The issue of contractor liability in workers’ compensation is something members of the claim management team need to be aware of when dealing with claims. This is especially true when handling claims in the construction industry or other job classifications that rely heavily on contractors to perform work.
Contractor Liability in Workers’ Compensation: Back to the Basics
As a general rule, employers (with some limited exceptions) are required to purchase workers’ compensation insurance for their employees. In the setting of a general contractor, they typically do not have employees as people who work for them are generally classified as “independent contractors,” or subcontracted labor through another person or entity.
Notwithstanding this exception to the general rule, contractors may want to consider obtaining the benefits of workers’ compensation coverage should a judge or industrial commission determine an injured person is an “employee.” Situations to consider include the following:
- Uninsured contractor: General contractors can be found liable in workers’ compensation matters if a subcontractor does not have required coverages for their employees. Although there is no employer-employee relationship, courts generally will look to the main contractor, as well as other intermediate contractors, for coverage.
- Employee misclassification: This can occur in serval different circumstances, which include times when the misclassification is intentional (fraud), the nature of the relationship changes during the course of business or in instances of good faith dealings a finder of fact determines an employer-employee relationship exists. The mistake of fact, even if it is unintentional, is not a defense.
- Self-coverage: In many instances, a contractor will purchase coverage for themselves, and others working under them. This can include independent contractors working directly for the contractor, and subcontractors and their employees and the independent contractors of a subcontractor. This can sometimes come in the form of “ghost” or “shadow” policy, which covers medical and indemnity benefits under a workers’ compensation act, and also cover expenses related to legal representation in legal proceedings.
Avoiding Contractor Liability in Workers’ Compensation
The policy behind contractor liability in workers’ compensation is two-fold.
- Avoids situations where a contractor is avoiding liability and the payment of workers’ compensation insurance at the expense of unskilled labor; and
- Provides a certainty in benefit payment and reduction in tort litigation (eg – the Grand Bargain).
When a person working in a subcontractor situation is injured, that party should either have workers’ compensation insurance, if self-employed or for their employees. If the subcontractor does not have workers’ compensation insurance, a cause of action may arise against the contractor immediately above that entity. Liability will often also extend to the next immediate contractor if there is not the presence of insurance, etc.
Based on this complex statutory framework, members of the claim management team need to be diligent in their investigation. Practice pointers should include the following:
- Educate all insureds about the basics of contractor liability in workers’ compensation matters. This includes making them aware of the fact they may be responsible for persons unrelated to their business when involved in projects involving contracted labor. This is especially prevalent in the construction industry;
- Determine if any contractors and/or subcontractors are present at the injury site. Things can get complicated, so drawing a diagram may assist in determining liability for a work injury; and
- Careful payroll audits when determining workers’ compensation insurance premiums. While most contractors and employers are honest when reporting the number of employees, wages and injury rates, there is a temptation to “game the system.”
When speaking with an insured about workers’ compensation insurance in a contractor/sub-contractor setting, it is also important to provide precise and correct answers. Failure to do so can give parties with a false sense of security.
Workers’ compensation systems become complex when dealing with contractors. It is important to educate insureds and provide them with accurate information. This includes resources on how to avoid unnecessary risks and do so in an ethical manner. It can also help avoid the unnecessary payment on claims when insuring a contractor who works with other entities.
Author Michael Stack, CEO Amaxx LLC. He is an expert in workers’ compensation cost containment systems and helps employers reduce their workers’ comp costs by 20% to 50%. He works as a consultant to large and mid-market clients, is a 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 & lead trainer of Amaxx Workers’ Comp Training Center .
Workers’ Comp Roundup Blog: https://blog.reduceyourworkerscomp.com/
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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.