they often pursue and receive lien reimbursement anyway.  The reason for this seemingly perverse result is simple.  An employer’s statutory subrogation right has often been interpreted by courts as “absolute,” thus discouraging equitable challenges from employees and counsel.

Although challenging an employer’s subrogation rights on equitable grounds is difficult, it is not hopeless. It is true that an employer’s statutory right to assert a lien against an employee’s third-party recovery has been generally recognized as “absolute,” there is one crucial exception.  The Pennsylvania Supreme Court has ruled that where an employer fails to act in good-faith or is “derelict in its duty so as to subvert its employee’s third-party claim,” as a matter of equity, that the employer will not be permitted to recover its lien.

In Thompson v. Workers’ Comp. App. Board, 781 A.2d 1146, 1154 (Pa. 2001), the Supreme Court noted that:

Although our disapproval of ad hoc equitable exceptions to the statutory right of subrogation, such as those relied upon by the Commonwealth Court below, is enough to decide this particular case, this Court is aware that there may be circumstances where an employer undertakes in deliberate bad faith to subvert a third party suit brought by its employee, circumstances which might require a different calculus.

Based upon this reasoning, the Thompson Court appears to have explicitly carved-out a bad faith and dereliction of duty equitable exception to an employer’s “absolute” right to subrogation, concluding:

Given the substantial benefits conferred upon employers by the Workers’ Compensation Act, and the inherently equitable nature of the doctrine of subrogation, it would be unreasonable to permit an employer both to act in deliberate bad faith to subvert an employee’s third party action, and then to demand subrogation arising from that action. Accordingly, nothing in this Opinion shall be construed as suggesting that subrogation would be appropriate in the face of deliberate, bad faith conduct on the part of the employer.

The rational of the Thompson court is important because it provides a legal “hook” that plaintiff attorneys can utilize to ensure that employer’s act in a good faith, cooperative manner during litigation.  But the Supreme Court’s decision to create an “equitable exception” to an employer’s absolute right to subrogation creates a novel question of jurisdiction.  Historically, the right to “adjudicate” the amount of an employer’s subrogation entitlement has been the province of a workers’ compensation judges and not the Court of Common Pleas.  This jurisdictional issue could present additional problems in challenging an employer’s right to subrogation.  First, attorney’s specializing in personal injury may be unfamiliar with proceedings before a workers’ compensation judge.  More importantly, opening a parallel proceeding before a new judge unfamiliar with the facts of the personal injury action may delay final distribution of the recovery.  For these reasons, it may be beneficial for an employee to have a Common Pleas judge make an equitable determination as to whether an employer can seek subrogation of its lien.  And, it just so happens, the Pennsylvania Supreme Court has recognized limited circumstances whereby the Court of Common Pleas can retain jurisdiction for purposes of determining an employer’s right to pursue subrogation.

In Gillette v. Wurst, 937 A.2d 430 (Pa. 2007), the Pennsylvania Supreme Court held that the Common Pleas Court could exercise jurisdiction over an employer’s subrogation claim under the Workers’ Compensation Act if resolution of the subrogation right included issues outside the scope of an administrative law judge’s authority:

The courts of common pleas lack jurisdiction to adjudicate Workers’ Compensation claims including issues involving subrogation. . . .  However, the issue here does not arise solely under the Workers’ Compensation Act; rather, it demands consideration of the interplay between . . .  unquestioned right of subrogation under the Act, Gillette’s  right to a wrongful death award, and the intestacy laws. Therefore, this matter was properly filed before the trial court rather than an administrative law judge, who would not be in position to adjudicate the wrongful death issue. It is the existence of the valid subrogation claim, not jurisdiction to adjudicate it in the first place, that answers the issue.

Arguably, this language can be interpreted to provide jurisdiction to the Court of Common Pleas in resolving “the existence” of an employer’s subrogation rights if there is substantial evidence that the employer’s failure to act in good-faith or derelict conduct subverted an employee’s ability to pursue a third-party personal injury action.  It can be credibly argued that resolution of such an equitable issue necessarily requires the exercise of the Court of Common Pleas’ broad equitable powers.  Broad equitable powers that administrative law judges do not necessarily possess.  See, e.g., Dollar Tree Stores, Inc. v. Workers’ Comp. App. Board., 931 A.2d 813, 815 (Pa. Commw. Ct. 2007) (“The doctrine of unjust enrichment is an equitable one; the Board, however, does not have its roots in equity. While we do not believe that this fact precludes the Board from employing certain equitable principles, its use of such principles must be restricted in light of its statutory constraints.”).

Although the jurisdictional issue would be a question of first impression, the Thompson decision alone is an important tool for plaintiffs’ counsel.  It can and should be used to ensure reluctant employers cooperate in personal injury actions.  The Thompson decision should also prompt counsel to make a strong record of instances of bad faith or derelict conduct by an employer.  Armed with such evidence, an employer’s historically “absolute” right to subrogation is no longer such a sure thing.

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