California Contractors Beware of Uninsured Subcontractors – A Costly Workers Compensation Audit Problem

Small contractors in California suffer costly workers comp audits as a result of using uninsured subcontractors! A workers compensation audit problem that can drive a small contractor out of business.

In a recent case we were asked to conduct an audit review for the client. The audit had been completed by the California State Fund. The client, after receiving an unexpected audit bill from the Fund, to the tune of $30,000+, submitted a dispute letter listing items in the audit they felt were incorrect. The dispute was assigned to a Senior Auditor in the Bill Resolution Unit for consideration.

Here’s a few facts about the client.

  • She operates a small contracting business as a general contractor performing various carpentry and residential repair type work;
  • She only has one part time clerical employee;
  • Most work is performed by subcontractors;
  • She secured workers compensation coverage because it was required for a job last year.

After their review the Fund revised the audit making some small adjustments removing two subcontractors who provided adequate proof of insurance. The remaining contractors were uninsured and lumped into the highest rated category generating the large additional premium due.

Part of the original dispute by the client was that only a portion of the work performed was carpentry. Other work consisted of drywall installation, painting, concrete work and plumbing. All which carry a rate less than carpentry. The separation was not allowed by the Fund who sited two rules:

  • WCIRB – 1995, Part 3, Section V, Rule 2 – “If the employer fails to keep complete and accurate records of the remuneration earned by all officers and employees in sufficient detail to permit the proper classification of payroll in accordance with the provisions contained herein and to make them available for examination by the insurer, the total remuneration earned shall be assigned to the highest rated classification describing any part of the work.”
  • Department of Industrial Relations Industrial Welfare Commission Order No. 16-2001 – which requires that all construction employers maintain precise records of hours worked each day for each employee. Including daily start and stop times, meal periods where no work is performed along with break time.

So here’s a recap and my take:

  •  The client was poorly prepared when the policy was originally purchased. Most small contractors are unfamiliar with the traps and pitfalls of a workers compensation policy and need special attention and explanation of how the policy and audit process works. Special effort must be given to explain the proper recording keeping requirements for separation of payroll and job classifications. At audit is the wrong time to learn about the rules.
  • The insurance carrier always knows the rules! If you are a small contractor make sure you ask your agent for help understanding how it all works and fits together. Get it in writing! Your agent should educate you so be sure to ask questions and get their input. If they can’t help you…find another agent!
  • Don’t use uninsured subcontractors! It’s a fine line you may be walking and one that might just break your company!
  • Read your policy and all the documents the insurance carrier sends to you when your policy is issued. If you don’t understand something pick up the phone and call your agent or call the insurance company! ASK QUESTIONS until you understand!

This is what I’d consider a real breakdown of the workers compensation system. A situation like this should never happen. Workers compensation insurance coverage is there to protect employees, to provide a safety net when someone is injured on the job, not to bankrupt an employer who’s providing jobs and contributing to the economy.

Hope this helps you out! Thanks!