Kentucky Supreme Court Affirms Finding of No “Up The Ladder” Liability for Workers’ Comp Coverage

Kentucky Supreme Court Affirms Finding of No “Up The Ladder” Liability for Workers’ Comp Coverage

      In a decision rendered last Thursday, the Kentucky Supreme Court affirmed the determination that there would not be “up the ladder” liability with respect to Workers’ Compensation liability. At the same time, they affirm the determination that it was the corporation, rather than its shareholders that was the employer. Nonetheless, closer attention to the corporate structure could have avoided many of the items here in dispute. Uninsured Employers’ Fund v. Crowder, 2015-SC-000362-WC, 2016 WL 2605624 (Ky. May 5, 2016).

      In 2009, Eugene Davis and James Dick purchased a Quizno’s franchise. They did this in their individual names. Only later did they organize a corporation, Pulaski Franchises, Inc. While neither the franchise agreement nor the assets of the restaurant were ever transferred to the name of Pulaski, the company’s receipts were deposited into its accounts, and disbursements for wages, taxes and royalty payments due to Quizno’s were paid therefrom.

      Tyler Hibbard was hired to manage the restaurant, and he in turn hired Darlene Crowder to serve as an assistant manager. She began work on April 3, 2010. Just 12 days later, she was severely injured on the job. Unfortunately, the Workers’ Compensation policy, which had been issued in the name of Pulaski, and as of the date of injury lapsed.

      As to efforts to impose up the ladder liability on the franchisor of the Quizno’s restaurants, that being QFA Royalties, LLC (“QFA”), there was testimony that QFA was exclusively devoted to licensing of Quizno’s Restaurants, making all of its profits from franchise fee and monthly royalties. Ultimately, QFA is not in the business of making sandwiches or operating any restaurants. Notwithstanding the detailed requirements set forth in the franchise operating manual, the Supreme Court affirmed the determination below that QFA was not in the business of "making and selling sandwiches to customers.". Further, it found that the role of QFA vis-a-vie an individual Quizno’s restaurants is indistinguishable from the situation reviewed by the Kentucky Supreme Court in Doctors’ Associates, Inc. v. Uninsured Employers’ Fund, 364 S.W.3d 88 (Ky. 2011). In furtherance thereof, the Supreme Court wrote:

In this matter, the ALJ’s determination that QFA does not have up-the-ladder liability is supported by substantial evidence. The ALJ found that QFA is in the business of granting and overseeing franchisee agreements and that, unlike the Quiznos in Somerset, making and selling sandwiches to customers is not a regular and recurrent part of its business. This finding is supported by the fact that QFA did not actually operate any Quiznos restaurant. While the franchise agreement and operating manual do provide detailed instructions on how to manage the restaurants on a day-to-day basis, these guidelines were instituted to protect the brand which QFA sold. Keeping the brand strong is a critical part of QFA’s purpose because it derives its revenue from franchise fees and royalties. Additionally, while the success of individual franchises does benefit QFA, its primary focus is making Quiznos franchises attractive to investors. Thus, since QFA is not in the business of making and selling sandwiches to customers and the Quiznos in Somerset was engaged in that work, QFA cannot be considered the contractor, and does not have up-the-ladder liability in this matter.

      From there, the Uninsured Employers’ Fund had argued that, in addition to treating Pulaski as Crowder's employer, Davis and Dick should likewise be treated as the employers through means of a joint venture. Applying the factors of Huff v. Rosenberg, 496 S.W.2d 352 (Ky. 1973), the administrative law judge had found that no such joint venture existed. This determination was affirmed by the Kentucky Supreme Court. Although the language employed by the court could have been more express, it found that Davis and Dick were as to each other involved in a joint venture, but that Pulaski had been created in order to effect that objective even as it shielded Davis and Dick from personal liabilities arising out of the business.

      The court went on to note that the real question is whether Pulaski was Crowder's employer notwithstanding that the assets of the restaurant in the franchise agreement had never been transferred to Pulaski. “If Pulaski is Crowder's employer, then Davis and Dick are shielded from being jointly and severally liable for the Workers’ Compensation benefits.”

      Based upon facts including that neither Davis nor Dick had any involvement in Crowder's hiring, that Pulaski was incorporated to operate the Quizno’s, and that Crowder was paid from Pulaski's bank account and, had the policy been in place, would've received to Workers’ Compensation benefits from an insurance policy held in Pulaski's name, the record that Crowder was Pulaski's employer was found to be sufficient and affirmed.