UNINSURED EMPLOYERS' FUND v. RELIANCE NATIONAL INDEMNITY CO.; FARMERS INSURANCE EXCHANGE; COLONIAL COAL CO.; ENTERPRISE COAL CO.; BILL MONT COAL; R.S. MINING, INC.; QUAD FUELS, INC.; GAMBLE COAL CO; PHELPS COAL & LAND CO.; JEFFREY BLANKENSHIP; JOHN CHAPMAN; VINCENT R. JOHNSON; HOMER RAY PREECE; THOMAS SALMONS; WAUSAU INSURANCE CO.; COMPETITIVE EDGE PERSONNEL CO.; SPECIAL FUND; HON. W. BRUCE COWDEN, ADMINISTRATIVE LAW JUDGE; AND WORKERS' COMPENSATION BOARD COLONIAL COAL COMPANY v. THE WORKERS' COMPENSTAION BOARD JEFFREY BLANKENSHIP; GAMBLE COAL CO.; COMPETITIVE EDGE PERSONNEL SERVICES; RELIANCE NATIONAL INDEMNITY CO; FARMERS INSURANCE EXCHANGE; SPECIAL FUND; UNISURED EMPLOYERS' FUND; HON. W. BRUCE COWDEN, ADMINISTRATIVE LAW JUDGE; AND WORKERS' COMPENSATION BOARD
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RENDERED: AUGUST 8, 2003; 10:00 a.m.
NOT TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2000-CA-002528-WC
UNINSURED EMPLOYERS' FUND
v.
APPELLANT
PETITION FOR REVIEW OF A DECISION
OF THE WORKERS’ COMPENSATION BOARD
ACTION NOS. WC-95-15471, WC-96-09293, WC-96-80054,
WC-96-80056 WC-97-01258, WC-97-01840, WC-97-01866
AND WC-098-00398
RELIANCE NATIONAL INDEMNITY CO.;
FARMERS INSURANCE EXCHANGE;
COLONIAL COAL CO.; ENTERPRISE COAL CO.;
BILL MONT COAL; R.S. MINING, INC.;
QUAD FUELS, INC.; GAMBLE COAL CO;
PHELPS COAL & LAND CO.; JEFFREY BLANKENSHIP;
JOHN CHAPMAN; VINCENT R. JOHNSON;
HOMER RAY PREECE; THOMAS SALMONS;
WAUSAU INSURANCE CO.; COMPETITIVE EDGE
PERSONNEL CO.; SPECIAL FUND;
HON. W. BRUCE COWDEN, ADMINISTRATIVE LAW
JUDGE; AND WORKERS' COMPENSATION BOARD
AND
NO. 2000-CA-002643-WC
COLONIAL COAL COMPANY
v.
APPELLEES
CROSS-APPELLANT
CROSS-PETITION FOR REVIEW OF A DECISION
OF THE WORKERS’ COMPENSTAION BOARD
ACTION NOS. WC-96-80054 AND WC-97-01840
JEFFREY BLANKENSHIP; GAMBLE COAL CO.;
COMPETITIVE EDGE PERSONNEL SERVICES;
RELIANCE NATIONAL INDEMNITY CO;
FARMERS INSURANCE EXCHANGE; SPECIAL FUND;
UNISURED EMPLOYERS’ FUND; HON. W. BRUCE
COWDEN, ADMINISTRATIVE LAW JUDGE; AND
WORKERS’ COMPENSATION BOARD
CROSS-APPELLEES
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
BUCKINGHAM, DYCHE AND JOHNSON, JUDGES.
JOHNSON, JUDGE:
The Uninsured Employers’ Fund (UEF) has
petitioned for review of an opinion of the Workers’ Compensation
Board entered on October 4, 2000, in which the Board concluded
that Reliance National Indemnity Company (Reliance) and Farmers
Insurance Exchange (Farmers) were not responsible for workers’
compensation coverage in the claims filed by the employees in
this action.
The Board also concluded that several “up the
ladder” prime contractors, namely Colonial Coal Company, Phelps
Coal and Land Company, and Enterprise Coal Company, were liable
for the payment of compensation to the employees of their
subcontractors pursuant to Kentucky Revised Statutes (KRS)
342.610(2).
Colonial Coal Company has filed a cross-petition
pertaining to its liability under KRS 342.610(2).
Having
concluded that the Board did not “overlook or misconstrue
controlling statutes or precedent or commit an error in
2
assessing the evidence so flagrant as to cause gross injustice”,1
we affirm.
In August 1995 James Taylor contacted Gene Eisenmann,
an insurance agent employed by Hanafin Bates & Associates, for
the purpose of securing workers’ compensation insurance for
Worldwide Personnel Services (Worldwide).2
that he was a consultant for Worldwide.
Taylor told Eisenmann
Taylor explained that
Worldwide was located in Jackson, Mississippi and that the
company was engaged in the business of employee leasing.3
Eisenmann forwarded Taylor’s request to Cynthia Burks, an
underwriter for Reliance.
Burks then drafted a retroactive
workers’ compensation insurance policy for Worldwide.
Reliance
was listed as the insurance carrier and Worldwide was listed as
the insured.
1995.4
The policy was issued to Worldwide on August 1,
Approximately three months later, Worldwide assigned 51%
of its stock to Omicron Holdings Corporation (Omicron).5
1
Shortly
Western Baptist Hospital v. Kelly, Ky., 827 S.W.2d 685, 687-88 (1992).
2
Hanafin Bates & Associates acts as a brokerage firm for Reliance National
Indemnity Company, a liability insurer. Hanafin’s principle place of business
is located in Dallas, Texas. Hanafin is authorized to solicit business and
deliver insurance policies on behalf of Reliance.
3
In particular, Taylor claimed that Worldwide provided certain employee
services, such as workers’ compensation coverage, to companies at a
discounted rate.
4
Worldwide paid an initial down payment of approximately $250,000.00.
Thereafter, Worldwide was required to pay a monthly premium based upon its
payroll.
5
Omicron was owned and operated by Taylor. Omicron was also headquartered in
Mississippi.
3
thereafter, Worldwide requested that Reliance list Omicron as an
additional insured on its insurance policy.
Omicron represented
itself as a holding company with Worldwide as its sole
subsidiary.
On or about November 10, 1995, Reliance added
Omicron to the policy and Worldwide was covered as a subsidiary.6
Worldwide then informed Reliance that all future business would
be conducted under the name of its parent company, Omicron.
In February 1996 Omicron started falling behind on its
monthly premium payments to Reliance.
Shortly thereafter,
Reliance learned that Omicron had engaged in business in Maine,
a state that was specifically excluded under its insurance
policy.7
To further complicate matters, Omicron informed
Reliance that it had just formed Competitive Edge Personnel
Services (CEPS), an employee leasing company.8
Consequently,
Eisenmann, the insurance agent, met with James Roark, the
president of CEPS, to discuss Omicron’s newly-formed subsidiary.
At this time, Roark informed Eisenmann that CEPS intended to
enter into “co-employment” arrangements with prospective
6
Consequently, Omicron agreed to pay a monthly premium to Reliance, based
upon its payroll.
7
In particular, Omicron entered into an agreement with Combined Management,
Inc. (CMI), a Maine corporation engaged in the business of employee leasing,
whereby CMI agreed to convey 51% of its outstanding shares to Omicron,
thereby becoming a subsidiary of the holding company. See e.g., Combined
Management, Inc. v. Reliance National Ins. Co. No. CV-96-101, 1996 Me. Super.
Lexis 393 (December 9, 1996).
8
CEPS was incorporated in Texas. Taylor assumed no official position with
CEPS, however, he was hired as a consultant.
4
clients.
Eisenmann advised Roark not to enter into any “co-
employment” arrangements as such arrangements were not
permissible under Omicron’s policy.
Roark then assured
Eisenmann that CEPS would not participate in any “co-employment”
arrangements.
Shortly thereafter, Taylor approached Eisenmann and
informed him that CEPS was interested in marketing its services
to several coal mines.
Eisenmann informed Taylor that Reliance
did not write insurance policies for coal mines.
Eisenmann
confirmed his discussion with Taylor in a written letter
addressed to Omicron dated March 28, 1996.9
Omicron subsequently
informed Eisenmann that his services were no longer necessary.
Around the same time that Omicron’s relationship with
Reliance began to deteriorate, Larry Lineville, an insurance
agent in Richmond Kentucky, began contacting various Kentucky
coal mining operations on behalf of CEPS.
Lineville claimed he
could offer the mines workers’ compensation insurance at a
discounted rate through CEPS.10
Consequently, several Kentucky
coal mines entered into “co-employment” arrangements with CEPS.
In summary, CEPS advised the mines to terminate all of their
9
In the letter, Eisenmann informed Omicron that any new clients or employers
in the coal mining industry would not be afforded coverage under its current
policy as “the workers compensation program for Omicron [did] not include
risks or classifications in the coal mining industry.”
10
According to the record, David Callarman, a CEPS salesman, also met with
the mines on behalf of CEPS.
5
employees, which they did.
CEPS then rehired the employees and
leased them back to the mines.11
The alleged purpose of this
procedure was to allow CEPS to provide the mines with lower
workers’ compensation rates for their employees.
The mines
agreed to pay CEPS a specified sum and in return CEPS agreed to
provide the mines with workers’ compensation coverage through
its policy with Reliance.
The mines never relinquished control
of their day-to-day operations and they continued to maintain
complete control over their former employees.
The mines also
continued to maintain their own payroll.12
In May 1996 Cindy Burks received a telephone call from
Libby Simpson, a claims representative for the Kentucky
Department of Workers’ Claims, concerning a claim filed in
Kentucky that involved Gamble Coal Company.
Simpson informed
Burks that Reliance was listed as the insurance carrier for
Gamble Coal.
Reliance also learned that coverage notices
listing it as the insurance carrier, commonly referred to as
WCI-1 forms, had been filed with the Kentucky Department of
Workers’ Claims for several other Kentucky coal mining
operations, namely R.S. Mining, Bill Mont Coal Company, Heath
Mining, Pace Mining, Quad Fuel, Hope Mining, Husky Mining, and
11
CEPS required the employees to sign a “co-employment” agreement.
12
CEPS never informed Reliance of its “co-employment” arrangements with the
mines. Consequently, Omicron, CEPS’s parent company, was never billed for any
coal mining operations pursuant to its workers’ compensation policy with
Reliance.
6
Black Star Mining.
Reliance, however, never filed any coverage
notices for the mines.13
Consequently, Reliance began the
process of terminating Omicron’s coverage.14
Undeterred by Omicron’s strained relationship with
Reliance, Taylor contacted Mike Whitis, a self-employed
insurance agent who served as a broker for Farmers Insurance
Exchange.
Taylor told Whitis that he was a consultant for CEPS
and that he was wanting to secure workers’ compensation coverage
for the firm.
Taylor described CEPS as a risk management firm
operating out of Texas.
of 13 employees.
Taylor told Whitis that CEPS consisted
He also told Whitis that CEPS was not engaged
in the business of employee leasing.
Consequently, on May 29,
1996, Whitis faxed an application for workers’ compensation
coverage to the underwriting department at Farmers.
On the
application, CEPS was described as a human resource consulting
firm that employed a staff of 13 office and sales employees.
The application was approved by Farmers and a quote was issued
based on the information provided by CEPS.
A workers’
13
In order for CEPS to have obtained workers’ compensation coverage for the
various coal mines, either CEPS or Omicron would have had to report a
material change in its operations to Reliance. This was never done. The name
of the underwriter listed on the coverage notices is Gary Trigleth. Trigleth
was never employed by Reliance or Hanafin Bates & Associates. Trigleth was,
however, employed by CEPS.
14
As these problems began to surface, Reliance attempted to audit Omicron.
Omicron, however, failed to provide the information requested by Reliance in
its audit. Omicron’s policy with Reliance was canceled effective July 2,
1996. As of July 1, 1996, CEPS had entered into “co-employment” arrangements
with over 30 companies across the United States.
7
compensation insurance policy was issued to CEPS on July 2,
1996.
Farmers was listed as the insurance carrier and CEPS was
listed as the insured.
Farmers made all the appropriate filings
with the state of Texas and CEPS began making payments on the
policy.
Shortly thereafter, Taylor met with Whitis and offered
him $6,000.00 to prepare certificates of insurance that named
the mines CEPS had contracted with as certificate holders.
Although he was not authorized to do so,15 Whitis prepared the
certificates and forwarded them to Taylor, who then forwarded
the certificates to the mines.
It appears that the purpose of
this scheme was to convince the mine operators that they had
workers’ compensation coverage through Farmers.
After the mines
received the certificates of insurance, CEPS started collecting
insurance premiums from the mines.
CEPS deposited these
receipts in a company checking account, which was used to pay
the firm’s operating expenses.
its dealings with the mines.
CEPS never informed Farmers of
Consequently, CEPS was never
billed for any coal mining operations pursuant to its workers’
compensation policy with Farmers.
On July 25, 1996, Farmers received notification from
the Kentucky Department of Workers’ Claims that several coal
mine operators in Kentucky were under the impression that they
15
Whitis had no authority to broaden or extended coverage under the policy.
8
had insurance coverage from Farmers.
Shortly thereafter,
Farmers learned that CEPS was engaged in the business of
employee leasing.
Farmers also learned that Whitis had prepared
falsified certificates of insurance.
attempted to cancel CEPS’s policy.
Farmers immediately
Taylor, however, managed to
thwart the process on two separate occasions.
In the interim, the Commissioner of the Kentucky
Department of Workers’ Claims, Walter Turner, began to suspect
fraud on the part of CEPS.
Consequently, a hearing was held on
July 30, 1996, for the purpose of addressing the Commissioner’s
concerns.
On August 5, 1996, the Commissioner issued an order
in which he concluded that CEPS had failed to demonstrate that
workers’ compensation coverage existed for the mines listed on
the coverage notices filed with the Department of Workers’
Claims.
Immediately thereafter, CEPS wrote to Farmers
requesting cancellation of its coverage effective August 8,
1996.
On August 22, 1996, Farmers notified the State of Texas
that CEPS’s policy had been cancelled due to fraud.
Farmers
then filed a declaratory judgment action in the State of Texas
against CEPS and its principals.
In particular, Farmers sought
recision of the workers’ compensation policy it had issued to
9
CEPS due to “fraud in the inducement.”
On February 2, 1998, a
Texas state court granted summary judgment in favor of Farmers.16
Shortly after Farmers filed suit in Texas, several of
the Kentucky coal mines that had contracted with CEPS filed suit
in the United States District Court for the Eastern District of
Kentucky, alleging fraud and breach of contract.
On September
9, 1996, the Court entered its findings of fact and conclusions
of law.
The Court found that CEPS had accepted premiums from
the mines for the purpose of providing them with workers’
compensation coverage, which it never provided.
On November 20,
1996, the mines entered into a settlement agreement with the
president of CEPS, James Roark, whereby Roark agreed to return
the premiums to the mines.
Around the same time frame, an
indictment was issued against James Taylor in the United States
District Court for the Northern District of Texas, charging him
with several counts of mail fraud, conspiracy to commit mail
fraud, wire fraud, and money laundering for his activities in
connection with Omicron, Worldwide and CEPS.
Taylor was
convicted on February 25, 1998.
In the aftermath of this debacle, several coal miners
filed workers’ compensation claims in Kentucky.
Due to the
false coverage notices filed by CEPS, Reliance and Farmers were
both identified as insurance carriers for the individual coal
16
The Texas court concluded that the policy issued by Farmers to CEPS was
void ab initio due to fraud in the procurement of the contract.
10
companies involved.
Reliance was identified as the insurance
carrier on claims filed by John Chapman, an employee of Bill
Mont Coal Company, Jeffrey Blankenship, an employee of Gamble
Coal Company, and Vincent Johnson, an employee of R.S. Mining.
Farmers was identified as the insurance carrier on claims filed
by Homer Preece, an employee of Bill Mont Coal Company, and
Thomas Salmons, an employee of Quad Fuel.
These five claims, as
well as several others, were consolidated and the issue of
coverage was separated.
After the ALJ considered an incredible amount of
evidence, he entered an opinion and order on January 22, 1999,
in which he concluded that no coverage had been afforded to the
mines through the policies issued by Farmers and Reliance.
The
ALJ reasoned that the “co-employment” arrangements entered into
between CEPS and the various coal companies were a “sham” and,
therefore, unenforceable.17
The ALJ’s opinion reads, in relevant
part, as follows:
[I]t is clear that the record does not
indicate in any way that an employment
relationship existed between [CEPS] and the
individual contract mines themselves
inasmuch as the factors delineated in
17
As a preliminary matter, we note that the ALJ correctly asserted
jurisdiction over the case. See e.g., Custard Insurance Adjusters, Inc. v.
Aldridge, Ky., 57 S.W.3d 284, 287 (2001). “[T]he fact-finder has jurisdiction
to decide questions affecting the insurer’s obligation to pay workers’
compensation benefits on behalf of its insured. Furthermore, having been made
a party, an insurer may question whether or not it had issued a valid,
outstanding policy that covered the employer at the time of the worker’s
injury” [citation omitted]. Id. See also Larson’s Workers’ Compensation Law,
Vol. 9 § 92.40 at 92.41 (1997).
11
Ratliff v. Redmon, Ky., 396 S,W,2d 320
(1965) can not be met. For example, it is
clear that [CEPS] did not exercise control
over the details of work. Moreover, the
occupation of coal mining is certainly
distinct from the purposes of safety
consulting and human resources [ ]. The
evidence further reveals that it was the
coal mines themselves that supplied their
own equipment and made the payroll and also
paid the insurance. . . . Nor can it be
demonstrated that the coal mines were lent
employees or were operating under a dual
employment doctrine [citations omitted].
. . . .
[T]he ALJ finds that fraud has been
perpetrated upon Farmers Insurance Exchange,
Reliance National Indemnity, [ ] and the
various coal mines by CEPS and its officers.
The co-employer agreements entered into
between [CEPS] and the various coal mines
are a sham and based on this fact and the
finding of fraud, the ALJ specifically finds
that no insurance coverage has been afforded
under the policies of Farmers Insurance
Exchange [and] Reliance National Indemnity,
[ ] to the various coal mines in question.
The ALJ further concluded that Farmers was not bound
in any way by the actions of Whitis.
The ALJ noted that “a
principal is never bound where the person dealing with the
agent, knows or has reason to know, the agent is exceeding his
authority.”18
The ALJ based his decision in large part on
several volumes of deposition testimony, which included the
18
See e.g., Gaines v. Murphy, Ky., 239 S.W.2d 453, 455 (1951). See also 3
Am.Jur.2d, Agency, § 80 (2002). “The principal is not bound, on the basis of
either actual or apparent authority, if the third person dealing with the
agent knows, or should know, the limitations placed by the principal on the
agent’s authority and that the agent is exceeding it” [footnote omitted].
Id.
12
testimony of James Roark, Earl Moore, the comptroller for
Colonial Coal Company, Gary Sams, the president of Phelps Coal
and Land Company, Walter Turner, Donna Smith, a bookkeeper for
Quad Fuel who dealt directly with Lineville, Joanna Benko, an
employee of Farmers who dealt with CEPS, Michael Whitis, Gene
Eisenmann, and Cynthia Burks.
The ALJ also took notice of the
conviction of James Taylor in the United States District Court
for the Northern District of Texas; the findings of fact and
conclusions of law entered in the United States District Court
for the Eastern District of Kentucky; and the February 2, 1998,
order granting summary judgment in favor of Farmers, which was
entered in a Texas state court.
The ALJ did not reach the
merits in any of the claims.
On February 4, 1999, the UEF filed protective
petitions for reconsideration in each of the claims involved.
The individual claims then proceeded to the merits, with the
finial decision in each case incorporating by reference the
opinion and order entered by the ALJ on January 22, 1999.
Individual decisions in Blankenship, Johnson, Preece, and
Salmons were rendered on September 3, 1999.
The ALJ entered
orders denying the UEF’s petitions for reconsideration in these
claims on January 31, 2000.
The ALJ also found that certain “up
13
the ladder” prime contractors, namely Colonial Coal Company,19
Phelps Coal and Land Company,20 and Enterprise Coal Company,21
where liable for the payment of compensation to the employees of
their subcontractors pursuant to KRS 342.610(2).22
Shortly
thereafter, the UEF filed notices of appeal with the Workers’
Compensation Board in the above-referenced claims.
Colonial
Coal, Phelps Coal, and Enterprise Coal, all filed cross-appeals.
A decision on the merits was rendered in Chapman on June 11,
2000.
The ALJ entered an order denying the UEF’s petition for
reconsideration in Chapman on July 7, 2000.23
The UEF filed a
notice of appeal with the Workers’ Compensation Board in Chapman
on July 17, 2000.
19
The Board then entered an order consolidating
Colonial Coal Company is the “up the ladder” contactor for Gamble Coal.
20
Phelps Coal and Land Company is the “up the ladder” contractor for Husky
Mining, Quad Fuel, and Black Star Mining.
21
Enterprise Coal Company is the “up the ladder” contractor for R.S. Mining.
22
KRS 342.610(2) provides, in relevant part, as follows:
A contractor who subcontracts all or any part
of a contract and his carrier shall be liable for the
payment of compensation to the employees of the
subcontractor unless the subcontractor primarily
liable for the payment of such compensation has
secured the payment of compensation as provided for
in this chapter. Any contractor or his carrier who
shall become liable for such compensation may recover
the amount of such compensation paid and necessary
expenses from the subcontractor primarily liable
therefor.
23
As previously discussed, numerous other claims were also filed with the
Department of Workers’ Claims, however, these claims were dismissed, settled,
or otherwise disposed of.
14
all the claims involved for the purpose of addressing the
coverage issue.
On October 4, 2000, the Board entered an opinion
affirming the ALJ’s decision in respect to the coverage issue.
In particular, the Board concluded that an employer/employee
relationship was never established between CEPS and the mine
employees.
The Board’s opinion reads, in relevant part, as
follows:
It has been said for compensation to be
payable there must be a contract of hire
between the alleged employer and its
employee. See Rice v. Connelly, Ky., 414
SW2d 138, amended 419 SW2d 769 (1967);
Louisville and Jefferson County Air Board
vs. Riddle, 301 Ky. 100, 190 S.W.2d 1009
(1946); and Dulaney v. Sebastian’s
Administrator, 239 Ky. 577, 39 SW2d 1000
(1931). Many factors go into consideration
of the employer/employee relationship. An
express or implied contract and who has the
right to control the work being performed
[sic]. See, for example, Partin-Lambdin
Lumber Co. vs. Frasure, Ky., 308 SW2d 792
(1958); and New Independent Tobacco
Warehouse #3 vs. Latham, Ky., 282 SW2d 846
(1955). According to the testimony and even
by way of documentary evidence, many of the
Workers involved in this matter, if not all,
signed an “employment contract” with CEPS.
As an example, one is attached to the
deposition of Thomas Salmon (“Salmon”). On
its face, one would think that the element
of an express or implied contract has been
met. However, the coerced entry into a
contract does not create the existence of a
contractual relationship. . . . Neither the
Mines nor the Workers according to their
testimony ever believed that they were
actual employees of CEPS. Further, in order
15
for there to be a semblance of an employment
relationship, it would be expected that
there be payment of wages. See Salvation
Army vs. Matthews, Ky.App., 847 SW2d 751
(1993). While the “co-employer agreements”
entered into between CEPS and the Mines
indicated that CEPS would hire, fire and pay
the employees, it never did so nor does the
evidence indicate that it was ever believed
that they would do so. The evidence is
consistent that throughout, the Mines not
only controlled the details of the work, but
chose who would work, determined and
actually paid the wages, withheld the taxes
as an employer, and provided additional
employee benefits. . . . While a great deal
of deference is granted to the actual
wording of a signed, written contract, the
very basis of contract law is that there be
a “meeting of the minds”. As between CEPS
and the Workers, the evidence in our
opinion, conclusively and as a matter of law
establishes no employer/employee
relationship.
The Board went on to conclude that the Texas state
court judgment granting summary judgment in favor of Farmers was
entitled to “full faith and credit.”
In addition, the Board
agreed with the ALJ that Farmers was not bound in any way by the
actions of Whitis.
As for the cross-appeals filed by Phelps
Coal, Colonial Coal, and Enterprise Coal, the Board concluded
that the companies were liable for the payment of compensation
to the employees of their subcontractors pursuant to KRS
342.610(2).
This appeal followed.
The UEF claims the Board erred in concluding that an
employer/employee relationship was never established between
16
CEPS and the mine employees.
The UEF argues that an employment
relationship was established pursuant to the “co-employment”
contracts signed by the mine employees.
We disagree.
The UEF
also claims the Board erred in its determination “that the Texas
state court judgment [is] res judicata on the issue of the
validity of Farmers’ insurance policy with CEPS[.]”
We do not
reach the merits of this contention as our disposition of this
appeal causes this issue to be moot.
In Ratliff, supra, the Supreme Court of Kentucky set
forth several relevant factors for the determination of whether
an employment relationship has been established under the
Workers’ Compensation Act.
These factors were later refined in
Chambers v. Wooten’s IGA Foodliner.24
The Chambers Court found
the following four factors to be determinative: (1) the nature
of the work as related to the business generally carried on by
the alleged employer; (2) the extent of control exercised by the
alleged employer; (3) the professional skill of the alleged
employee; and (4) the true intent of the parties.25
Based upon
these factors, we cannot hold that the Board erred in assessing
the evidence relied upon by the ALJ in determining that an
employment relationship was not established between CEPS and the
mine workers.
A thorough review of the record clearly indicates
24
Ky., 436 S.W.2d 265 (1969).
25
Id. at 266.
17
that the workers never believed that they were employed by CEPS.
Likewise, CEPS never intended to enter into a true employment
relationship with the mine workers.
Moreover, the mines never
relinquished control of their day-to-day operations and they
continued to maintain complete control over their “former”
employees.26
Furthermore, the individual coal mines provided all
of their own equipment and tools.
Finally, the nature of the
work performed by the mine employees was no more than
tangentially related to the work carried on by CEPS.
We acknowledge the fact that the workers involved in
this litigation signed an “employment contract” with CEPS.
Nevertheless, as the Supreme Court stated in Kentucky Farm &
Power Equipment Dealers Assoc., Inc. v. Fulkerson Brothers.,
Inc.:27
Compensation decisions uniformly exclude
from the definition of “employees” workers
who neither receive nor expect to receive
any kind of pay for their services. The
threshold requirement in a compensation
claim is that the claimant must be an
employee for hire. The essence of
compensation protection is the restoration
of a part of wages which are assumed to have
existed. In this case, no compensation by
the association existed (nor was any ever
contemplated), and therefore, no benefits
can be awarded [citation omitted].
26
In fact, the mines even continued to maintain their own payroll.
27
Ky., 631 S.W.2d 633, 635 (1982). See also Salvation Army v. Mathews,
Ky.App., 847 S.W.2d 751 (1993).
18
In the case sub judice, CEPS never paid any wages or
any other form of remuneration to the injured workers involved
in this litigation.
Furthermore, it is clear that CEPS never
intended to pay the workers for their services, nor did the
workers expect to receive any form of compensation from CEPS.
For all intents and purposes, the individual mine operators
continued to employ the mine workers.
The so-called “employment
contracts” were nothing more than a façade.
As professor Larson
has noted in a similar context:
It is a truism that the name chosen by
the parties to describe their relationship
is ordinarily of very little importance as
against the factual rights and duties they
assume [footnote omitted].28
. . . .
[T]he contractual designation of the
relationship as employment . . . may be so
plainly and completely at odds with the
undisputed facts that the contractual
designation must be disregarded [footnote
omitted].29
A valid “contract of hire” never existed between CEPS
and the mine workers as there was never a “meeting of the
minds.”30
The fraud and deception involved in this case militate
28
Larson, Workers’ Compensation Law, Vol. 3 § 46.30 (1997).
29
Id. at § 44.32(a).
30
See M.J. Daly Co.
other grounds, U.S.
934 S.W.2d 266, 269
relationship, there
employee, expressed
v. Varney, Ky., 695 S.W.2d
Fidelity & Guaranty Co. v.
(1996). “[B]efore there is
must be a contract of hire
or implied, containing all
19
400, 402 (1985), overruled on
Technical Minerals, Inc., Ky.,
an employer/employee
between the employer and
elementary ingredients for a
strongly against a finding of an employment relationship between
the mine workers and CEPS.
In sum, we agree with the ALJ that
the so called “co-employment” arrangements entered into between
CEPS and the mines were a “sham” and, therefore, unenforceable.
Likewise, an employment relationship was never established
between CEPS and the mine employees.
The UEF next argues that the Texas state court
judgment entered on February 2, 1998, which concluded that the
insurance policy issued by Farmers to CEPS was void ab initio
due to fraud in the procurement of the contract, is “void on its
face” because it failed to name the UEF as a party.
Even if we
were inclined to agree with the UEF that the Texas judgment is
“void on its face”, we hold that this issue is rendered moot in
light of our holding that an employment relationship was never
established between the mine workers and CEPS.
Since reliance
on the Texas judgment is not necessary to affirm the Board in
the case sub judice, the UEF’s rights are not prejudiced in any
way by the Texas judgment.
We now turn our attention to the cross-petition filed
by Colonial Coal.
As previously discussed, the Board concluded
that Colonial Coal, Phelps Coal, and Enterprise Coal were liable
for the payment of compensation to the employees of their
contract.” Id. (citing Rice v. Conley, Ky., 414 S.W.2d 138 (1967)). It is
axiomatic that a “meeting of the minds” is a fundamental prerequisite to a
valid contract.
20
subcontractors pursuant to KRS 342.610(2).
Colonial Coal claims
the Board’s decision is erroneous because the evidence did not
demonstrate a knowing participation on its part in CEPS’s
fraudulent activities.
Colonial Coal argues that “the rigid
interpretation by the Workers’ Compensation Board as to the
applicability of KRS 342.610(2) is not warranted” under the
facts of the case sub judice.31
Colonial Coal appears to fail to recognize that the
very purpose of KRS 342.610(2) is to “discourage owners and
contractors from hiring fiscally irresponsible
subcontractors[.]”32
Although it did so inadvertently, Gamble
Coal33 participated in a scheme that bypassed the normal approach
to obtaining workers’ compensation coverage.34
At the very
least, Gamble Coal should have been more careful in obtaining
workers’ compensation coverage.
Thus, while there is no
evidence that Gamble Coal played an active role in the
fraudulent scheme perpetrated by CEPS, we cannot conclude that
its conduct was “fiscally responsible.”
31
Moreover, the language
Colonial Coal cites absolutely no authority in support of this contention.
32
Matthews v. G & B Trucking, Inc., Ky.App., 987 S.W.2d 328, 330 (1998)
(citing Tom Ballard Co. v. Blevins, Ky.App., 614 S.W.2d 247, 249 (1980)).
33
As previously discussed, Colonial Coal Company is the “up the ladder”
contactor for Gamble Coal.
34
The case sub judice is clearly distinguishable from the normal employee
leasing situation as Gamble Coal continued to withhold taxes and maintain its
own payroll for its employees after the so-called “co-employment” agreements
were signed.
21
of the statute is clear and unambiguous.
KRS 342.610(2)
provides, in relevant part, as follows:
A contractor who subcontracts all or any
part of a contract and his carrier shall be
liable for the payment of compensation to
the employees of the subcontractor unless
the subcontractor primarily liable for the
payment of such compensation has secured the
payment of compensation as provided for in
this chapter.
It is undisputed that Colonial Coal subcontracted with Gamble
Coal.
Consequently, the Board did not err in affirming the
ALJ’s ruling that Colonial Coal was liable under the statute.
Based upon the foregoing reasons, the opinion of the
Workers’ Compensation Board entered on October 4, 2000, is
affirmed.
BUCKINGHAM, JUDGE, CONCURS.
DYCHE, JUDGE, CONCURS IN RESULT ONLY.
22
BRIEF FOR APPELLANT, UNINSURED
EMPLOYERS’ FUND:
Albert B. Chandler III
Attorney General
Michael A. Richardson
Assistant Attorney General
Frankfort, Kentucky
ORAL ARGUMENT FOR APPELLANT,
UNINSURED EMPLOYERS’ FUND:
Michael A. Richardson
Assistant Attorney General
Frankfort, Kentucky
BRIEF AND ORAL ARGUMENT FOR
CROSS-APPELLANT, COLONIAL COAL
CO:
J. Gregory Allen
Prestonsburg, Kentucky
BRIEF FOR APPELLEE, RELIANCE
NATIONAL INDEMNITY CO. &
FARMERS INSURANCE EXCHANGE:
Cynthia K. Lowe
Cincinnati, Ohio
ORAL ARGUMENT FOR RELIANCE
NATIONAL INDEMNITY CO. &
FARMERS INSURANCE EXCHANGE:
James L. Salmon
Cincinnati, Ohio
BRIEF FOR APPELLEE, SPECIAL
FUND:
Joel D. Zakem,
Frankfort, Kentucky
BRIEF FOR APPELLEE, THOMAS
SALMONS:
Leonard Stayton
Inez, Kentucky
BRIEF FOR CROSS-APPELLEE,
UNINSURED EMPLOYERS’ FUND:
J. Gregory Allen
Prestonsburg, Kentucky
BRIEF FOR APPELLEE/CROSSAPPELLANT, BILL MONT COAL CO:
Eileen O’Brien
Lexington, Kentucky
23
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