Navigating Worker’s Compensation Insurance for Contactors
By: Judd A. Genda & Robert C. Procter | Axley Attorneys
In the complex insurance world, particularly in worker's compensation, the relationship between general contractors and subcontractors can present many challenges and legal nuances. As an insurance agent, it's crucial to understand the interplay between legal requirements and practical considerations when ensuring adequate coverage for subcontractors.
Legal Framework:
In Wisconsin, the legal requirements for worker's compensation insurance for subcontractors hinge on their classification as independent contractors or employees. Independent contractors, without employees, are not mandated by Wisconsin law to carry worker's compensation insurance.
General Contractor Obligations:
Central to the discussion is the general contractor's responsibility to ensure adequate worker's compensation coverage for all on-site workers, including subcontractors. If an injury occurs to a subcontractor or a subcontractor's employee, and the subcontractor fails to meet the criteria for an independent contractor, the injured person may be considered an employee of the general contractor for worker's compensation purposes.
Is a Subcontractor an Employee or an Independent Contractor:
For purposes of workers' compensation, put aside your current understanding of whether a subcontractor is an employee or an independent contractor. In Wisconsin, the subcontractor will be considered an employee of the general contractor for purposes of worker compensation if the subcontractor does not satisfy each part of the following nine-part test:
- Maintain a Separate Business
- Obtain a FEIN or Have Filed Business or Self-Employment Tax Returns
- Operate Under Specific Contracts
- Responsible for Main Expenses
- Satisfactory Completion of Work or Services
- Receive Compensation Under a Contract on a Commission, Per Job, or Competitive Bid Basis (the subcontractor is not being paid hourly)
- Realizes a Profit or Suffer a Loss
- Recurring Business Liabilities or Obligations
- Relationship of Business Receipts to Expenditures
Each of these tests offers specific criteria and considerations to assess whether an individual is classified as an independent contractor or an employee, providing a comprehensive framework for evaluating the nature of the working relationship. The following link to the Department of Workforce Development website provides an explanation of the requirements contained in the nine-part test and case studies relevant to each requirement based on cases decided by the Labor and Industry Review Commission (LIRC) and Wisconsin courts: https://dwd.wisconsin.gov/worker-classification/wc/ninepart/. The onus is on the general contractor to prove that the subcontractor meets the nine-part test if an injured subcontractor or subcontractor employee makes a worker's compensation claim. Including language in a contract with a subcontractor stating that the subcontractor is an independent contractor and not an employee does not satisfy this burden.
Risk Mitigation Strategies:
To mitigate potential liabilities, general contractors often stipulate in contracts that subcontractors must carry worker's compensation insurance and provide proof of coverage. This requirement not only safeguards against potential claims but also ensures compliance with insurance standards set by carriers. A contractor’s insurance policy often contains certain rules requiring that subcontractors carry workers compensation insurance, in addition to other types of insurance, such as general liability insurance. Even if the general contractor does not have employees, it should have a worker compensation policy. In this circumstance, the policy would be very reasonably priced—likely in the hundreds of dollars. The ramifications can be significant when a subcontractor or its employee is uninsured and sustains an injury. The injured party may file a claim against the general contractor's worker's compensation policy. Despite any representations of the subcontractor, the responsibility is on the general contractor to prove that the subcontractor or its employee is an independent contractor.
The Role of Insurance Agents:
While the legal landscape surrounding worker's compensation insurance for subcontractors may be nuanced, insurance agents can provide invaluable expertise in helping general contractors navigate these complexities. By advocating for comprehensive coverage, agents can empower their clients to ensure compliance with insurance standards and, most importantly, mitigate risks effectively.
This information is provided for the convenience of PIAW members, but cannot be construed as legal advice. Members of PIAW may call (608) 200-4221, or email their questions to insurancehotline@axley.com, to work with an attorney and receive legal information specific to your situation.