Worker’s Compensation – Subs, 1099s, Employees – From a Risk and Bonding Perspective – It Does Matter!

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Workers’ compensation can be a sticky wicket for construction firms. It’s an area where new contractors and veterans alike can find themselves in legal and financial hot water, especially when it comes to determining who is an employee and who is a 1099 contractor.

Deisy Perez, vice president of American Contractor Insurance and Bonds Inc. in Phoenix, AZ spends much of her time educating contractors on workers’ compensation laws in Arizona. American Contractor is Old Republic Surety’s largest commercial surety producer in the state, and Perez graciously agreed to share some tips about workers’ compensation with us in this blog.

Make sure your subs are licensed and have workers’ comp

“Most new construction companies don’t hire employees right away,” Perez notes. “Instead, they sub out their work or use temporary employees. While 1099 subcontractors are used by a lot of industries, with construction there can be many perils if the sub isn’t licensed or gets hurt.”

A good example, Perez says, is the general contractor (GC) who hired a roofing subcontractor without a license. The sub picked up a day laborer to help with the job. The day laborer had no roofing experience and, unfortunately, was electrocuted when he grabbed onto an air-conditioning unit. To make matters worse, the subcontractor didn’t have workers’ compensation insurance.

“Even though the GC had no idea the sub had picked up a day laborer, the GC was held responsible for the accident and fined by the state industrial commission,” she says. The worker’s family also sued him.

“The point is you need to make sure the subs you hire are licensed, they understand the law and they’re covered by workers’ compensation,” she says. “In Arizona, the GC has to know every aspect of the job at all times.”

Your 1099 subcontractor may really be a W-2 employee

Perez says one of the biggest mistakes contractors make is misclassifying 1099 subcontractors. “Contractors don’t always understand the difference between a 1099 worker and a W-2 worker,” she says. “A contractor may think he doesn’t have to provide workers’ compensation coverage for someone who receives a 1099. But if he’s treating the worker as an employee, he’ll have to pay for workers’ compensation insurance.”

Various states and the U.S. Department of Labor have been cracking down on employers who hire employees but call them independent contractors to get out of paying payroll taxes and insurance. To be classified as an independent contractor, a worker must be hired on a contract basis to do work that is typically independent, unsupervised, and limited in time, scope and duration.

“If you’re telling a contracted worker where to be, if you’re setting his schedule, establishing the pay rate and supervising him, then he’s probably an employee,” Perez explains. “A legitimate subcontractor that’s licensed will tell you when he’s available; he’ll sign a contract and he’ll write an invoice for you. He comes in and does his work, and then he leaves.”

The bottom line, according Perez: “If you’re treating someone as an employee, a 1099 isn’t going to get you out of any injuries the person may incur while working for you.”

Perez says contractors just starting out may want to go through a staffing company. “Staffing firms will usually cover workers’ comp and handle payroll taxes. So we recommend picking up someone from a staffing company, since they take care of everything for you.”

Strive to keep your workers’ comp costs down

“Construction is a risky business, so contractors may have a tough time finding a workers’ comp insurer that will carry them,” Perez says. “Roofers, painters, plasterers — anyone who’s on scaffolding — tend to have high rates and find it difficult to find coverage.”

A few tips for lowering your workers’ comp exposure:

  • If you’re a general contractor, make sure your subs carry workers’ comp.
  • Check the work class codes you use. They can make a difference in your premiums.
  • Review your experience modification (ex-mod) to make sure it accurately reflects your employment records.
  • Take advantage of any premium adjustments you may qualify for.
  • Consider doing a workers’ compensation audit, which looks at your payroll, classification codes and ex-mod factors.
  • Clear safety procedures, tools and communications can also significantly help you with your workers' compensation insurance costs. Oftentimes, the work comp carrier has established programs to utilize so that you can improve your own program.

Educate your clients to minimize losses

Perez believes that one of the best things she can do for her clients is to educate them on the risks of being a contractor. “We show them how to cover their risks as much as possible with contracts, invoices, disclosures and hold-harmless agreements,” she relates.

“We talk about what it costs for workers’ comp and where to get it,” she continues. “Job safety and OSHA requirements. Recordkeeping and tax filings. Environment and pollution laws. General liability, commercial auto, and tools and equipment insurance. These are all topics our clients need help with. If we can get them up to speed on these basics, it goes a long way toward ensuring their success and reducing their risk of defaulting on a project.”

Thank you, Deisy Perez, for being a great Old Republic Surety client and for the work you do on behalf of our industry!

Have more questions about worker's compensation? We'd be happy to help! Contact an appointed agent, or reach out to an Old Republic Surety branch nearest you.

Margaret Carey

Margaret Carey is an Executive Surety Marketing Representative at the Old Republic Surety Desert States Commercial Branch. Margaret has approximately 30 years of surety experience. She worked at The St. Paul before joining Old Republic in 2008. Margaret has a Masters degree in HRD - Training and Development and an MBA. She enjoys food, photography and cars.