When the Independent Contractor Strategy Literally Blows Up

June 28th, 2005 by

The Insider has frequently explored the ramifications of getting work done through employees (who are protected by workers comp) and through independent contractors (who have no such protection). The practice of using independent contractors can save a lot of money in workers comp premiums, especially when your employees perform the more expensive classes of work such as in those in the building trades. But sometimes the strategy backfires.
Fifteen people were killed in a March 23 blast at a BP oil refinery in Texas. More than 170 were injured, dozens of them seriously, in what was the worst United States refinery accident in recent memory. Anne Belli of the Houston Chronicle has done a terrific job of reporting on this tragedy. Although performing regular work at the site, most of the injured were not BP employees; they were independent contractors. While the strategy of staffing the plant with contractors surely made business sense at the time, in retrospect, from a financial perspective, it has turned into a real disaster.
Exclusive Remedy
Had the killed and injured workers been employees of BP, workers comp would be the exclusive remedy. Dependents of the deceased workers would be entitled to death and dependency benefits; the injured workers would collect indemnity benefits and all their medical bills would be paid. Even though there are some indications that the company failed to follow through on safety issues, even though the company may have been in some respects negligent in their operation of the facility, employees would be limited to the statutory benefits under workers comp. Employees cannot sue their employers for work related injuries. Under the usual workers comp benefit structure, the fatalities would generate claims valued at less than $1 million; for the seriously burned, who face years and years of treatments, you might see reserves in the $3 to 5 million range. It’s hard to believe, but these amounts are far less than what BP is now facing.
Contractors can Sue
Because many of the deceased and injured were not BP employees, they are suing BP as a third party and collecting not just indemnity and medical benefits, but also tort liabilities for pain and suffering, loss of consortium and so on. The liabilities for BP in this situation are formidable. In what can only be regarded as a remarkably rapid process, BP has already agreed to settle with several of the families of the contractors and is in the process of settling with dozens more. And here’s the financial rub: these settlements are running in the tens of millions for each family. The article quotes a number of the plaintiff attorneys involved, who seem stunned that BP has accepted liability so readily and is offering such generous settlements to resolve the cases.
In the days following the explosion, BP seemed inclined to blame the workers for not following procedures. If they really thought that this was a viable position, they would probably not be so interested in offering generous settlements. The post accident investigation brought in federal investigators with the U.S. Chemical Safety and Hazard Investigation Board. The investigators have stated that BP management may well have dropped the safety ball. Had BP equipped the blowdown system with a flare, as is standard in the industry, the hydrocarbons might have been burned safely away and the accident might have been prevented. In addition, OSHA warned BP 13 years ago that the lack of flares on a vent stack at the refinery was hazardous to the environment and to workers. I think BP’s lawyers took a careful look at the history and threw in the proverbial towel.
Bottom Lines and Human Lives
This is nothing less than a tragic tale of unnecessary death, suffering and loss. I suppose it’s better for the families that their loved ones were not BP employees — the proposed settlements will support the survivors far better than comp benefits would have. But the real question is not really one of business strategies and honing the bottom line. It’s how BP lost sight of the real dangers in their workplace and missed numerous opportunities to fix them. How ironic is it that the most cost effective strategy for BP had nothing at all to do with employees versus contractors? No, it was simply a matter of listening to OSHA back in 1992 and making some adjustments in the plant infrastructure. A safer workplace would have been a lot less expensive to operate than what BP has now — a fire ravaged plant and a tragically decimated crew .