Tribal Workers Compensation Programs Off the Reservation

Discussion Draft — Does Not Represent Department or Administration Position

TRIBAL IMMUNITY AND STATE WORKERS’ COMPENSATION LAWS:
ISSUES ARISING FROM OFF-RESERVATION BUSINESS ACTIVITIES

Robert Alan Wake, Staff Attorney, Maine Bureau of Insurance

Last year in these pages, Robert Aurbach and the IAIABC Task Force on Tribal Sovereignty and Workers’ Compensation presented an article entitled Indian Sovereignty and Workers’ Compensation: Some Questions and Some Policy Options,[1] discussing the implications of tribal sovereignty when workers suffer compensable injuries on tribal lands, which means, primarily, on Indian reservations and trust lands, including premises governed by Indian gaming compacts.

The focus of this article can be seen as the opposite side of the same coin: claims that state workers’ compensation and insurance laws are preempted (or unenforceable) even though the workers in question are employed outside tribal lands, where the Tribe does not exercise sovereign power. In particular, regulators in a number of states are grappling with the issues raised by several employment outsourcing services that allege that their status as tribal enterprises makes them – and their non-tribal clients – subject exclusively to tribal workers’ compensation benefit and coverage laws rather than to state law. Although the outsourcing services contend that the tribal benefit programs in question are equivalent or superior to the benefits promised under state law, the State cannot simply take their word for it. For workplaces under the protection of state law, it is the State – not the Tribe and certainly not the employer – that has the responsibility to determine whether the benefits are sufficient, whether the coverage is provided by a financially sound licensed insurer or authorized self-insurer, and whether the claims are adjudicated fairly under appropriate judicial oversight.

According to one recent report by the Coalition Against Insurance Fraud:

“Native American tribes are setting up unlicensed workers comp operations on California reservations to sell cut-rate – and possibly bogus – coverage to vulnerable businesses seeking affordable premiums, the state regulators say. The tiny Fort Independence Indian tribe is the latest tribe to sell bogus coverage to businesses desperate for affordable comp coverage, the department suspects. The tribe leases workers to small businesses through a firm based on the reservation. It handles payroll processing, taxes, comp claims and other administrative chores. Premiums are 20–50 percent below market, and the tribe says it’s signed up 125 businesses. State officials say the coverage is bogus and have shut down at least three tribal programs in the last year.”[2]

One of the best known examples is Mainstay, discussed in Section III below. This is a professional employer organization in California that claims in court documents to be an enterprise “organized under the laws of a federally recognized tribe”[3]. Mainstay markets its services to businesses around the State with no other connection to the Tribe, and claims that when a client enters into a PEO contract with Mainstay, the client becomes exempt from state workers’ compensation law because all its employees, whether or not they are Indians, become subject to a relationship governed exclusively by tribal law. In order to respond appropriately to such claims, it is essential to understand the differences between a Tribe’s sovereign power and its sovereign immunity, the essential elements of tribal immunity, and what tribal immunity does and does not accomplish.

Outside its own tribal lands, a Tribe is in a very similar position to a foreign nation.[4] Within its own borders, a nation’s sovereign immunity is self-created and self-perpetuating, part and parcel of its own sovereign powers, and something the sovereign has the sole discretion to waive in part, based, for example, on its own principles of fairness or its reciprocal agreements with trading partners. Outside the nation’s borders, the situation is reversed – foreign sovereigns (unless they are occupying powers) cannot declare themselves to be immune. Rather, immunity is granted by the host country based on principles of comity, subject to the conditions the host country deems fair and appropriate. However, the division of sovereignty under our federal system adds an additional layer of complexity, because States and Tribes are both “dependent sovereigns,” so States lack the power to define or regulate the powers, privileges, and immunities of foreign or tribal sovereigns within the State’s borders. That is a matter of federal law. Issues of State-tribal relationships are further complicated by the wealth and influence many Tribes have accrued through gambling revenues and the benefits provided to the host States that share in those revenues.

Many claims of tribal immunity are spurious, and some are blatantly fraudulent, but it is not always that simple. Some readers may be surprised to learn that when a federally recognized Tribe engages in ordinary business activities outside tribal lands, it remains protected by tribal immunity. On the other hand, that protection is limited and may be waived. Tribal immunity, where it applies, protects the Tribe against actions for money damages, and perhaps from certain other lawsuits in state and federal courts. It is not a blanket exemption from applicable state laws. States may in some circumstances need to adjust their enforcement techniques, but outside tribal lands, the State may still insist that all injured workers receive the benefits required by state law and that all employers obtain coverage in the manner required by state law. Furthermore, when employee leasing or other outsourcing arrangements are involved, the non-tribal client employers do not have the benefit of tribal immunity.

I. The Nature and Essential Elements of Tribal Immunity

As noted above, tribal immunity is not the same as tribal sovereign power. Native American Tribes hold sovereign power over their own reservation lands, subject to such restrictions as are imposed by federal law or by treaties to which the Tribe is a party. But that sovereign status does not make the Tribe a law unto itself wherever it might establish a business presence, no more than a State or a foreign country could set up shop outside its own borders and still claim to be governed exclusively by its own laws. The most obvious example is gaming – nobody could seriously argue that a Tribe that wanted to operate a casino could simply buy some land anywhere in the country, enact a law authorizing a casino on that land, and ignore applicable state laws and local ordinances with impunity.

However, the following scenario may seem factually similar, yet the Tribe prevailed. The Tribal Industrial Development Commission buys an interest in a local, off-reservation business. The Tribe pays for it by giving the parent corporation a promissory note, but then defaults on the note. The parent corporation sues in state court, and the Tribe pleads sovereign immunity as a defense. These are essentially the facts of Kiowa Tribe of Oklahoma v. Manufacturing Technologies, Inc.[5] Although the Oklahoma courts held that tribal immunity did not apply to suits for breach ofcontract arising out of off-reservation commercial activities, the Supreme Court reversed, by a 6–3 vote,[6] and held that the Tribe was immune from suit.

Justice Kennedy, writing for the majority, was almost apologetic about the Court’s holding. He explained that “Though the doctrine of tribal immunity is settled law and controls this case, we note that it developed almost by accident,”[7] and went on to concede that the case law establishing the doctrine was based on “at best, an assumption of immunity for the sake of argument, not a reasoned statement of doctrine,”[8] and “is but a slender reed for supporting the principle of tribal sovereign immunity.”[9] He acknowledged that Justice Stevens had used even stronger language – “founded upon an anachronistic fiction” – in his recent concurring opinion in the Potawatomi case, in which the Court had unanimously held that a State cannot sue a Tribe to collect unpaid state taxes.[10] Furthermore, the changing nature of tribal economic activity provides additional “reasons to doubt the wisdom of perpetuating the doctrine,”[11] which “might suggest a need to abrogate tribal immunity, at least as an overarching rule.”[12] Finally, the Court observed that the sovereign immunity granted by the United States to foreign countries is narrower, and does not extend to the commercial activities of foreign sovereigns within our borders.[13]

Nevertheless, the Court held that the existence and scope of tribal immunity are by now well established, and that where changes are necessary it is up to Congress to make those changes. Foreign sovereign immunity is a case in point: after a lengthy period of uncertainty in the law, Congress codified the doctrine by statute and clarified those uncertainties.[14]

The following basic principles of tribal immunity, as outlined in Kiowa and Potawatomi, will be discussed in more detail in the remainder of this article:

· Only sovereign Native American Tribes are entitled to tribal immunity.[15] Some courts have held that this immunity also shelters tribal subsidiary corporations, but as discussed in the next section, the rationale for doing so is questionable.

· Tribal immunity can be waived by the Tribe or abrogated by Congress, but “tribal immunity is a matter of federal law and is not subject to diminution by the States.” Courts will not find a waiver or abrogation of tribal immunity without a clear expression of intent.[16]

· Tribal immunity extends to “suits on contracts, whether those contracts involve governmental or commercial activities and whether they were made on or off a reservation.”[17]

· Nevertheless, States may apply their substantive laws to off-reservation tribal activities, as long as those laws are not enforced in a manner that violates tribal immunity.[18]

II. Federally Recognized Tribes and Tribal Instrumentalities

In some cases, a claim of tribal immunity will be transparently fraudulent. For example, the notorious “Sovereign Cherokee Nation – Tejas” claimed to be based on an island in the Rio Grande between Texas and Mexico, and to be immune from state and federal insurance, banking, and securities regulation.[19] When its spokesman, “Chief Wise Otter,” was questioned about his fair complexion, blond hair, blue eyes, and English accent, he responded that the birth of an Albino Cherokee is a mystical sign and an occasion for great rejoicing among his people.

However, the answers are not always quite so clear-cut. A genuine Native American community might be involved, but not a federally recognized Tribe. The business might actually be operated from a genuine federally recognized reservation by members of the Tribe, but not be operated by the Tribe itself.[20] When the entity claiming the immunity is not recognized as a sovereign, there can be no sovereign immunity. Thus, the first thing regulators should look for, when an entity doing business outside tribal lands claims tribal immunity, is whether that claim is being asserted by a federally recognized Tribe. Generally, sovereign tribal status is linked to federal recognition. If there is no sovereign Tribe, the claim of tribal immunity has no merit and there is no impediment to the full enforcement of all applicable state laws.

Federal recognition is not always dispositive, however. Although claims of tribal immunity should be viewed skeptically when the alleged Tribe is not federally recognized, and all of the leading cases on tribal immunity begin with a recital that the Tribe in question is federally recognized, tribal status may also be recognized at common law. The criteria were discussed by the Montana Supreme Court in Koke v. Little Shell Tribe of Chippewa Indians:[21] “The Little Shell Tribe has been pursuing recognition by the federal government under the Indian Reorganization Act of 1934 since the 1930’s. Although the Little Shell Tribe has not yet received federal recognition, tribes may still be recognized as such under common law. The United States Supreme Court established the criteria for common law recognition of a tribe in Montoya v. United States:[22] first, members must be of the same or a similar race; second, they must be united in a community; third, they must exist under one leadership or government; and fourth, they must inhabit a particular, though sometimes ill-defined territory.”[23] Similarly, in First American Casino Corp. v. Eastern Pequot Nation,[24] the Connecticut Superior Court held that although the Eastern Pequot Nation was not federally recognized, it was entitled to tribal immunity because “The state of Connecticut has recognized that the defendant is a dependant [sic] domestic nation, a ‘self-governing [entity] possessing powers and duties over tribal members and reservations.’”

Tribal Instrumentalities and Tribal Enterprises

One area where the law remains unsettled is whether a Tribe can claim immunity for its subsidiary enterprises.[25] A subsidiary governmental unit is immune in the same manner as municipalities and other instrumentalities and subdivisions of States,[26] but what about a business corporation owned by a Tribe? Some courts have held that these tribal enterprises are also immune, but have often taken this conclusion for granted without analyzing the fundamental distinction between the Tribe itself and a subsidiary corporation, and without developing any test for identifying whether or not a subsidiary corporation qualifies for immunity as an “instrumentality of the Tribe.”

In one leading case, White Mountain Apache Indian Tribe v. Shelley,[27] the Arizona Supreme Court did at least recognize that there was a problem, although its efforts at a solution left some key questions unanswered. The court held that the Fort Apache Timber Company, a subsidiary of the White Mountain Tribe, could not be sued in state court for breach of contract. While recognizing that governmental corporations and instrumentalities are not ordinarily immune from suit, the court justified its holding by explaining: “We believe it would defeat the purpose of Congress in granting immunity to Indian Tribes were we to treat a subordinate economic organization of an Indian tribe as governmental corporations or federal instrumentalities are treated. If it is the intent of Congress that such organizations be treated as governmental corporations or federal instrumentalities it is a matter best left to Congress for action.”[28]

The court, however, did not explain what purpose it envisioned, other than observing later in the opinion that (as the Supreme Court subsequently also held in Kiowa), tribal immunity applies even to “an enterprise private or commercial in character, rather than governmental,” because “It is in such enterprises and transactions that the Indian tribes and the Indians need protection.”[29] This does not seem to be an adequate explanation, since immunizing a commercial enterprise from suits to enforce its contractual obligations seems to go beyond the ordinary understanding of “protection.” Had tribal immunity been the result of an Act of Congress, as the court seemed to believe it was, the answer would have been clearer since a statute would have had to spell out who is entitled to immunity and what activities, if any, are excluded from immunity.[30]