Sole proprietor not ‘employee’ under workers’ comp law

A Virginia court has rejected an insurance company’s argument that the owner of an unincorporated cleaning business should be counted as an employee along with her two hired workers, thereby subjecting the business to the Virginia Workers Compensation Act, or VWCA.

When an employee sued the owner after a car accident they were involved in on the way to a job, the insurer refused to defend, reasoning that its policy excluded claims that were eligible for workers’ compensation.

But Fairfax County Circuit Court Judge David Bernhard found that the insurer was “not entitled to judgment as a matter of law because [the owner] is the sole proprietor of her unincorporated cleaning business and has not elected coverage as an employee under the VWCA.”

Bernhard also rejected the insurer’s argument that the cleaners were employed by the business’s customers “since that result is inconsistent with the VWCA’s purpose.”

The opinion is New South Insurance Co. v. Lopez, et al. (VLW 022-8-073).

Injury claim

Susana Carrillo Lopez marketed her home cleaning business under the name “Susana’s Cleaning Service,” and she operated from her home. Lopez didn’t incorporate or have a separate tax ID for her business, but she maintained a separate bank account.

She hired two workers to assist her with cleaning homes three days a week and transported them to and from jobs. Lopez paid her workers for cleaning time but not transportation time.

Although Lopez never purchased workers’ compensation insurance, she bought a liability policy with New South Insurance in June 2017. The policy excluded liability claims when an injured person was entitled to workers’ compensation.

In December 2017, Lopez and her workers were involved in a car accident while driving to a customer’s home. When one of the workers sued Lopez for negligence, New South sought a declaratory judgment to determine its obligations.

No third employee

New South argued its policy excluded the claim because the cleaning business had three employees, including Lopez, and was therefore obligated under the VWCA to provide workers’ compensation insurance.

But Bernhard explained that if a business “‘has fewer than three employees “regularly in service,” it is not subject to the [VWCA] and has no obligation to provide its employees with workers’ compensation benefits.’”

Finding that Lopez only had two employees regularly in service, the judge concluded she was not “automatically subject” to the workers’ comp statute.

Bernhard said that, under the plain language of the statute, “a proprietor of an unincorporated business does not fit neatly within such a definition” and rebuffed the insurer’s argument that Lopez was also an employee of her business.

“The VWCA includes specific guidance for circumstances where one individual is wholly responsible for a business; for example, sole proprietors, shareholders of a stock corporation having only one shareholder, and members of a limited liability company having only one member,” Bernhard explained. “The statute states that these individuals must ‘elect[] to be included as an employee under the workers’ compensation coverage of such business [and notify] the insurer … of this election.’”

Here, the judge found that Lopez was a sole proprietor because she never incorporated, didn’t have an office and owned the business’s assets.

As a sole proprietor, Lopez “may elect to be deemed an employee under the VWCA by obtaining insurance [and] may still have employees subject to the VWCA’s provisions, even if they have failed to elect coverage for themselves.”

“However, ‘[i]n determining the number of employees a sole proprietor has “regularly in service,” a sole proprietor is excluded from the calculus unless an election is made to be included as an employee under workers’ compensation coverage and the insurer is notified of the election,’” Bernhard noted.

Because Lopez didn’t purchase workers’ compensation insurance and didn’t notify an insurer about an election, the judge concluded that she wasn’t an employee of the business under the VWCA.

True employer

Bernhard found unpersuasive New South’s alternative argument that Lopez’s customers were the true employers of her workers.

“[T]his interpretation is a strained construction inconsistent with the statutory scheme,” he wrote.

“The record does not indicate that [the injured employee] is under a contract of hire to any customers of Susana’s Cleaning Service but rather performs services as directed by Lopez,” Bernhard pointed out. “To the extent that any employment contract … exists in this case, the contract is between [the employee] and Lopez. The scope of the VWCA encompasses the relationship between an employer and its employees rather than between the employees and the employer’s customers.”

Finding nothing to indicate that the injured worker interacted with or was paid directly by customers, Bernhard said there was no employment relationship there.

“The VWCA includes specific guidance for circumstances where one individual is wholly responsible for a business; for example, sole proprietors, shareholders of a stock corporation having only one shareholder, and members of a limited liability company having only one member. The statute states that these individuals must ‘elect[] to be included as an employee under the workers’ compensation coverage of such business [and notify] the insurer … of this election.’”

— Fairfax County Circuit Court Judge David Bernhard

‘Ultimate arbiters’

David Falcon Jr. of Ackerman Falcon in Vienna has handled thousands of injured worker claims. He told Virginia Lawyers Weekly he usually searches for a third employee so his client can seek workers’ compensation.

“Here you had the flip side, but it’s precisely what the law intended,” he said. “You don’t want a situation where you have an injured person who can’t get workers’ comp and they don’t have an insurance company to go after.”

Meanwhile, John Johnson, a litigator based in Roanoke who has defended numerous injury claims, said he was surprised by the insurance carrier’s approach.

“The VWCA, being in derogation of common law, must be strictly construed, and the law is pretty clear that the employer is the ‘employer,’” he said.

Herndon attorney Doug Landau of Abrams Landau represents injured workers in several states along the east coast. He advised practitioners to “be particularly careful and thorough in briefing so judges will understand the jurisdiction of the VWCA.”