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FMG Law Blog Line

Another Risk of Using Independent Contractors – Workers’ Compensation Laws

Posted on: January 1st, 2012

By Bart Gary and Leanne Prybylski

Many businesses see the use of independent contractors as a way to circumvent laws applicable to employees, such as wage and hour laws, withholding of taxes and FICA and employee benefits.  Frequently, the benefits are too good to be true.  Add to the list of pitfalls, the workers’ compensation law.  Under many workers’ compensation laws the general contractor is the “statutory employer” of all employees working under its umbrella.  It is imperative that the general contractor ensure that its subcontractors have their own workers’ compensation insurance coverage.  In exchange for placing this “statutory employer” obligation on the general contractor, the statute also protects the general contractor from tort liability for injuries or death to employees of subcontractors.  Not only does this rule apply to construction contractors, but it also applies to anyone who hires independent contractors to provide services.

A general contractor should not assume, however, that it cannot be liable for providing workers’ compensation benefits to workers classified as “independent contractors.”  For example, in a recent case, the general contractor, who was unable to secure workers’ compensation coverage on the open market, was placed in the assigned risk pool.  The assigned risk pool is maintained by all carriers of workers’ compensation, generally for high risk insureds.  Like most coverage, the premium is based on the actual amount paid to workers during the policy term.

When the policy was issued, the contractor estimated that no wages would be paid to its employees because it was hiring independent contractors or subcontractors to perform the work.  The initial premium was only $750.  At the end of the first and second policy terms, the insurance company audited the contractor for actual amounts paid to workers and included wages paid by the independent contractors.  Based on the audit, the insurance company sought additional premiums of $79,523 and $24,551 for the first and second policy terms, respectively.

The contractor unsuccessfully argued that wages of the independent contractors should not be included in calculating its workers’ compensation premiums because the workers were not its employees.  The court disagreed, stating that the purpose of the statute is to ensure that all employees on construction projects are covered by workers’ compensation benefits.  Since the contractor did not show that any of the independent contractors or employees of its subcontractors were covered by another workers’ compensation policy, and did not show that any workers included in the audit were “misclassified,” the court found that the contractor was liable for all the insurance premiums.

As “statutory employers,” general contractors are ultimately responsible for providing workers’ compensation coverage to all employees working on their projects.  To limit liability, general contractors must require their subcontractors to have in effect workers’ compensation coverage and to flow the requirement down to any sub-subcontractors.  Alternatively, the contractor should deduct the premium for covering all employees from the independent contractors’ compensation.  Additionally, contractors should ensure that their own employees are not misclassified as independent contractors.

For more information, contact Bart Gary at 770.818.1403 or [email protected] or Leanne Prybylski at 770.818.1404 or [email protected].

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