Workers Compensation Audits and Independent Contractors

One of life’s many non productive responsibilities is managing your annual workers compensation audits and Independent Contractors. Whats worse is pulling together all that information only to be back charged. You may have paid for vendors and sub contractors but didn’t collect a workers compensation certificate. This article deals specifically towards sole proprietors with no direct employees. This may relate to your workers compensation premiums and audits.

Sole Proprietors

We chose this one type because they can be tricky, especially if your insurance carrier is the NY State Insurance Fund or NYSIF.

The Workers Compensation Law states that sole proprietors with no employees are not obligated to carry workers compensation insurance.

This applies in many states including New York. Thus, in effect sole proprietors can opt out and self insure. That creates a problem for companies that hire them as the lack of proof of coverage creates an audit exposure. If you are unable to prove the vendor or independent sub contractor did have coverage, the payments your company makes to this sole proprietor will be picked up on your workers compensation audit. This will become a chargeable event under your policy. This is one of the many ways the workers compensation system can be problematic if you are not tight in your process and procedures. The result is the carriers can charge you for those companies, driving up your insurance costs. Additionally, should you hire a sole proprietor or other vendor/sub contractor that does not have Worker Compensation insurance, your policy could be liable for any job-related injuries they sustain.

We suggest two options for handling independent contractors in a workers comp audit:

Disregarding what the State allows in terms of who can forego the purchase of a workers compensation policy you have the right to obligate EVERY vendor, sub contractor, and independent contractor to carry both workers compensation AND statutory disability insurance. This is your most cost effective risk management strategy.
If you must hire this person / company and they cannot provide proof of Workers Compensation insurance, you may still be charged at audit. It is possible to mitigate the chances an injury will be picked up by your policy. To do this we suggest a waiver be created, signed and executed.

This waiver should simply state the following:

The name of the Sole Proprietorship (including D.B.A.) address and phone on letterhead.
A simple statement that reads the Sole Proprietorship understands they are responsible for their own workers compensation and statutory disability coverage and cannot look to (your company) for coverage. It was their choice to forgo the purchase of an actual policy which would have provided them coverage regardless of the state allowing sole proprietors to refuse the purchase of a policy.
That they have no direct employees other than the signatory on this letterhead.
Should they hire employees they must notify you of such in writing and provide a Certificate of Insurance evidencing proof of workers compensation coverage and statutory disability coverage.
They are not allowed to hire subcontractors without your written authorization. Subcontractors who are sole proprietors must provide same Acknowledgement letter, or provide a Certificate of Insurance proving they do in fact have coverage.

The letter sets a standard of care and expectation in the event that the Sole Proprietor looks to your workers compensation policy for coverage for their injury. This letter will provide defense and allow your workers compensation broker to controvert the workers compensation claim. If you have the waiver signed, the carrier will still charge you on your audit.

Make sure you bake the cost of the contract down between labor and materials. Only the labor component of the contract is chargeable with respect to the workers compensation audit.

Don’t start from scratch! Below is a draft copy of such a letter as an example. Before you place our “Draft” letter in production we suggest you swing it past your attorney for their approval. Further we suggest you click here to download our Guide to NY State Workers Compensation Statutes.

Last point

We highly recommend someone in your office confirm that workers compensation coverage is in truly in effect. There are a lot of fake certificates of insurance on the street. Someone in accounting or bookkeeping should verify coverage before payments are dispersed. There should be a mechanism in your contracts that allow retainage in the event coverage is found to have lapsed, or worse, was not in effect at all. To do this simply CLICK HERE to verify if the Employer has workers compensation coverage in NY. For other states simply contact a Risk Advisor by clicking here and we will research for you.

Solid risk management saves a lot of time and money. This is but one example of how through proper process and protocol you can better lower your cost structure. Metropolitan Risk’s goal is to make our clients cost efficient/cost consistent to earn higher profits and grow market share. If you have further questions contact us directly at (914) 357-8444.