How can our workers compensation company charge us premium for help we paid to build our own home?

I recently received an email from the wife of a small Florida construction company owner asking this question. Over the past year they built their own residence using friends and neighbors to help with different steps in the building process. They paid their friends and neighbors for their time and help out of their business checking account. They operate their business as a “S Corporation” so the business is actually a separate entity.

Upon expiration and audit of their business workers compensation policy the auditor told them to expect all the monies paid to their friends and neighbors to be included and added to their workers compensation payroll, causing them to have a large additional premium bill due. In her comments to me she mentioned that her and her husband had no employees in their business.

So how can this be right?

To begin, she’s unknowling incorrect when she stated they had no employees…you see, when the checks were cut to the friends and neighbors using the business account, for all intents and purposes, those friends and neighbors, in the eyes of the workers compensation insurance carrier, were then considered employees. Perhaps statutory employees, but employees none the less. If one of those folks were injured while helping out build the house, then the insurance company would have had to pay a workers comp claim, and if they insurance company would have had to pay a claim, then they are due the premium.

If they had not used the business account to pay their friends for their time but rather wrote the checks out of their personal account, it would have been considered a personal transaction, outside the scope of the “S Corporation” and outside the workers comp policy. Remember, in past posts we’ve talked about entities and their effect on workers comp. You have to keep the entity in mind! In this case the workers comp policy was for the business, a “S Corp,” not in the name of the individual, so when they paid their friends out of their business account those friends all of a sudden became statutory employees and subject to the protection of the business workers comp policy.

Be careful out there! A little mistake like this can cost you a lot of money!

How could this have been avoided? When in doubt…contact your insurance agent, they should be able to help you! Be sure to ask them questions about how your policy would respond and get the answers in writing!

Hope this helps you out.  Thanks!

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