By John Rosmalen
Finding the right workers’ compensation insurance at an affordable price is a challenge for every general contractor. It is an especially difficult dilemma for independents in the trades and services industry. As independents, they are by and large subcontractors, and in many cases, one-person bands who are not obligated to maintain coverage. They are considered owners and operators because of their independence, which is why general contractor (GC) do not have to include them in their company’s workers’ comp coverage.
The nature of GCs is to take on a large job using their own experienced staff for the work specialties where they excel and then subcontract the remaining work components. Since this is a common practice, it is unreasonable to expect a general contractor to maintain such skilled trades as plumbers and electricians on the payroll even though they might be needed. GCs do all they can to avoid such unnecessary expenses, which creates a burden for two major project line items: payroll and workers’ comp coverage. That’s what usually happens when highly skilled professionals sit idle for a substantial amount of time until the GC is ready to use them. As a result, labor costs increase and profits decrease.
Payroll employees are required to receive Form W-2 Wage and Tax Statement, and as such must be covered in workers’ compensation policies. Naturally, most general contractors want to avoid that type of expense, which is why they subcontract on a job-by-job basis.
Workers’ Compensation Dilemmas
Here is where the policies of some carriers unfortunately become the problem instead of the solution to potential workers’ comp issues. The carriers vie for the GC’s premium but tend to cap subcontractor exposure at varying percentages, usually in the range of 20 percent. That is a dilemma for those independents obligated under the state laws where they are employed to maintain workers’ compensation insurance. Requirements for independents and exposure vary with each state. Some states like Arkansas, Virginia and Florida rely on data generated by the National Council on Compensation (NCCI) for their ratings and refer to themselves as NCCI states. Then there is Ohio, which uses NCCI, but bars private insurance for workers’ compensation policies. Instead, the Buckeye State maintains its own state fund.
In fact, many independents are turning to state funds where available. These funds were supposed to be the last resort for contractors that could not afford private insurance. However, more GCs and those subcontractors that are obligated to carry coverage may view state funds as more affordable.
Complicating the issue are the various laws mandating coverage state by state. Some owner/operators (one-man-bands) are exempt from having to purchase workers’ comp insurance. Others are inconsistent about the mandates. In Alabama, it is required for those firms that have more than four employees, while in Colorado, the standard is one or more employees. A number of states permit self-insurance.
The last thing carriers want is a claim from a subcontractor. There are subs who either never or rarely carry workers’ compensation insurance. Yet some of these firms, use their attorneys to go after the larger carriers because, in their view, they can always afford to pay. This explains why most GCs look to state funds as their salvation and believe that the percentage for subcontractor exposure should not be their concern.
State funds tend to have rigid rules applying to independent contractors particularly in defining who really is an employee or a subcontractor who receives a 1099 tax form as an independent. The distinction is critical particularly during an end of year audit. Its findings could lead to a major bill from the state should the audit determine a need for some worker reclassification.
The Best Defense
So what is the best defense for the GCs and 1099s when it comes to workers’ compensation issues? The answer is thorough and comprehensive documentation. Without it, insurance auditors are likely to place general contractors in the highest classification, which results in burdensome higher insurance rates. Documentation includes time or job cards, descriptions of the job being completed, and job classifications. Without such information, the contractor or subcontractor will have very little data to prove its case in a job classification dispute and inclusion or exclusion of workers from coverage.
The best advice is to configure the back office to effectively document all work completed and all those who performed it. Another recommendation is to make sure a compliance schedule in place so that the subcontractor either has workers’ compensation insurance or, if working alone, signs a letter that declares the individual to be an owner/operator, exempt from the insurance requirement. Failure to maintain such documentation could lead to an audit finding against the GC or the subcontractor. Verify that workers maintain correct time on a job by job basis. Insurance companies are gradually moving to workers’ compensation products molded around the customer and the industry instead of what has been until recently the opposite.
In the future, there could be increasingly more state and/or private insurance carriers that will offer more flexible guidelines to allow greater subcontractor exposure. Regardless of the insurance environment, insist upon thorough and verifiable documentation. Workers’ compensation rates may depend on it.
John Rosmalen, a veteran of 25 years in the financial services industry and a qualified CPA, is senior underwriter and program manager for Imaco Insurance, which offers underwriting solutions, cost efficient access to worker compensation programs and expertise to help client companies thrive. To learn more, call (800) 943-3821 or visit www.imacoinsurance.com.