The Illinois Supreme Court has expanded the liability that parent companies may face when an employee of a subsidiary is injured or killed at work. In Forsythe v. Clark USA, the court established that parent companies may be subject to "direct participant liability" and held that a corporate parent may not be protected by the Worker's Compensation Act's exclusivity provisions. This determination will open the door to suits by injured employees against parent companies and could result in liability for a parent that is far beyond that which the subsidiary would have faced.

Worker's compensation has long been a system of give and take for employers. Under the Illinois Worker's Compensation Act, employers are required to make payments for on-the-job injuries to employees regardless of whether the employer was at fault. However, at the same time, the Act restricts the employer's exposure in situations where it may have acted negligently or recklessly, thus significantly limiting employer liability. This protection, referred to as worker's compensation exclusivity, is a strong bar to claims brought in court against employers.

In Forsythe, two employees died in a fire at the oil refinery where they worked. Their widows received worker's compensation payments from their husbands' employer, Clark Refining. Seeking more, they brought suit in court against Clark Refining's parent company — Clark USA — claiming that Clark USA should be held liable as a direct participant in the incident that led to the deaths. In particular, the widows argued that Clark USA should be separately liable because it required that Clark Refining operate in "survival mode," which (the widows argued) Clark USA knew would adversely affect safety by reducing expenditures in training and maintenance. The widows also pointed to the fact that the individual who oversaw the budget cuts served both as Clark USA's president and Clark Refining's CEO (and that some of the key budgetary determinations were documented by him on Clark USA letterhead).

Clark USA claimed that it's relationship with Clark Refining was merely that of an investor or shareholder and argued that "direct participant liability" should not be recognized in Illinois. Clark USA argued that it could not be held to have a duty to the employees or be liable for their deaths unless the widows met the high standard of establishing that Clark Refining and Clark USA were, in essence, a single entity. It also argued that even if such a duty existed, Clark USA should be protected by the Act just as the employer was protected.

The Illinois Supreme Court agreed with the widows and found that Clark USA could be subject to "direct participant liability" for the deaths of its subsidiary's employees. Considering whether the corporate parent had "an obligation of reasonable conduct for the employee's benefit," the court rejected Clark USA's argument that the widows had to establish that the parent and subsidiary were one and the same (or, in other words, "pierce the corporate veil" between parent and subsidiary) in order to state their case. Rather, the court stated that where a parent company "specifically directs an activity, where injury is foreseeable, [the corporate parent] could be held liable." The court further explained that "if a parent company mandates an overall course of action and then authorize[s] the manner in which specific activities contributing to that course of action are undertaken, it can be liable for foreseeable injuries." The court noted that allegations of budgetary mismanagement, without more, are not enough for a parent to be held liable as a direct participant, but held that when budgeting authority is combined with implementation of policy or some other "specific direction or authorization," the parent may be held liable.

The court also agreed with the widows that Clark USA could not claim protection under the exclusivity provisions of the Worker's Compensation Act. The court held that the individuals who died were the employees of Clark Refining — not Clark USA. Neither Clark Refining's employment of the decedents nor its payment of worker's compensation benefits to their widows was a sufficient basis to bring Clark USA within the Worker's Compensation Act's exclusivity provisions. As a result, despite the fact that worker's compensation payments had been made to the widows by Clark Refining, Clark USA was not entitled to any of the protection contemplated by the Worker's Compensation Act.

This decision is important for two primary reasons: First, it establishes the theory of "direct participant liability" in Illinois, which for the first time allows a parent company to be held liable even if the plaintiff is unable to establish that the parent and subsidiary should be considered a single entity. Second, it gives plaintiffs a "back door" around worker's compensation exclusivity, which will undoubtedly lead to increased suits against parent companies in cases of employee injury and death.

The Schiff Hardin Labor and Employment Group will keep you informed of further developments in the area of direct participant liability. In addition, the firm's lawyers are available to review companies' practices and policies and assist in implementing procedures that will help insulate parent companies from this kind of liability in the future. Please contact any member of the Labor and Employment Group for assistance.

Catherine Hobart Thompson, "Immigration Law for the Construction Industry," Atlanta Electrical Contractors Association, Atlanta, Ga. (May 3, 2007)

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