When Settlement Doesn't Settle Everything: Employer Negligence and Workers' Compensation Liens

by Juancarlos Hernandez

An employee injured at work by a third party settles the civil lawsuit after years of litigation. After attorney fees and costs, the worker expects substantial compensation. Then the employer's workers' compensation carrier files a lien that consumes a substantial part of the settlement. Many workers don't realize there's a solution: challenging whether the employer's own negligence contributed to the injury. This unresolved question can dramatically increase the worker's actual recovery.

The Legal Principle

When an employee is injured at work by a third party, the employer's workers' compensation carrier typically holds a lien on any third-party recovery, preventing double recovery for the same damages. But a critical exception applies when employer negligence enters the picture.

Under California Supreme Court precedent in Witt v. Jackson and Associated Construction v. WCAB, negligent employers cannot profit from their own wrongdoing. If employer negligence contributed to the injury, the lien is either reduced or completely wiped out.

The challenge is that third-party settlements resolve liability between worker and defendant but don't address the employer's degree of fault. That question remains unresolved unless someone pursues adjudication.

Why the Issue Stays Hidden

Workers' compensation operates on a no-fault basis, so employees never prove employer negligence to receive benefits. In third-party lawsuits, alleging employer negligence would only strengthen the defendant's comparative fault defense. Yet evidence of employer negligence often emerges through the defendant's litigation strategy.

When defendants raise dual employment defenses—arguing the worker had two employers, making workers' compensation the exclusive remedy—they highlight the employer's workplace role. In some cases, some employers may even help the third party if that means keeping a good relationship with the third party in the future. Some will even submit declarations supporting the defendant's motion for summary judgment.

Ironically the employer helps mount defenses that threaten the employee's recovery, the employee settles to avoid substantial risk, then the employer seeks full reimbursement. This dynamic is extremely unfair to the injured worker.

The Solution: WCAB Adjudication

The California Supreme Court directed in Associated Construction: "When a settlement between the employee and a third-party tortfeasor fails to resolve these issues, the task devolves upon the [Workers' Compensation Appeals] Board." Associated Construction & Engineering Co. v. Workers’ Comp. Appeals Bd. (1978) 22 Cal.3d 829, 845. The WCAB—not the civil court—is the proper forum for determining employer negligence and its impact on lien rights.

Returning the lien dispute to the WCAB is often the most favorable path for the injured worker because the Board evaluates the employer’s conduct within a framework that differs from that of the civil courts. The WCAB routinely examines workplace safety, employer control, and compliance with labor regulations, making it uniquely equipped to determine whether the employer’s negligence contributed to the injury. When that negligence is established—even in part—the carrier’s lien can be substantially reduced or eliminated under Witt and Associated Construction.

Procedurally, sending the lien dispute to the WCAB places the injured worker in a far stronger position. The WCAB allows a full evidentiary hearing on employer negligence with far fewer procedural barriers. The Board’s discovery rules are more flexible, the burden of proof is more practical, and the judge has broad discretion to weigh the evidence already developed in the civil case without the worker having to re-litigate issues. This procedural structure makes it easier, faster, and more realistic for an injured worker to establish employer negligence and obtain a meaningful lien reduction.

Practical Guidance for Attorneys

Throughout litigation, document everything suggesting employer negligence: affirmative defenses implicating the employer, employer declarations supporting the defendant, supervisor deposition testimony about workplace conditions, safety regulation violations, and evidence of employer control over the injury-causing situation.

After settlement with the third party and employer's attempt to impress their lien. Request the court to remove the case to the WCAB for proper adjudication of employer fault.

The Bottom Line

Settling a third-party lawsuit doesn't resolve every financial issue when employer negligence may have contributed to injury. The Workers' Compensation Appeals Board provides the proper forum for adjudicating employer fault and determining fair lien amounts. Attorneys must identify potential employer negligence early, preserve evidence throughout litigation, and ensure clients understand their options. The financial impact can be substantial—often the difference between inadequate compensation and meaningful recovery. California law prevents negligent employers from profiting while seeking full reimbursement, but this protection only works when properly invoked.