Updates and background for this project (Digest)
I. INTRODUCTION
4.1 Since the Commission sought this reference in July 1983, the problems arising in relation to employee's liability in tort and in contract have been resolved either through the original amending legislation or, more recently, through the revised interpretation of such statutes. As outlined in Chapter 2, however, anomalies remain. The law as it stands is uneven, and offers no consistent approach. A negligent employee may be protected from indemnifying his employer under the contract of employment, or as a joint tortfeasor,1 but will still be liable for such an indemnity under s 64A of the Workers' Compensation Act 1926, in relation to statutory workers' compensation payments made to an injured Co-employee. The recommendations set out in this Chapter, seek to overcome these anomalies to make the law consistent with the intentions of earlier legislative amendments.
4.2 In this regard, the arguments put forward in the second reading speech on the 1982 Act on 17 March 1982 are still appropriate. In line with the trend in workers’ compensation legislation, employees and employers generally assume that an employee will be automatically covered for any negligent acts (or omissions) committed in the course of employment by insurance taken out by the employer. Any loophole allowing an insurance company to avoid liability and "off load" the obligation to pay to an employee should be removed. Clearly in the past, the option of seeking an indemnity of this sort (whether in tort, contract or via s 64A) was rarely resorted to by employer or insurer. This alone is no good reason to reject reform. Even if it is rarely enforced, the right may in isolated cases cause considerable hardship2 to individual employees.
4.3 While most of the recommendations of this Report are directed at finally removing the indirect liability of an employee to the employer, consideration of a slightly more extensive revision of rights is also raised. On the surface, the abolition, or at least severe limitation, of the liability owed by an employee directly to the injured party appears no more than a simple extension of the policy of enterprise liability, consistent with the reasons set out in 4.2. Careful consideration, however, must be given to the effect of such abolition on the rights of the injured party.
II. RECOMMENDATIONS
4.4 The Commission recommends that the Employee's Liability (Indemnification of Employer) Act 1982 be redrafted and its provisions replaced with sections of wider application and clearer intent. This redraft would basically attempt to achieve four results:
(i) to be structured in such a way as to avoid, so far as possible, any further misinterpretation of the legislation, or any unwitting alteration or exclusion by later amendments to related Acts.
(ii) to entrench in legislation the interpretation given to the 1982 Act by the High Court in McGrath's case.
(iii) to extend the ambit of that Act in order to provide employees with protection from indemnifying their employers in relation to payments made pursuant to the Workers' Compensation Act 1926.
(iv) to limit the right of the injured party to sue a negligent employee directly.
4.5 The draft provision recommended is:
Clause 1 (1) Notwithstanding any Act or law, or the provisions express or implied of any contract or agreement, where an employee commits a tort whether personally, vicariously or otherwise
(a) the employee shall not be liable to indemnify the employer in respect of the liability incurred by the employer; and
(b) the employee shall not be liable to pay contribution to the employer as a joint tortfeasor under the provisions of s 5 of the Law Reform Miscellaneous Provisions Act 1946; and
(c) unless the employee is otherwise entitled to indemnity in respect of his or her liability, the employer shall be liable to indemnify the employee in respect of liability incurred by the employee in respect of the tort.
(2) Where an employer is proceeded against for the tort of his or her employee, and the employee is entitled pursuant to a policy of insurance or contract of indemnity to be indemnified in respect of liability that he or she may incur in respect of that tort, the employer shall be subrogated to the rights of the employee under that policy or contract in respect of the liability incurred by him or her (the employer), arising from the commission of the tort.
Draft legislation prepared by Mr D Colagiuri of the Office of Parliamentary Counsel is attached in Appendix A. This provision represents the Commission's suggested first draft from which that legislation was developed. The clause is largely based on a combination of s 27C of the Wrongs Act 1936 (SA) and s 22A of the Law Reform (Miscellaneous Provisions) Act (NT). Changes have been made to clarify some aspects of the original provision and to reinforce areas relevant to New South Wales. While this is the major recommendation of the Commission, there will be a number of changes required to various related Acts in order to fully accommodate the proposed amendments. These revisions will be discussed separately, as the issues arise.
4.6 Before examining the clause further it should be noted that sub-clause (3) limits the ambit of its operation so that:
(3) Where a person commits serious and wilful misconduct in the course of his or her employment and that misconduct constitutes a tort, the provisions of this section shall not apply in respect of that tort. This accords with provisions in the existing 1982 Act and will protect employers from Liability for the excessive or extraordinary actions of employees.
4.7 While the 1982 Act, the Law Reform (Miscellaneous Provisions) Act 1946 and the Workers' Compensation Act 1926, all deal with the apportionment of liability, the basic aim of each Act varies widely. The 1982 Act was introduced primarily to protect employees from owing their employer an indemnity in contract, the Law Reform (Miscellaneous Provisions) Act 1946, to provide for fair contribution between tortfeasors of any sort, and the Workers' Compensation Act, to regulate no-fault statutory payments made to workers injured in the course of employment.
4.8 Both Public Transport Commission of NSW v J Murray-More (NSW) Pty Ltd3 and Civic v Glastonbury Steel Fabrications Pty Ltd4 demonstrate that restrictive interpretations have been given to these Acts. They also reveal the general reluctance of the courts to increase or shift the burden of liability to another party without a clear expression of statutory intent.5 Minor amendments to each of the existing Acts would not resolve many of these difficulties. Retention and extension of the 1982 Act will however, create a single, clear and comprehensive coverage of employees liability. The rest of this Chapter considers some of the implications of the new provisions, along with the effect they will have on the current situation.
III. RIGHTS OF EMPLOYERS AGAINST EMPLOYEES
4.9 There are, as has been noted several times, three ways in which an employer may indirectly recover damages from an employee through an indemnity in relation to the negligent acts of that employee.
A. Lister v Romford Ice and Cold Storage Co Ltd
4.10 This indemnity, based on the contract of employment was abolished by the 1982 Act. Clause 1(1)(a) of the proposed provision (set out at 4.5) has the same effect, so that employers will continue to be denied the use of the indemnity.
B. Contribution under the Law Reform (Miscellaneous Provisions) Act 1946, s 5
4.11 Contribution by employees under this section was also abolished by the interpretation of the 1982 Act adopted by the High Court in McGrath's case.6 It is however, the opinion of the Commission that this question should also be made clear on the face of the new comprehensive legislation. Clause 1(1)(a) is clearly wide enough (in the light of McGrath’s case) to include contribution claims. However, to overcome any residual problems which may arise in this respect, Clause 1(1)(b) has been added, stating:
The employee shall not be liable to pay contribution to the employer as a joint tortfeasor under the provisions of s 5 of the Law Reform Miscellaneous Provisions Act 1946.
This clause specifically addresses the question of contribution claims between employer and employee, the result being that an employer will be barred from relying on s 5 of the Law Reform (Miscellaneous Provisions) Act 1946, without affecting any claim an employee may have under that section.
C. Workers' Compensation Act 1926, s 64A
4.12 The right given to an employer via ss 64 (1) (b) and 64A of the Workers' Compensation Act 1926, to recover compensation payments wade under the Act from an employee, has already been 8 discussed in Chapter 2.7 Waters v Dedini8 failed to resolve the question of whether the 1982 Act applied to such a claim. The indemnity in that case was denied (and, therefore, the Act applied) only because no arguments were advanced by the opposing party as to why the 1982 Act should be excluded.
4.13 It is unlikely that as it stands the Employee's Liability (Indemnification of Employer) Act 1982 could be applied to protect employees from the effects of s 64A of the Workers' Compensation Act. Section 2(3)(b) specifically limits the operation of the 1982 Act to circumstances where "proceedings for damages may be taken". Similarly, in the definitions given in s2(1)
"fault", in relation to an employee, means negligence, or other act or omission, of the employee (not being negligence, or other act or omission, that is serious and wilful misconduct) as a result of which his employer is, as employer and not otherwise, liable in damages in tort (emphasis added).
This final phrase could clearly be interpreted in conjunction with s 2(3)(a) to exclude liability which does not arise from fault, but by statutory compulsion.
4.14 Of course, in any situation where the employee is a tortfeasor and so liable to indemnify an employer via s 64(1)(b) and s 64A, the employer will also, through the workings of vicarious liability, be liable for “damages in tort”. Thus, it could be contended that the 1982 Act would apply. This argument however misconstrues the nature of the Act, and the basis of the courts' interpretations of these statutes. The 1982 Act is only directed at damages which arise out of that vicarious liability; it will not and cannot extend to a liability that arises in the employer from another source, even if that other liability arises at the same time and out of the same circumstances. Because s 64A of the Workers’ Compensation Act 1926 concerns itself with the statutory liability of the employer, the existing provisions of the 1982 Act, relating as they do to vicarious liability and damages in tort, will not suffice.
4.15 The conclusion to be drawn then, is that despite the decision in Waters v Dedini9 employers - and more importantly, their workers’ compensation insurers - are technically capable of returning the burden of workers' compensation payments to their employees. This result is not only inconsistent with the trend of industrial law over the last century, but also inconsistent with the basic aims of the Act itself.
4.16 The clause set out in para 4.5 is intended to overcome these difficulties in two ways. First, by avoiding reference to the "end result" of the liability (ie "damages in tort" etc) and relying instead on a simple reference to liability. For example, subclause (1)(a) states:
the employee shall not be liable to indemnify the employer in respect of the liability incurred by the employer.
Second, subclause (1) is expressed in the widest possible terms as it applies:
... where an employee commits a tort for which his employer is liable; whether personally, vicariously or otherwise
This clearly directs that the Act should include any statutory liability incurred by the employer.
4.17 Another problem in relation to the Workers' Compensation Act is its failure to allow workers' compensation payments made by the employer to be pleaded in defence when an employee is sued directly by an injured co-employee. This defence is available to an employer, under the Workers' Compensation Act:
63(5) Where any payment by way of compensation under this Act has been made the payment shall, to the extent of its amount, be a defence to proceedings against the employer independently of this Act in respect of the injury.
As the proposed revised provisions for the 1982 Act do not deal directly with this contingency, any amendments would, if necessary be required to be made to the Workers' Compensation Act itself.
4.18 Generally, as subclause (1)(c) of the proposed reforms indemnifies an employee against being sued directly, (see 4.25 and following) there seems no necessity for a defence to be available in such all action. The subclause states:
unless the employee is otherwise entitled to indemnity in respect of his or her liability, the employer shall be liable to indemnify the employee in respect of liability incurred by the employee in respect of the tort.
The indemnity set out in this clause shifts the burden of the entire common law claim back to the employer. This is, in turn, complemented by the existing provisions of s64(1)(a) which state:
the worker may take proceedings both against that person to recover damages and against any person liable to pay compensation under this Act for such compensation, but shall not be entitled to retain both damages and compensation.
If the worker recovers firstly compensation and secondly such damages he shall be liable to repay to his employer out of such damages the amount of compensation which the employer has paid in respect of the worker's injury under this Act, and the worker shall not be entitled to any further compensation.
If the worker firstly recovers such damages he shall not be entitled to recover compensation under this Act.
Thus the injured employee to required to reimburse the employer for the amount of the statutory payments out of the damages awarded him by the court. There is no possibility of the injured worker being able to enjoy the benefit of both statutory payments and common law damages, while the negligent employee is automatically covered by clause 1(1)(c).
4.19 There are, however, two matters in relation to this defence which require some attention. An employer could attempt to rely on a wide interpretation of s 63(5) of the Act, to the effect that the proceedings launched by an employee are "proceedings" subject to the operation of s 63(5). Such a construction of this section would exempt the employer from indemnifying a negligent employee for so much of the claim as amounts to the statutory payment. This would severely restrict sub clause (1)(c) and leave the negligent employee still liable for at least a percentage of the damages award.
4.20 It is, however, unlikely that this wide interpretation would be accepted by the courts. Section 63(5) is directed not only at "proceedings" but "proceedings in respect of the injury". To allow this defence to sub clause (1)(c), would in effect extend s 63(5) to include "proceedings for an indemnity in relation to proceedings in respect of an injury"; clearly both an unsatisfactory and artificial result. In any event, this debate becomes academic, for under the opening terms of clause 1 the employer would be denied the right to rely on s 63(5), as the provision specifically states it will operate
Notwithstanding any Act or law, or the provisions express or implied of any contract or agreement.
4.21 A second argument for providing a negligent employee with a defence in these situations, relates to the complexity of the procedural steps involved. Subclause (1)(c) as it stands, does not restrict the right of an injured worker to obtain damages or collect workers' compensation payments. It is only the first step in a lengthy procedure, whereby the injured worker, on conclusion of a successful action against the co-employee, is required (via s64(1)(a)) to reimburse the employer; who in turn would be required (via the indemnity) to reimburse the negligent employee for the entire amount of damages, including that percentage returned to the employer under 64(1)(A). It could be argued that introducing a defence for the defendant employee could at least by-pass this circular process.
4.22 To rely on this reasoning, however is to confuse the purpose of the defence and its relationship with the rest of the Workers' Compensation Act 1926, for in allowing the s 63(5) defence to an employee, problems are automatically created with the distribution of liability. The defence was originally provided for the employer; ie a party liable for both statutory payments and common law damages. Section 63(5) created an automatic adjustment to stop an injured employee from unfairly gaining excessive damages. Similarly s 64(1)(a) was aimed at providing the same adjustment where a third party was liable. Again, the intention of the section was to ensure an injured party was not "double paid". If a defence is introduced for the negligent employee this balance would be upset, to the inevitable disadvantage of the injured worker. The amount of statutory payments would automatically be deducted from any damages award against a co-employee, yet at the same time s 64(1)(a) will stand, and continue to require the injured employee to pay back an equal amount to the employer.
4.23 This could be corrected by amendments to s 64(1)(a) to exclude litigation between employees from the ambit of the section, however, in view of the minor gains to be made from such amendments, and the complications likely to ensue, it is wiser to avoid granting a negligent employee a right to this defence, and to rely instead on the effect of sub-clause (1)(c).
D. Per quod servitium amisit
4.24 One final aspect of an employee's liability to his employer remains: the possibility of a direct action by the employer based on the old common law cause of action11 of per quod servitium amisit. While all but abolished in the UK;12 it has been applied in Australia in at least two cases,13 with the widest possible reach, applying whenever the relationship of master and servant exists. The action is limited in that it will only be available to recover money paid as wages while the injured worker was unable to provide service.14 While there is no direct authority to confirm it, there is no reason why an action per quod servitium amisit should not be available against an employee.
4.25 The amendments to the 1982 Act already set out, another clause be added:
Clause 2. No employee shall be liable in tort under the laws of New South Wales to any other person on the ground only of having deprived that other person of the services of that other persons servant.15
In addition though beyond the terms of reference of this report, the Commission recommends that the action per quod servitium amisit be abolished altogether.
IV. RIGHTS OF THIRD PARTY AGAINST A NEGLIGENT EMPLOYEE
4.26 A person injured by a negligent employee has the right - like any other plaintiff - to sue that negligent party directly. This right exists separately from any other rights which may accrue from the operation of vicarious liability, or statute. The negligent employee will not be treated as a ‘special case’ because the incident arises in the course of employment. The employer is under no obligation to indemnify or contribute to the damages unless personally liable; and then only under the usual contribution provisions of s 5 Law Reform (Miscellaneous Provisions) Act 1946.
4.27 To continue to allow the fact of employment to be treated as an irrelevancy very obviously runs counter to the norms of ‘enterprise liability’ which have guided much of the modern legislation in this area. At the same time, any extension of the existing protections and immunities available to an employee ought to be approached with caution. It is not the automatic process which might be expected, as Glanville Williams noted.
. . . a statute should be passed to disallow an action by the master for indemnity against the servant, where the servant has been guilty only of inadvertent negligence. It may be expected that many persons would approve this proposal, while jibbing at the logical corollary - that the servant who is sued should be given a right of indemnity against the master.16
4.28 So far, this Report has only addressed matters affecting rights between employee, employer and insurer, and the best way to distribute the burden of liability between them. The major impetus for reform goes beyond the precarious position in which employees are currently placed to address the issue of whether insurers should be permitted to off-load their responsibilities in the ways suggested. When the discussion is extended to cover the rights of the injured third party, new factors come into the calculation. Any moves to restrict the liability of negligent employees could be seen as narrowing the options available to the injured party, and it is of primary importance that whatever the injustices between the employee and the employer, they should not be resolved at the expense of the injured third party.
4.29 There are two options available to protect an employee from direct action by an injured 3rd party. They are
4.30 Initially, the better option appears to be to abolish the employee's liability altogether17 in cases where the employer would be vicariously liable for the employee's acts. This would directly protect negligent employees and avoid the more circuitous route of indemnification by the employer. Such a provision would also satisfy the policy of enterprise liability. But, as was stressed above, the rights most involved here are those of the injured third party. When that person's position is examined the pitfalls in this approach become apparent.
4.31 The creation of a complete immunity for an employee, envisaged by the abolition of the injured party's right to sue, ignores situations where an employer may be insolvent or uninsured. If this proposal were adopted in such circumstances an injured party would be denied a remedy. This would be particularly unjust if the liability arises out of a motor vehicle accident when the employee is covered by compulsory third party insurance for the straight abolition of liability would relieve the compulsory third party insurer of its statutory burden and possibly require the employer to take out extra insurance to cover the liability.
4.32 For these reasons the Commission does not recommend abolition of the right to sue the negligent employee. However, we do recommend inclusion of a provision in the form of subclause 1(1)(c) [set out in para 4.5 above]. This offers protection to the employee, who is not otherwise indemnified against the loss. That employee is given a right to indemnity from the employer. Clause 1(1)(c) reads as follows
. . . unless the employee is otherwise entitled to indemnity in respect of his liability, the employer shall be liable to indemnify the employee in respect of liability incurred by the employee in respect of the tort.18
4.33 The introduction of this indemnity will not, of course, solve all the situations that can arise in relation to employees' liability. It will only alleviate the situation. The difficulties noted above in relation to an employee’s immunity will continue to arise where an employer does not have proper extra insurance. No system can deal with all imperfections. Whether an indemnity or immunity is created, the loss will fall somewhere. What is attempted here is the best possible balance between the rights of the injured third party and the interests of the employee. This means limiting the liability of the negligent employee as much as possible, while retaining a wide choice for the plaintiff; including the opportunity of calling on the resources of the insured employee.
4.34 It was argued above that introducing an absolute immunity for a negligent employee ought to be avoided as it would deny an injured person access to this resource, and force that party to bear the loss. Generally, it is true, a prudent employer will have complete insurance to cover an indemnity. However, when neither defendant is insured it is necessary to fall back to the primary basis of enterprise liability, and require the party who is most able to bear the burden, to bear it. This is an end best served by the use of an indemnity clause such as is set out by subclause 1(1)(c).
V. INSURANCE
4.35 The issues raised in relation to insurance and employees' liability have already been noted at paragraphs 2.35 et seq. It is the intention of the Commission that the present rules of contribution between insurers be retained. To this end, the terms of the proposed reforms set out in clause 1(1)(c) only grant an employee indemnity from the employer
...unless the employee is otherwise entitled to indemnity in respect of his liability.
This is intended, as are the reforms in South Australia and the Northern Territory, to maintain the status quo.
VI. CONCLUSION
4.36 This Report is a product and reflection of the many reforms over the last hundred years in the areas of industrial law and workers' compensation. It cannot be said that it is conclusive on such issues, but it does attempt to provide a single, comprehensive guideline to one aspect of that law - namely the liability of employees. In this respect it is based on other reforms in other jurisdictions, but it seeks to go beyond the sectional approaches taken there, in setting out a wide coverage of both the problems of this liability and the methods by which these difficulties may be resolved.
FOOTNOTES
1. Although the Law Reform (Miscellaneous Provisions) Act 1946, s 5(1) is directed at contribution between tortfeasors, the peculiar circumstances created in cases of vicarious liability will mean that when the employer has no personal liability, the contribution he/she can seek from the negligent employee will, for all practical purposes amount to an indemnity.
2. South Australian Parliamentary Debates 8 March 1972 at 3705 Hon L J King, Attorney General.
3. (1975) 132 CLR 336.
4. (Unreported) 24th February 1983, Supreme Court of NSW Yeldham J; where Yeldham J stated he was not prepared to give a wider interpretation unless there were clear words to that effect.
5. McGrath v Fairfield Municipal Council [1984] 2 NSWLR 247; the interpretation given by the High Court ((1985) 59 ALR 18; 59 ALJR 655) was in this respect an exception to the other cases in this area.
6. (1985) 59 ALR 18 at 23.
7. Ante; 2.25 and following
8. (Unreported) 17 September 1982 Supreme Court of New South Wales.
9. Which could be argued to have been reinforced by the High Court decision in McGrath's case (see note 5).
10. For example, the difficulties which arose in amending s 46(1)(b) reflected in s 46A.
11. Although this action did in part arise from the Statute of Labourers of 1351 (23 Ed III) see G H Jones 'Per Quod Servitium Amisit' (1958) 74 LQR 39.
12. IRC v Hambrook [1956] 2 QB 641; also see Law Commission (GB), Report on Personal Injury Litigation - Assessment of Damages (Law Com No 56, 1973) paras 144-50.
13. Commissioner of Railways v Scott (1959) 102 CLR 392; Sydney County Council v Bosnich [1968] 3 NSWR 725.
14. Id, Bosnich at 726 per Sugerman AP.
15. This is based on the provision recommended by the English Law Commission, see note 12 at 122; Clause 12(c).
16. Glanville Williams 'Vicarious Liability and the Masters Indenmity' (1957) 20 Mod LR 437 at 446.
17. This would of course, not apply to any liability for 'serious and willful misconduct' see ante, para 4.6.
18. This is based on s 27c(3) Wrongs Act (SA).
