What if a Subcontractor Doesn’t Have Workers Comp? A Broker’s Guide

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Your clients come to you with payroll in hand and a list of their class codes. But could they be missing some vital information that directly impacts their policy premium? As you well know, the answer is yes!

Failing to include relevant subcontractors in workers compensation payroll reporting can lead to trouble. Clients will often only include employees on the payroll, but they may have responsibilities to their 1099 or subcontractor staff.

To help your clients get the coverage they need without any surprises come audit time, you need to prepare them to identify which subcontractors fall under their policy. Doing so will help your client minimize their liability, both generally and in terms of premiums.

In this guide, we’ll walk you through the subcontractor problem, from who gets covered and when to how to help your clients avoid higher premiums.

Who Is Considered a Subcontractor in Workers Compensation?

Workers compensation coverage provides coverage for all salaried workers. We covered much of this in our guide to work-relatedness. If you’re on the payroll, you’re covered.

However, different rules apply to subcontractors or people who work with your client but not as a salaried or waged worker. These complex rules can apply even when it’s crystal clear that the subcontractor is an independent contractor and not an employee. The subcontractor issue is a thorny one that regularly trips up clients in safety-critical verticals like construction.

The coverage question comes down to your state and its subcontractor rules: many states, especially California, have a unique spin on the question. In many cases, subcontractors fall under your client’s policy when the subcontractor is under your client’s direction and control.

Additionally, many clients tend to split their payroll reporting based on who they classify as independent contractors on their federal taxes. However, be aware that the state and the IRS may disagree on who and what a subcontractor is.

So even if your client adds someone as a subcontractor for IRS tax purposes, the state may not agree that the same person is exempt from workers comp. 

If your client isn’t sure, then IRS Publication 15-A is a good starting point, followed by a look at state legislation.

Keep in mind that all is fair in love and Texas. Texas doesn’t mandate workers compensation coverage for any business outside of those that work on federal and state contracts.

Ask: Who is In Control?

Subcontractor rules typically depend on whether your client provides the subcontractor with direction and controls their work environment.

The answer isn’t always clear, but the following checklist can help illuminate the matter:

  1. Does the contractor provide services primarily for your client?
  2. Does the client provide the contractor with restrictions for doing the job?
  3. Does the contractor use the client’s supplies?
  4. Does the client tell the contractor when and where to work?
  5. Does the client tell the contractor what order or sequence of work to follow?
  6. Does the contractor advertise and attract other business?
  7. Does the contractor get paid hourly or daily or on a bid or contract?
  8. Does the contractor work alongside the client’s other employees?
  9. Does the contractor pay tax and follow state regulations?
  10. Does the client tell the contractor who to hire and fire?
  11. Does the subcontractor have liability insurance for their work?
  12. Does the subcontractor have their own workers compensation insurance?
  13. Do both parties have equal rights to terminate the work?

If your client primarily answers “yes” to 1-8 and “no” to 9-12, then your client is likely considered to exert direction and control over the subcontractor. In other words, your client probably needs to cover that subcontractor on their policy.

Keep in mind that things get tricky when your client tends to lean on the same subcontractors over and over again.

Suppose a general contractor always taps the same small group of plumbers, and those plumbers get most of their work from that general contractor. In that case, the line gets blurry, particularly if there’s an attempt to streamline processes through day rates, tool sharing, and schedule synchronization.

When Is Your Client Not Responsible for Subcontractors?

Are there any explicit scenarios where your client wouldn’t cover a subcontractor? The answer depends on the state’s exemptions.

Often, clients have no responsibility for subcontractors who:

  • Already have their own workers comp insurance before starting work
  • Provide a job that isn’t part of the client’s normal operations (such as HVAC repair contractor in a manufacturing facility)

In some states, like Oregon, exemptions extend to construction and landscape construction when the subcontractor has an active state construction/landscaping license.

In cases when you’re unsure, it’s worth liaising with the state workers compensation board or group.

Agents: Get Lists of Your Clients’ Employees AND Their Subs

Knowing where contractors stand is critical for every client. Hiring an uninsured contractor can not only cost your client if the subcontractor gets injured, but insurers also punish you for misrepresenting payroll. Clients may face retroactive premium bills for contractor coverage.

If payroll is consistently inaccurate, the carrier may drop your client, leading to higher premiums and a long road to the insurer of last resort.

Getting acquainted with state law and sorting through the process during payroll reporting can help prevent unpleasant surprises down the road. So, make sure you have the list of W-2 employees and any independent or subcontractors whenever you start or review the process.

Nowhere is this more important than in California.

While federal law makes it challenging to misclassify an employee in any context, California Labor Code §2750.5 offers two presumptions that workers are employees and not contractors. The code requires businesses who hire someone to perform “any function or activity” for which they need a license to hold said license. If the subcontractor doesn’t have a license, then they are a de facto employee.

Don’t Start Work Without a Certificate of Insurance

Suppose your clients’ subcontractors are truly independent (i.e., seeking other work, bring their personal tool library, and paying taxes as a business). In that case, clients should also ensure their subcontractors provide an insurance certificate before starting work.

Proof of insurance removes liability in almost every case unless the subcontractor is improperly classified.

Don’t just take the certificate as proof: look up the policy and confirm it’s valid before signing anything. And keep a copy of the insurance cert on file for the duration of the project. 

While your client is less likely to be subject to coverage if the subcontractor’s policy lapses mid-work, it’s better to have all the information to provide to your insurer and the state board if required.

Broker Tip: Encourage clients to add an insurance certificate to the work contract or tender. It’s always better to make insurance coverage a condition of the deal than to pay the price later!

Prevent Surprises by Looking Beyond W-2 Workers

The independent contractor issue is a tricky one: it differs by state and plagues some industries more than others. However, it is a problem that pops up repeatedly: even after years in business, many clients don’t realize that their contractors are employees in the eyes of the state workers compensation board.

You can help prevent surprises during payroll reporting and audits by working with W-2, 1099, and subcontractor workers. If those subcontractors look like they may be employees, consult the law, run the checklist, and make sure clients get the coverage they need.

Working with clients who rely on subcontractors requires an eagle eye. At Foresight, we specialize in hard-to-place industries and wrap every policy with our streamlined technology, making it easier to serve your clients. Ready to work with us? Get appointed today.

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