Uninsured Subcontractors – A Persistant Workers Compensation Audit Problem – Updated 06-02-15

Been there done that! Uninsured subcontractors continue to cause a great deal of workers compensation problems for employers at audit time. Not a week goes by that we are not contacted by an employer surprised after receiving a huge audit bill from their insurance company. The culprit? Persistant use of uninsured subcontractors. Please read on…

It’s not really my favorite subject but it seems that I spend a lot of time writing about the use of subcontractors and how they can cause problems at audit. The general rule to follow is that if an employer uses an uninsured subcontractor the employer will pay workers compensation premium based on the amount he paid the subcontractor! Sure there are some states where exceptions may apply given strict conditions. However by far the norm for this situation is that the employer hiring the uninsured sub will pay the premium!

Why? Remember this:

  • If your workers compensation insurance company would have to pay a workers compensation claim, then they are allowed to collect a premium.

It’s a touchy subject that crosses all types of employers. Call them what you like, subcontractor, independent contractor, 1099 worker, day laborer, you chose the term. It really doesn’t make a difference. If you are an employer and hire someone to do a job for you and you pay them, whether it’s cash or check, and they do not have a valid workers compensation policy in force, in the majority of states this person will be considered an uninsured subcontractor and your insurance company will charge you premium for their exposure.

To track down the source of this problem you have to look to an individual states workers compensation statutes. Start by locating and reading the definition of an “employee.” I’ll bet you’ll be surprised who statute considers to be your employee! If you need to find your states workers compensation statute just go to our State Rules Directory where you can look up information about your specific state.

While we’re at it, what about those states where an individual owner, operating as a sole proprietor, is excluded from the workers comp act? But when performing work for another can still make a claim against the other employers policy. Surprise! Frankly this is a nasty situation for any small employer that usually doesn’t present itself as a problem until, after audit, they receive an audit bill for several thousands of dollars.

You see, the owner/operator subcontractor tells the employer that he doesn’t have to carry workers compensation insurance on himself because he’s excluded in their state. Right. But what they don’t know is that when the uninsured sub performs work they are, by definition, considered an employee and any amount paid to them during the policy period will be used to calculate the final premium after audit.

How can this problem be avoided? Ask questions of your insurance agent and get the answers in writing if you can! If you feel like you need more information than your agent can help you with then call your insurance company direct! They are usually pretty helpful about these things.

What type of businesses use subcontractors?

  • Construction
  • Dental Offices
  • Cleaning Services
  • Insurance Agencies
  • Attorney Offices
  • Real Estate Offices
  • PI Offices
  • Repair Garages
  • And many, many more!

Remember these things:

  • If you hire a subcontractor ask for a valid certificate of insurance for workers compensation coverage. Make sure you are using an insured subcontractor. Make sure you provide a copy of the valid certificate of insurance at audit and you should be in good shape! 
  • If you use an uninsured subcontractor you will have to pay a premium.
  • Subcontractors are typically used in the construction industry but may also be found in every other type of business. If you pay someone for work or services they do, who is not a direct employee, then you should consider them a subcontractor.
  • Make sure you ask questions about the use of subcontractors.

Ok, maybe a little bit of ranting today! Sorry about that. But this is a hard problem to crack. It really boils down to education about the workers compensation product and how it works. Insurance companies really don’t want to surprise an employer at audit. Insurance agents don’t want to see their clients suffer because of a misunderstanding about the use of subs. And employers don’t want to face surprises and additional cost!

Hope this helps you out! Thanks!

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