Who Covers Workers Compensation
The responsibility for workers compensation coverage on construction sites in Illinois involving employees of subcontractors can sometimes be murky. The general rule is that the hiring company is responsible for its own employees getting workers compensation. This is often true even if the hiring company does not currently have any employees working on the project. The hiring company is still deemed responsible for the workers compensation of its employees. More often than not, the hiring company will have a general liability insurance policy that also provides workers compensation coverage.
The general contractor on the job can be held by law to also be responsible for the workers compensation coverage on behalf of any subcontractors. This is often typically done through what is called a "flow down" insurance clause in the contract . The general contractor can require that its subcontractors have their own workers compensation policy in place and name the general contractor as an insured under the subcontractor’s workers compensation policy as an additional insured. Any company or business with employees in Illinois is required by law to have workers compensation insurance. There are some limited companies or businesses that may not be required to have workers compensation insurance in Illinois. If a business has no employees, there is no duty to have workers compensation insurance. The owners of a business have the option of electing to be covered for workers compensation in Illinois if they have no employees. If they do not elect (and are not otherwise required) to have workers compensation insurance in Illinois, they are considered exempt from the requirement.
The most common scenario though is that a subcontractor for a project has its own workers compensation insurance that covers the subcontractor’s employees.
Differences Between Subcontractor & Employee
Subcontractors and employees are both crucial parts of a workforce, but their roles are distinctly different – as are their classifications under the law. If you hire subcontractors, you must be aware of how they differ from employees for purposes of workers compensation laws in your state, as these distinctions may affect when, how and if insurance is applicable. If a subcontractor engages in behaviors that increase the risk of a claim, you may become partially responsible for their actions and therefore face liability in addition to that of your employee. Familiarize yourself with the key differences between these two classifications.
One of the primary legal distinctions between employees and subcontractors is the level of control exerted by the hiring firm over the worker. Employees are directly supervised and are much more subject to company policies and procedures than are contractors. This is especially true if the contractor is performing work outside the scope of the business, or in an area in which the employer has no expertise or special knowledge.
Misclassifying a subcontractor as an employee can lead to significant liability for the employer. Some signs to look for that indicate a worker is more likely in the subcontractor category than in the employee category include:
Just as there are basic differences between employees and subcontractors, there also are certain elements the employer should look for to determine whether the worker actually meets the legal criteria to be classified as a subcontractor. These indicators include the following:
An employment agreement and the applicable workers compensation policy should spell out how each of these areas is to be handled, especially if one applies to subcontractors but not employees. You should never assume that the terms of your policy automatically apply to all classifications of worker without confirming that you’re in compliance with your insurer’s requirements.
Requirements of Subcontractors Insurance
In most states, workers compensation insurance requirements apply to every subcontractor and general contractor with employees. This means that each of these businesses will be required to have the insurance separately in place, although it may be possible for one policy to cover both businesses. Most states have additional insurance requirements for subcontractors that increase the likelihood of subcontractor’s coverage. These additional coverage requirements will typically not apply to regular employees, meaning that employers will have to purchase further insurance beyond those of their employees if they plan to use subcontractors.
Legal Variances Some jurisdictions have additionally different requirements for subcontractors and general contractors. In Pennsylvania, for example, the insurance unit recommends that all subcontractors hold their own policy, but the law does not actually require any additional coverage for subcontractors. In Chicago, subcontractors are fully covered for workers compensation and employers must provide loss cost rates. Subcontractors in the city cannot ask to opt-out of this insurance requirement.
Penalties of Not Having Workers Comp
If a company or subcontractor does not have workers compensation and one of their workers suffers an injury on the job, they can be held liable for every damage that injured worker suffers. This is true no matter how severe the injuries. Since there is no cap on personal injury awards, this could be a large amount of money. If a construction or building company does not have workers compensation in place, a lawsuit could result in them having to pay out substantial amounts of money, which could lead to bankruptcy.
Even if the injured worker does not file a lawsuit, the company without workers compensation coverage could be fined for having workers compensation insurance lapse or being entirely uninsured. In order to register for workers compensation, a state fee must be paid. The penalties for not having insurance in the first place or for falling behind on those payments are significant enough to be counterproductive in many cases.
If a building or construction company has workers compensation in place, they are immune from being sued after a workplace injury. This is just one of many good reasons to have workers compensation in place. Unfortunately, many companies do not carry workers compensation as they should, leaving others to suffer when their workers are injured on the job.
How to Make Sure Subcontractors are Covered
The golden rules are that only covered entities can be paid benefits if they become injured in the course of their employment. Therefore, the steps necessary to ensure that workers compensation coverage is in place and that the proper parties are protected against claims of reimbursement by filing an MCS-90 endorsement, sometimes referred to as a Motor Carrier Act Endorsement, must be observed.
First, all parties should draft and execute a sub-subcontract or sub-licensing agreement that lays out the responsibilities of all parties. A start would be, of course, to have a clearly defined construction agreement , which should specify that subcontractors shall provide workers compensation insurance coverage. If the certificate of insurance which the subcontractor provides does not have the MCS-90 endorsement, the prime contractor will have to require it from the general contractor.
As previously remarked, insurance companies are required to file copies of endorsements that impact upon the duty to indemnify insured and others in the form of an MCS-90 endorsement. Copies can be obtained through state offices in the Departments of Transportation and/or the offices of your State Insurance Commissioner.
State Law Considerations for Subcontractor Workers Comp
Because workers’ compensation is generally governed by state law, each state has its own rules determining which employers have to carry workers’ compensation insurance, including whether coverage extends to subcontractors. Most states follow a general rule that if an employer has more than a certain number of employees or a minimum payroll, it must carry workers’ compensation insurance. So, if a men’s clothing store in Virginia has more than three employees (which most likely it does), and it pays any one employee more than $150 in a calendar quarter, then the employer is required to be covered by workers’ compensation for its employees. This is true even if the employee only works part-time for the store. Likewise, Arizona requires any employer with one or more employees to provide coverage for all employees, "whether stated as full-time or part-time." Minn. Stat. § 176.181. In Colorado, any person, firm, limited liability company or corporation that has employed more than 1 employee for at least 20 days within a 12 month-period is required to provide workers’ compensation benefits. Wyo. Stat. Ann. § 27-14-103. The high threshold and broad application of these requirements under both of those state laws presumably applies to most businesses. However, an employer should be aware that, in some states, there are exceptions to the general rule. For example, in cautioning employers against incorrectly believing that they are exempt from the requirement because their employee head-count does not really meet the threshold, the Hawaii Supreme Court held that the statute covers a small "literature clearinghouse" that had a constant flow of part-time employees. In Hawaii, the statutes defining "employer" and "employment" also provide that no particular number of employees is necessary to invoke the obligation to provide coverage, and there is no minimum payroll requirement. Interstate Collection Agency, Inc. v. Hawaiian Insurers Council, 631 P.2d 167, 168 (Haw. 1981); Hynum v. Baker, 655 P.2d 757, 758-59 (Haw. 1982). In addition, in New Jersey, statutes defining "employer" and "employee" expressly state that no specific number of individuals is necessary to require an employer to provide workers’ compensation insurance coverage. N.J. Stat. Ann. § 34:15-36.
Examples of Different Scenarios
The most recent case in Georgia was in the case of Womack v. Hudgins Contracting, Inc., from Macon County, Georgia. Macon County was also in the news for allowing one of its Highway Patrol members to case coal trucks due to an insurance quitclaim being made in exchange for a monetary payment.
In Womack, Macon County had hired and dispatched employees and a worker fell 20 to 30 feet from a water tower he was painting. The injured worker sued Macon County for workers compensation benefits as a co-employee under the theory that the negligent acts of the county were intentional.
Ironically, five days prior to being injured, the injured worker signed a contract stating that he was a subcontractor. Macon County argued that it was not an employer under the Workers Compensation Act because the worker had signed a contract saying that he was a subcontractor. However, the Judge ruled that just because the worker signed a contract does not mean that he was a subcontractor and that the determination is really in the relationship and the job being performed.
This case is good for employers because the Judge reminded the workers’ compensation division that they can’t enforce just any contract. A contract between an employee and an employer should be construed based on the real nature of the relationship and the true contracture of the parties.
Another more recent case was Roadadic v. Cline Tabernac, Inc., a Waldorf, Maryland case. The employer covered by the Maryland laws had contracted with a church to paint a fence. The church would pay the contractor $2,000 to paint a wooden fence. The contractor hired a Labor Ready to supply six minimum-wage workers for the job. One of the workers fell and was seriously injured and sued the church, the contractor and Labor Ready. The trial court jury awarded damages of $37,387.00 for medical bills, $44,750 for loss of retired wages, and $7,500 for pain and suffering and estimated future economic loss. The total judgment was $89,637.00.
In this case, the court concluded that the contractor had no legitimate interest with respect to the job. The court agreed with the injured worker that he was a statutory employee of the church, and voted to affirm the $89,637.00 judgment against the church.
These two situations demonstrate that in addition to using a writing to establish status, the facts of the situation will be looked at to determine the true nature of the relationship.
Legal Considerations for Subcontractors
Because workers compensation for subcontractors can be murky waters to navigate, it is extremely important to get sound legal advice on what rights you have. There are a myriad of issues surrounding the obligations for payment from a general contractor to a sub that are certainly unresolved despite the seemingly simple option to just put up a $100,000 Surety Bond. It is important to discuss these things with an attorney because any mistakes you make or advice you get might subject you to liability in the future for unpaid workers compensation bills. Many subcontractors are really consultants, they incorporate a business (usually an LLC) and then they provide advice to the project owner (usually they are hired directly by the project owner). An attorney might very well look at their day to day functions and say that they are not employees, which will save them a bunch on workers compensation insurance premiums. But other attorneys might look at the relationship and say they are employees, which puts them under the Florida Workers Compensation Act and subjects them to it . If you have agreed to be an employee and to be under the Florida Workers Compensation Act, it does not matter what your attorney says, you and your employer are obligated. Likewise, as a consultant you have certain responsibilities to your laborers… you also have reviews you have to make to ensure they are on the job. So you have to be careful when you have workers reporting to you to make sure you know what is going on and to make sure you are not liable for the debt that occurs when you go on a 2 week vacation. Additionally, workers compensation premiums are based on the amount of payroll you have… so you should consider how much you are making and whether you are going to be able to pay the bill if it is back charged to you. You do not want to find yourself in a position where someone knows more about your rights under workers compensation than you do and puts you in a position where you are going to get stuck with the bill.