Every contractor understands the advantage of using independent contractors rather than hiring employees: No FICA or FUTA, no workers’ comp, no sick leave, no overtime. Using gig workers cuts at least 30% off labor costs. Great choice!
But you probably detect problems lurking here. I’ll explain by offering a little history.
Statutory Employees
A hundred years ago, employees injured
on the job could sue their employer. Recovery often took years. Meanwhile, employees
went without medical treatment and without essential rehab. Early in the 20th century,
state legislatures stepped in, enacting the first workers’ compensation laws. Workers’
comp took away the right to sue an employer for negligence and gave back compensation
for on-the-job injuries, regardless of fault.
From that day, nearly all employers, including construction contractors and subs, had to buy workers’ comp coverage for employees. A sub who didn’t buy workers’ comp coverage made the next contractor up the chain liable for coverage. Usually, that made the prime contractor’s carrier liable for injury to a sub’s employee. The prime contractor became the “statutory employer”.
That solved one problem. Injured employees always got workers’ comp benefits. But it created another problem. Workers’ comp carriers for the prime could be exposed to claims from every sub on the job. The remedy should be obvious. Prime contractors learned to insist that subs and sub-subs carry workers’ comp insurance on their employees.
Enter the Gig Worker
Remember where we started: Contractors
save 30% on labor cost by using independent contractors. Now the problem: Where
contractors and subs are licensed, about half the licensees claim to have no employees.
Since only employees are covered by workers’ comp, about half the trades on your
job may have no workers’ comp coverage. If true, that could make you the statutory
employer.
Being a statutory employer cuts two ways. First, you’re not going to get sued. Workers’ compensation is the exclusive remedy when an employee is injured on the job. Second, your cost of workers’ comp coverage is going to jump the next time there’s an audit.
How to Protect Yourself
- Trade certificates of insurance with subs before work starts. Certificates of insurance confirm that coverage is in effect and will show coverage limits. The sub’s policy limits should match limits in your coverage.
- Be alert for subs who rely on gig workers and claim few or no employees. That could be misclassification, employees passed off as independent contractors. You become the statutory employer for misclassified workers. If the tradespeople are true gig workers, you’re not the statutory employer. Fine. But those tradespeople are not covered by worker’s comp. That means you’re likely to be sued for any injury on the job.
- Use written subcontracts. Have each sub sign an agreement before work starts. A signed agreement is the best evidence that work is being done by an independent contractor, not an employee. In that agreement, include a clause that requires subs and sub-subs to carry workers’ comp insurance on employees. Include an indemnification agreement. If you’re found liable as the statutory employer, you can recover against the sub.
If you’re not using written subcontracts or if your subcontracts don’t require subs to carry insurance, have a look at ConstructionContract Writer. The trial version is free.
