Why Employers Use Uninsured Subcontractors – Unintended Consequences in Workers Compensation

Why are Employers surprised after a workers compensation audit to find they have been charged many thousands of dollars for payments they made to uninsured subcontractors? This problem never goes away! So it’s time to talk about it again! In this blog we’ll explore why employers hire subcontractors and uninsured subcontractors and discuss the resulting consequences on their workers compensation premium.

Why do employers hire subcontractors?

  • The employer doesn’t have their own work crew – It’s common in the world of construction to find that a general contractor does not have their own crew of workers. Maybe their skill is in engineering or design and when they secure a job they must rely on hiring subcontractors to do the actual work.
  • The employer takes on a job where their own work crew lacks a specific set of work skills required for the job – Perhaps the employer has a crew of carpentry and finish workers but the job requires plumbing, electrical and drywall.
  • The employer secures a job away from their normal work locations – When an employer takes on a job at a remote location they may have to hire subcontractors to perform the work.
  • The employer takes on a job that exceeds the capacity of their normal work crew – The job is large and requires additional workers to complete in a timely manner.
  • Hiring a subcontractor may cost less – Employers will hire a subcontractor because it typically costs less than bringing on direct employees. The employer will not have to pay payroll taxes, insurance and other benefits.

The hiring and use of subcontractors is a very normal practice in the world of construction. Think about it. You wouldn’t necessarily want a roofing contractor to install your granite kitchen counter tops or expensive mosaic tile pattern now would you? Not that they couldn’t get the job done but that there’s probably a more experienced contractor out there that knows how to do that type of work.

So if hiring subcontractors is a normal situation in construction why do some employers hire uninsured subcontractors or subcontractors who do not have workers compensation insurance?

  • It’s cheaper – Workers compensation insurance, especially in the construction arena, is very expensive. Carpentry rates can easily exceed $18 and $20 per 100 of payroll. That means a contractor who has a carpentry work crew with $100,000 in payroll could easily pay in excess of $20,000 just for those workers. Contractors who do not carry workers compensation will typically charge less for a job than fully insured contractors.

That means the uninsured contractor can do the work for the hiring employer at a lower cost. Which means the hiring employer can do the work for the end-user or consumer for less cost. Or that they will make more profit on the job for the consumer.

Isn’t there some kind of requirements that an employer carry workers compensation insurance?

  • Why Yes There Are! – Most states have some kind of statutory requirement that mandates when an employer must carry workers compensation insurance on their workers. But it gets confusing! For example in Missouri non-construction employers do not have to carry workers compensation unless the have 5 employees. However if they are in the construction industry and have 1 employee then they must carry workers compensation. This differs from state to state. Check out our State Rules Directory for more information on state rules.
  • Don’t Forget the Exemptions – It gets confusing when, for example, a sole proprietor may not be required to carry workers comp on himself in his state if he is the only worker in his business. Again, you must check out the individual state requirements. These exceptions usually do not apply when the sole proprietor is doing work for another employer who has a workers compensation policy. Be careful!

What happens when an employer hires an uninsured subcontractor?

  • The uninsured subcontractor will now fall under the hiring employers workers compensation policy – This means that for any subcontracted cost the hiring employer pays to the uninsured subcontractor that amount paid will be picked up at audit and used in calculating the hiring employers final audit bill. For example, the hiring employer contracts with the uninsured carpentry contractor, as mentioned above, with a payroll of $100,000. The hiring contractor will now be charged additional premium.
  • Why does the insurance company make this charge? Because if one of the uninsured subcontractors workers is injured on the job the coverage will fall back to the hiring employers policy and if the insurance company would have to pay for an injury then they are due a premium.

Our firm has worked an untold number of uninsured contractor cases. It always begins when the hiring employer is audited and is charged for the uninsured contractor. These cases can be extremely costly for the hiring employer generating many thousands of additional premium dollars due. And for the most part, it is what is is…not one of my favorite sayings…but with the results being the unintended consequences of significant additional cost.

I hope this helps shed a little more light on the associated problems with using uninsured subcontractors.

Thanks for reading!