Contracting, Strangers and Insolvency of the Employer

In one line

A principal employer is liable for a contractor's workers doing his own kind of work on his own premises, he can be indemnified by the contractor and by any outsider who caused the injury, and if he goes insolvent the worker takes over his rights against the insurer.

In exam wording: sections 85 to 87 of the Code on Social Security 2020 make a principal employer liable to pay compensation to employees of a contractor executing work ordinarily part of his trade or business, with a right of indemnity against the contractor, give the payer a right of indemnity against a stranger legally liable in damages, and on the employer's insolvency transfer his rights against his insurers to the employee and give the compensation priority in the distribution of assets.

Why the law has these at all

Each section closes a way the compensation could disappear.

Section 85 closes the contractor route. An employer who put every dangerous job out to a thinly capitalised contractor could otherwise leave injured workers with a claim against a man with no assets. So the principal employer is made liable as if the worker were his own, and left to recover from the contractor afterwards. The risk of the contractor's insolvency falls on the employer who chose him, not on the worker.

Section 86 closes the windfall. If a stranger caused the injury and is liable in damages, the employer who has paid compensation should not be out of pocket while the wrongdoer pays nothing.

Section 87 closes the insolvency route. An insured employer who goes broke has one valuable asset for these purposes, his claim against the insurer. Section 87 takes it out of the general pool and hands it directly to the injured worker.

Some words this chapter uses

Principal employer here means the employer who contracts out the work, as distinct from the contractor who executes it. Indemnify means to reimburse another for a loss he has borne. Composition or scheme of arrangement is an agreement between an insolvent and his creditors to settle debts. Winding up is the process of dissolving a company and distributing its assets. Void means of no legal effect; voidable means valid until avoided by the party entitled. Adjudication of an insolvent is the order declaring him insolvent. Prove, in insolvency, means to submit a claim in the distribution.

Section 85: contracting

Section 85(1), the liability. Where an employer, in the course of or for the purposes of his trade or business, contracts with a contractor for the execution by or under the contractor of the whole or any part of any work which is ordinarily part of the trade or business of the employer, the employer shall be liable to pay to any employee employed in the execution of the work any compensation which he would have been liable to pay if that employee had been immediately employed by him.