A statutory Employer is an entity that becomes an actual employer by Law or Rule. These laws and rules are designed to protect an employee against not being covered for workers compensation benefits due to a lack of insurance or fuzzy employer-employee arrangements.
The most common situation is in the construction industry. Wide spread use of subcontractors, independent craftsmen, and joint-venture contracts can leave gaps in benefit protection for injured employees.
Most general contractors and property owners in construction are quite familiar with their exposures for becoming a Statutory Employer. They normally protect themselves by using hold harmless and indemnification agreement contracts. They often require that they be named as an also insured by endorsements to workers compensation, general liability, and property insurance policies.
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Other Exposures for Statutory Employment:
A few other situations that can lead to statutory employment and require the payment of workers compensation benefits are:
- Using individuals who may not qualify for workers compensation by statute. (Single Proprietors, Senior Corporate Officers, Domestics, and Juveniles are a few examples)
- Over control, long term use, or direction of temporary or leased employees.
- Improper job classifications and poor job descriptions.
- Poor contract wording or intent with the contracted entity.
- Failure to document insurance and request being a named insured on insurance policies.
- Definitions of employers by government agencies such as the IRS
- The IRS defines statutory employees for social security and Medicare taxes.
- These employment functions include drivers, insurance sales, traveling sales, and work done at private residences. While these requirements may not create a workers compensation statutory exposure, they might be used by a claimant in a litigation situation. (See IRS Publication Employer’s Supplemental Tax Guide 15-A for full details and compliances. Have an attorney review if your organization for any of these situations.)
- Voluntary persons
- Part-time persons
- Situations where the work function being done by the non-employee is primary to the employer’s business.
- Challenges to the enforceability of hold harmless and indemnification clauses based on language, vagueness, or public policy.
Protections and Precautions:
Before embarking on the use of sub-contractors, independent technical s, temporary and part-time employees, volunteers, as well as leased employees plan carefully. A few items to consider are:
- Weigh the pros and cons of using this type of entity to accomplish the task needing to be done.
- Consider the education, qualification and experience levels needed.
- Research local employment laws, rules and regulations that may impact their use.
- Review recent legal decisions that have come down that might have destroyed or mitigated prior defenses.
- Review agencies or government entities that might be defining statutory employment.
- Research contracts and facts where the courts have sustained defenses in statutory employment challenges.
- Use an attorney specializing in developing contracts, and protections for non-employees.
- Insist that all entities being hired have all their insurance policies endorsed naming the hiring organizations as also insureds. Insist on adequate limit amounts of coverage and defense costs. (Some claims made policies add defense cost or reduce them from the coverage limit.) Insist on reinsurance coverages when primary carrier limits are not sufficient to meet catastrophic losses. It is also a good idea to have an endorsement extending the policy for claims made or not reported during actual work contract time.
There are numerous areas when use of non- employees can make an organization a statutory employer.
While defenses are being attacked and diminished, good planning, tight contracts and proper insurance endorsements can still protect against losses and statutory employment claims.
Author Michael Stack, Principal, COMPClub, Amaxx LLC. He is an expert in workers compensation cost containment systems and helps employers reduce their work comp costs by 20% to 50%. He works as a consultant to large and mid-market clients, is co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder of COMPClub, an exclusive member training program on workers compensation cost containment best practices. Through these platforms he is in the trenches on a working together with clients to implement and define best practices, which allows him to continuously be at the forefront of innovation and thought leadership in workers’ compensation cost containment. Contact: firstname.lastname@example.org.
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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.
Richard J. Crollett, Esq.
Being that very few subcontractors carry worker’s compensation insurance, I believe the better way for the “General Contractor” as a statutory employer to protect himself/herself is for the general contractor to carry worker’s compensation insurance and name the subcontractor as an additional insured to its policy, and then of course reduce the cost of such insurance from the subcontractor’s contract price for the job; otherwise, the general contractor will be liable for job injuries to the subcontractor’s workers.