You already know that Workers’ Compensation insurance premiums are mostly based on payroll. Your policy is initially issued with a provisional premium; Your actual final premium is only determined at the end of the policy period once a review, or ” premium audit,” of your payroll for that period has been completed, leading to either a refund or an additional invoice (an audit premium).
What you may not know, and is important to you, is that in addition to traditional employee payroll (W-2s), certain 1099s paid to subcontractors are included in the payroll review, and could increase your audit premium.
Which 1099s may be included in your premium audit, and why:
It is not unusual, particularly in construction, for an injured subcontractor who did not carry Workers’ Compensation insurance, to submit a claim under his contractor’s insurance. When such a claim is made, a Workers’ Compensation judge examines the facts, and rules on payment for the injury. The contractor and his insurer will often be required to pay for the claim, even though, as an independent contractor, the subcontractor was not included in the contractor’s policy and no premium was collected for that individual.
As a result, insurers increasingly verify that subcontractors carry Workers’ Compensation insurance of their own. When they do not, the contractor’s insurer will add the subcontractor’s cost to the employee payroll used to calculate the Workers’ Compensation premium. The insurer may also examine other circumstances to clarify the contractor’s true exposure. Ultimately, the ability to exercise control and direction over the sub’s performance is viewed as an essential element in assessing the relationship.
This can also be true of subcontractors that are operating as a sole proprietor, an LLC, or a partnership. While these types of businesses are not required by law to carry Workers’ Compensation insurance if they have no employees, they may be able (under the right circumstances) to collect benefits under the contractor’s policy when a claim occurs. As a result, some insurers will also charge for them.
How to limit unwanted charges for your subcontractor(s):
In order to limit charges to your insurance, it is important that you keep track and retain a copy of the following documents from each subcontractor with whom you do business during the policy period. Currently, insurers may NOT include the subcontractor if you are able to provide:
- a certificate of Workers’ Compensation insurance (not just General Liability) for the subcontractor, OR
- a copy of an Executive Officer exclusion IF the subcontractor is an officer of a corporation.
If you are not able to produce one of the above documents, the following records and information should be collected, but may not guarantee that the cost of coverage for the subcontractor will be excluded from your premium:
- Written contract with the subcontractor regarding the services to be performed,
- Certificate of General Liability insurance,
- Proof that the subcontractor is customarily engaged in an independent trade or business (including owning his own business as well as essential tools and equipment, realizing a profit or a loss, working for other contractors, business cards)
The same rules should be applied to subcontractors that are operating as a sole proprietor, an LLC, or a partnership.
Protecting you is our main concern, and we want you to know ahead of time the importance of documenting your relationship with your subcontractors. This knowledge can help minimize the risk of audit charges you may not have budgeted for.
If you have any questions or concerns, please do not hesitate to contact us.