Sole Proprietor is Not Employee of Sole Proprietorship

Sole Proprietor is Not Employee of Sole Proprietorship

      In a decision rendered by the Kentucky Supreme Court on May 14, 2015, it clarified the law governing sole proprietorships and the relationship of the sole proprietor thereto, a decision which, in this instance, had a material impact upon the availability of workers compensation coverage. Kentucky Employers’ Mutual Insurance v. Ellington, 2013-SC-000802-WC, 2015 WL 234-0284 (Ky. May 14, 2015).

      Randy Ellington operated his business, R & J Cabinets, as a sole proprietorship (at one time it had apparently been a partnership, but became a sole proprietorship some six years before this case arose). The sole proprietorship maintained a workers’ compensation insurance policy with Kentucky Employers’ Mutual Insurance. In December, 2010, presumably while rendering services on behalf of R & J Cabinets, his sole proprietorship, Ellington slipped on ice at a job site and broke his femur. Thereafter, he filed a claim for workers compensation benefits.

      The insurance policy, in numerous instances, excluded Ellington from coverage. For example, an endorsement with the heading SOLE PROPRIETORS, PARTNERS, OFFICERS AND OTHERS EXCLUSION ENDORSEMENT “specifically stated that there was no bodily injury coverage to any person” named on a certain schedule; it listed Ellington. In fact, on that schedule, Ellington’s name appeared in a column with the heading “Excluded Individual Name.”

      While both the ALJ and the Workers’ Compensation Board determined that coverage was not available, the Court of Appeals reversed, holding there to be an ambiguity in the agreement to the effect that while Ellington was excluded in his capacity as the owner of the business, he could be included as an employee of his sole proprietorship. That determination would be reversed by the Supreme Court. Explaining that the sole proprietor is not their own employer, the Supreme Court wrote:

It is thus evident that the Court of Appeals’ reading misunderstands the nature of a sole proprietorship.  Unlike a corporation or a limited-liability company, a sole proprietorship is not an entity separate from the proprietor.  They are one and the same.  Cf. Black’s Law Dictionary (10^th ed. 2014) (defining sole proprietorship as “[a] business in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity” (emphasis added)). Though we often speak of such people as being self-employed, no one really contemplates that a sole proprietor acts in two capacities, both as employer and employee.  The Court of Appeals’ confusion appears to stem from the fact that Ellington operated his business under an assumed name, rather than his own, as is allowed under KRS 365.015. But again, that does mean that R & J Cabinets was a separate entity from Ellington.  Rather, the use of the assumed name for the sole proprietorship further demonstrates that Ellington and the business were one and the same.

       The Supreme Court went on to undertake a “reasonable expectation” analysis of the policy, concluding therefrom that Ellington could not have had a reasonable expectation that he was covered by the policy.

      This decision is important for a number of reasons.  First, it clarifies the relationship of a sole proprietor to their sole proprietorship. Second, it makes clear that the filing of a certificate of assumed name does not of in itself create a distinct legal entity. Third and perhaps of greatest import, it highlights the importance to sole proprietors who want workers’ compensation insurance coverage to be sure that the policy they have purchased affords them coverage. As an extension thereof, it needs to be recognized that, absent specific riders, members of an LLC are typically not covered by workers’ compensation coverage. Where the LLC’s members are rendering services on its behalf, it is important that they scrutinize their policy to ensure that coverage, if desired, is available. Surprises in this area can be very expensive.