Worker’s Compensation and Third Party Damage Payments

What happens when a Federal employee receives worker’s compensation (FECA) and successfully recovers damages from a third party that caused the injury? The government gets the money, of course, as one couple recently learned.

What happens when a Federal employee receives worker’s compensation (FECA) and successfully recovers damages from a third party that caused the injury? The government gets the money, of course, as one couple recently learned.

In Gonzalez v. Department of Labor (C.A.D.C. No. 09-5195), 6/22/10, the appeals court now agrees with the lower court that the Labor Department may demand reimbursement of its injury compensation costs directly from the federal employee who was able to work out a settlement of her claim against a third party, despite her lawyer’s creative but futile attempt to prevent this result. The facts are taken from the court’s decision.

Rachel Gonzalez worked at the U.S. Embassy in Mexico. She was injured when an elevator at the embassy made a sudden stop. She filed a FECA (Federal Employees Compensation Act) claim and the Labor Department granted her compensation for her injuries.

A few years later Rachel and her husband sued the companies that serviced the runaway elevator, seeking damages for Rachel’s injuries and for her husband’s loss of consortium. The Gonzalez’s attorney wrote to Labor Department and suggested it join the suit since the government is entitled by law to share in the recovery from the third party. Labor declined to join the lawsuit but notified Rachel through her lawyer that she should continue with her lawsuit and be sure an involve Labor before accepting any settlement. This notice cited the law that required Rachel to make sure that the U.S. interests were protected before she accepted settlement proceeds. (Opinion pp. 2-3)

While negotiating a settlement with the private companies, the Gonzalez’s attorney wrote to Labor and requested that any settlement proceeds “be treated as a payment to Mr. Gonzalez for his loss of consortium claim.” (p. 4) That way, Rachel could retain all of the FECA compensation she had been paid.

Labor nixed that idea and again reminded the attorney that the agency must approve any settlement arrangement, making clear that under its normal guidelines the typical allocation of a joint settlement for the loss of consortium claim would normally be 25%.

Rachel and her husband both signed a “confidential” settlement agreement releasing all of their claims in return for a payment to “Plaintiffs” of $625,000. The agreement addressed Rachel’s duty to reimburse Labor for the FECA benefits she had received. However it had the following language: “Defendants understand that Plaintiffs as between themselves and in consultation with their attorneys have allocated the consideration paid under this Agreement to [the husband] whose claims will be dismissed in their entirety…” (p. 5)

Not so fast, said the Labor Department, which demanded reimbursement from Rachel of the $216,266.86 it had paid out to her under FECA. Rachel’s lawyer refused to advise his client to repay any amount, arguing that the $625,000 settlement amount was for Richard’s claims only. The agency eventually issued a formal decision that the settlement had been jointly paid to Rachel and her husband, that the husband was entitled to keep only 25% of the total settlement, and that Rachel was required to repay Labor $152,091.16 (which would let her keep about 30% of FECA monies received) from the remainder of the settlement proceeds. (p. 6)

Not happy with having to pay 70% back, Rachel appealed this decision. Following unsuccessful administrative appeals, Rachel ended up in federal court challenging Labor Department’s determination. The district court granted summary judgment to the agency, so Rachel took her case to the appeals court where she has fared no better.

The nub of Rachel’s argument was that it was her husband, not her, who received the settlement. Even thought the settlement agreement reflected it was a “joint recovery,” the document allocated the entire settlement amount to the husband, and the Labor Department “must respect that allocation instead of imposing its own.”

Citing Supreme Court precedent, the appeals court ruled “an employee who receives FECA payments is required to reimburse the United States for those payments…when he obtains a damages award or settlement from a third party…” (p. 7) The court stated, “It is hard to imagine a clearer indication that the parties’ mutual intent was to have both spouses release their respective claims…In other words, pursuant to the Settlement Agreement, Rachel and Richard jointly settled.” (pp. 10-11) The court went on to characterize the agreement’s language about allocating all the settlement proceeds to Rachel’s husband as a “vain attempt to avoid reimbursing Labor for Rachel’s workers’ compensation benefits.” (p. 11)

In other words, nice try, but no dice.

About the Author

Susan McGuire Smith spent most of her federal legal career with NASA, serving as Chief Counsel at Marshall Space Flight Center for 14 years. Her expertise is in government contracts, ethics, and personnel law.