When subcontractors become your workers compensation employees you should not be surprised at the devastating effect it has on your workers compensation audit and resulting additional premium. If you’ve ever had this happen to your business you know exactly what I mean! Lets take a look at the who what and why of subcontractors being treated as your employees by your workers compensation insurance company at audit.
This is an age old problem. It hasn’t gone away. I don’t think it will ever go away and I don’t understand why. Not a week goes by where our consulting firm is contacted by an employer who has had at least one subcontractor picked up on their workers compensation audit and charged as if they were a direct employee. This most often results in the employer being charged a substantial additional premium amount by their insurance company and the employer making some statement to the effect that “I didn’t know this would happen!” My response to that is really?
I’m going to keep this very simple. While there may be some states that have some special rule situations regarding independent contractors you should always consider this, if you hire a subcontractor and they do not have a workers compensation policy you will be charged for the amount you pay them just like they were your employee. If you remember this you should never be surprised at how a workers compensation auditor will treat your uninsured subcontractor.
Here’s the facts in a recent case where we were asked to help:
- The hiring contractor was experienced having been in business for 10+ years;
- The hiring contractor always had a workers compensation policy in place having a full time staff of carpenters and other workers;
- The hiring contractor had been through at least 10 workers compensation audits;
- The town where the hiring contractor conducted business was struck by serious storms causing many of their town residents to suffer significant property damage causing the need for repairs;
- The hiring contractor had so much business come in that they needed to hire subcontractors to fill the gap and get the work completed in a timely manner;
- The hiring contractor hired an out of state subcontractor to install siding;
- The out of state subcontractor told the hiring contractor that they did not have to carry workers compensation insurance since they were a sole proprietor and did not fall under the states requirements to have a policy;
- The hiring contractor paid the uninsured subcontractor $100,000;
- The workers compensation audit on the hiring contractor was completed and the auditor included the amount paid to the uninsured subcontractor as employee payroll;
- The additional premium generated from the audit, just for the uninsured subcontractor, was a little more than $18,000.
- The hiring contractor said “But he didn’t have to have workers compensation!!”
- Guess again.
I look at these kind of situations as a failure to seek out help. Simply put, if the hiring contractor had taken just a few minutes to reach out and find out for sure rather than take the word of the uninsured subcontractor, the additional premium they were facing may have been completely avoided. All the hiring contractor had to do was remember that uninsured subcontractors will be treated as employees. Another way to look at it is if your insurance company has to pay a claim for an injured worker then you have to pay a premium for that exposure.
This is not the post where I go into the specific issues, like statutory employment etc., that may be the root or reason why an insurance company can make a charge for uninsured subcontractors. Evidently all an employer must know is that if they use an uninsured subcontractor they will incur an additional cost on their workers compensation policy for doing so. And sometimes that additional cost is a big deal!
The hiring contractor used in the above example is a real, hard working contractor. This situation really happened. Now they are left to scramble around and come up with the additional premium they have to pay to their workers compensation insurance company all because they listened to an uninsured sub telling them that they did not have to carry workers compensation. Don’t let this happen to you and your business. When in doubt, reach out to your insurance agent or contract your individual states department of insurance and ask them.
Oh, did I mention that the uninsured subcontractor in the above example completed his work, took his money and went back to the state he came from? So our hiring contractor has no continuing work with this uninsured sub where he can work with them to collect back the premium dollars they were charged.
Hope this helps you out!
Stay safe and thanks for reading!