If I subcontract a piece of my job, at a lump-sum price, to a sole proprietor who works solo and has no employees, what risk do I run if he has no workers comp insurance, and only has liability coverage? No hourly rates, just a package price for a well-defined piece of work.
Discussion Forum
Discussion Forum
Up Next
Video Shorts
Featured Story
Natural light, taller ceilings, and more functional spaces transform this midcentuary-modern home.
Featured Video
Highlights
"I have learned so much thanks to the searchable articles on the FHB website. I can confidently say that I expect to be a life-long subscriber." - M.K.
Replies
If he is injured on your job he has every right to sue you for worker compensation benefits. And regardless of any waiver you have him sign he will win the case. PERIOD.
If you were here, you'd be just fine. Sole props don't need WC and don't carry it. Could it be different in another state? Why not, everything else varies by state. I'm solo, never had workmans comp. I carry liability, and when I'm a sub, I'm in the position you just described.
"The child is grown / The dream is gone / And I have become / Comfortably numb " lyrics by Roger Waters
A huge risk, put simply, as I learned the hard way.
The risk depends somewhat on whether you carry comp or not. If you are a sole prop with no employees, you probably don't.
I'm a sole prop. I got comp on my employees, because its the right thing to do, its the law and to protect myself in case there is an injury. The latter is probably a joke.
If anyone is hurt on your job, as the general you could be on the hook. If the person is not carried by comp your odds are greatly increased. If they are not carried, and you carry comp, eventually you will be paying for their comp so factor it into your business model.
Require everyone on your jobs to have a comp certificate. Be extremely diligent in supervising your jobs so you are 100% positive that everyone one working on your job carrys comp or is an employee of someone who does. Put a provision in your subcontracts that you have the right to inspect their books regarding this matter.
You might find yourself on the hook for comp premiums for your subcontractors as I did. And I'm not talking "bogus subs". I'm going to be on the hook for 12% of everything I payed to my drywall contractor, electrician, and a few others, including materials, unless I can produce receipts.
Basically comp is a tax. I have never had a claim, and if I did, I would expect them to either not pay it, or recoup their losses by increasing my rates.
Ultimately, you have to factor the cost into your business if the sub isn't, because at a minimum you could be on the hook for the premiums.
This is a real good time to steal Mike Smiths byline,
"But what do I know?"
Tom
I am a sole proprietor granite fabricator. I have had WC for employees but am told by my insurance broker that sole proprietors, such as myself, cannot purchase WC for themself in CA.
I haven't looked into it but it sounds like in some places I could sue the general contractor if I get hurt on the jobsite doing an installation. Is this true? If so I would assume WC is availible to sole proprietors in that state.
Karl
karl and micro.. the way i've always looked at it.. suppose someone is working on your job..........ok.. it's YOUR job
now . that someone is a sole prop., or a sub-contractor, or an employee of a sub-contractor.. no matter what the relationship... it ain't gonna make no matter
now that some one is injured... let's just use the old quadra-palegic example
the injured worker ( on your job ) will never work again, will incur a million dollars in medical expenses, has a mortgage, has kids, has a wife... and she will be denied conubial relations with him...
after his lawyer gets thru do you think for one minute that you will not be named in a suit ?... do you think for one minute that someone is not going to come after you and claim that you were the party responsible for Workmen's Comp ?
just defending that suit is going to cost you dearly... and odds are good that your defense will be inadequate..
so, i really don't care what your state law says about who is required to have WC.. you , as the GC are the ultimate responsible party.. no matter what some of these lame insurance agents tell you about others not having to carry it... you should insist that all on your job are covered..
that said.. some states have sort of addressed this issue....
here in RI, the state Dept. of Labor issues a form called a DWC-11C.. which the individual states that he has read it, that he understands that he is not required to sign it, and that he swears he is an Independent Contractor with NO employees, he signs it in duplicate and i mail both in to Dept of Labor, they stamp it and send an original back to me for my files... I keep a copy of it on file along with a copy of their GL certificate for my insurance audit.... maybe it will stand a legal test... we'll see..
Mike Smith Rhode Island : Design / Build / Repair / Restore
"suppose someone is working on your job..........ok.. it's YOUR job
now . that someone is a sole prop., or a sub-contractor, or an employee of a sub-contractor.. no matter what the relationship... it ain't gonna make no matter"
Yes, it does matter what the relationship is.
The whole concept of workers comp is to compensate an employee for injuries without reguard to who is responsible.
Lets say that you had concrete for lumber delivered to your job site and their employee" was injured. Now that employee would collect from his employers WC and he can only collect what the law in that state says. He can't collect for pain and suffering for sue for punitive damages from his employer. BUT he can from you, if he sues you can wins.
Your workers comp would not touch that at all. However, if you had liability then it would if that is part of the coverage.
Now lets go back to the independent contractor. Some one in this thread said that they where a stone worker, I assume counter tops. Similar would be a cabinet maker. They may be on your job site for only a short period of time or in the case of the cabinet maker you might give them all the measurement and do the install yourself. And they are never on the job site.
But if they are "working on your job" do you think that your WC would cover them if they where hurt working "on your job", but never being at your job site?
The real problem with all of this is that there are a number of employers that are treating employees as IC. So a lot of states are saying that reguardless of what the IRS says about whether they are are not employees that they assume that they are employees, just for WC, unless they have either their own WC or certified as self-employeed.
But all of this really depends on your state WC laws.
No matter what anyone says here the only as a contractor you can do is to get with your attorney and determine what coverage, either WC and/or Liabitity to cover you risks on the job site. And they review your polices to see that they have that coverage.
Likewas for any IC to determine what kind of coverage that they can get and what there state law requires. If the IC can't get WC then they would need medical and disability to cover them.
bill... uh.. bill.. i think we're saying the same thing..
basically.. if the injured worker is not covered.. either thru GL or WC.. then you , as the GC, can expect to get named in a suit , and a corporate veil will be easily peirced..
my point was that you have to cover yourself and do due diligence to make sure all on the job site are covered or waived in accordance with state law..
the problem with the waiver route is that the GC may still have to answer a suit..and his GL policy ..
may not step up to defend him ..
suppose the injured worker's lawyer gets a judgement that the worker did have a relationship with the GC.. now what?
best if all on the site are covered by WC...then no suit can be brought forwardMike Smith Rhode Island : Design / Build / Repair / Restore
Bingo!
"best if all on the site are covered by WC...then no suit can be brought forward"
"One measurement is worth a thousand expert opinions"
I was told that this is the case in Calif. also. I later found out that this is not true. I was by STATE FUND that it is not available and I think that it comes down that they don't want to write it. I have been forced to have a Policy on "myself" by some big contractors. It only convered the potential of me hiring someone and I could not claim myself. Since then, I have had to furnish an exemption form to some contractors to please their carriers. If any one would to force me into a policy again, I would turn down the job. Ask around to some other carriers
In Michigan, a sole proprieter, cannot get a comp. policy. Having worked both alone, and with employees. I've always had a comp policy. The catch is that my premiums are based on having 2 people on the payroll( I'm one of them). Basically, I pay double what I should, then get a refund after my audit. To keep my employer status, I hire my BIL or wife part time on occasion. If you have an employee, even part time, you must have comp. And they will write a policy for you. As far as the overpayment goes, I consider it cheap insurance, in case someone else on my jobs isn't covered. This would be because they are sole proprietor. It's a nasty world, lets be careful out there!
Brudoggie
When I was a sole proprietor in NJ, I was not required by law to carry WC unless I had employees (most years I worked alone), and I couldn't collect on it if I did. However, some of my builder customers required WC or they'd deduct the percentage of the premium from my check. I'd be mad enough to spit nails every time I paid that useless premium, but in the end it was cheaper to have my own policy.
It's been seven years since I had that worry, so things might have changed. On the other hand, the state WC fund had a source of income with no exposure to risk, so I'd guess they're the same. I always appreciated knowing that the State of NJ was looking out for me. Or for my money, anyway.
Andy Engel, The Former Accidental Moderator
the word "SUB-contract" is what puts you on the hook.
If a sole individual contracts with the HO to do work, they can agree between them that the HO releases the individual from liability.
But you cannot waive any rights or responsibilities on behalf of the other parties that you stand between. When you take a contract, you take on a responsibility.
I have a lot of similar jobs and subs. I carry a workers comp policy. If they fail to provide me with a verification number, I have to pay based on their billing for labor. But I can sleep well knowing that I have a buffer policy. It would be un professional of me to bring uninsured people on to a customer's property and put them at risk of a lawsuit like Mike laid out. The chain of responsibility goes up, naming me and then the HO if there is a problem. The lawyer looks into every deep pocket along the road to riches.
Excellence is its own reward!
Legally, it depends on whether he can be considered an "employee" under the state worker's comp law, as opposed to a true indepenent contractor. If you are the general on the job and hire an electrician to do the wiring because you don't do wiring, he's an indepndent contractor and not an employee. But, if you just need someone to help sheetrock a couple of rooms or shingle part of the roof, he's going to be found to be an employee, no matter how you pay him. The key issue is the extent to which you exercize, or can exercize, control over his work and work product. In practice, these are very fluid concepts which provide a w.c. judge great latitude in finding that someone is an employee entitled to comp. benefits. If you have no insurance to pay such an award of benefits, most state's have a "fund" which will pay the award and they will then come after you for reimbursement. Many states, like Ct. also have civil and criminal penalties for not having wc insurance. Be careful.
One more point...If you have w.c. insurance for your employees, and he is found to be an "employee" by a w.c. judge, then the insurer will be required to pay the award. They will get you later with higher premiums or surcharges.
U just described me....
In PA....sole prop's don't need WC......
I don't have WC.....
neither myself or any of my customers/GC's have ended up in jail yet.
Jeff
Buck Construction Pittsburgh,PA
Fine Carpentery.....While U Waite
jeff... every once in a while something will happen that will goose the buearacracy and then they will become very active ..
and start looking for horrible examples... i always get the feeling i have a sign hung on me... "horrible example".. so i make sure i'm covered the best i can..
that niteclub fire that killed 99 6 weeks ago ?.. and injured another 50.. ( still getting skin grafts ).. the two brothers who owned it had let their WC policy lapse for over a year..
several of their employees died.. and a couple were injured.. so the WC judge fined them $1.2 million bucks.... and that's before the civil suits start from the employees looking for "financial responsibility "...
"horrible example " is a lot worse than being dragged by your belt-loopsMike Smith Rhode Island : Design / Build / Repair / Restore
I am the person that started this thread. Thanks to all for your input. I am in the state of New York, and have researched the topic at the NY state website, and sole proprietors are not required to have WC insurance here.
My anxiety stems from the situation I have, building one house per year as GC, and wanting to hire certain specialties out to "sole proprietors" that want to work and get paid by the hour, do a specific work scope that I map our with drawings and specs, have liability insurance but no WC, and claim not to need it. There are only a few of these guys, their gross payout won't amount (each) to more than $5K or $7K, and none of them, not a one, will stick their neck out and bid a job and be held to a lump sum price. They just don't have to, they have all the work they want on this hourly basis.
In the past, we have done our paperwork this way. We describe the work scope as simply as possible in words, for example, "prep and install all tile work in lot #54 house," then he or she writes me a weekly invoice for an amount equal to the hours worked times the agreed upon rate, and the invoice says, "workscope description xx% complete = $yy"
Since from week one on, he or she is into the job and can see with some reasonableness how much there is to go, the "xx% complete" is somewhat accurate, and we always sandbag a little to not run out. With the last paycheck, the total of all the percentages comes to 100.
How safe am I, operating this way?
You seem to be wanting someone else tell ya you are safe.
Doesn't sound like you'll get that vote here.
Me....I'd say...safe.
As I sub myself out w/o WC. Same deal as yours...but I give a fixed price. Don't think that changes things a bit.
But others here are saying different......how about ya ask your lawyer?
What does the opinion of a bunch of 12 year olds on the internet mean?
We don't even live in your same state.
Me.....I'd be asking the lawyer.....you know..the one I work with in my own state?
JeffBuck Construction Pittsburgh,PA
Fine Carpentery.....While U Waite
Use to work as a siding sub, owner of company I worked for use to say "if you fall your fired before you hit the ground".
My accountant and lawyer and insurance agent all say the same thing. If he or she is uninsured, sole proprietor or not, they will be treated as an employee. I will deduct the appropriate percentage from the gross (for a residential up to 2 story carpenter it is about 18%), and pay it into the NY state WC fund. I will 1099 the individual at the end of the year. No FICA withholding, nor for federal or state income.
Dear Micro,
While my first love has always been boards, nail, pipes and wires, leading me to avidly read FineHomebuilding (and do some construction activity or other virtually every day), I've actually earned my living for 25+ years in NY State as a lawyer, practicing in the field of personal injury.
The general policy behind worker's compensation is to make sure that injured workers get medical treatment and sustenance, without regard to who is to blame for the injury. This leads to the general rule that injured workers tend to "win" compensation claims; i.e., apart from very persuasive evidence of independent contractor status, the contractor will be deemed to have been the employer, and the comp claim will be paid. One of the people in this thread was quite correct in saying that the issues concerning such status revolve around the level of control which was or could have been exercised by the contractor over the so-called "sub". The reason so many require subs to get their own comp policy (which does no good whatsoever for the solosub who hires no one) is that it is simply a piece of evidence that the sub really believes himself to be so. That won't settle the issue, however. Questions about who directs the work; who provides tools, equipment, material; whether pay is by the hour or by the job; who sets the working hours; how many other contractors does this so-called sub work for.... all of this will be relevant, and you need to always bear in mind that that worker's comp judge is supposed to hold for the worker in case of doubt. Again, the whole idea is to make sure injured workers get their medical paid for and "enough to get by" (try getting by on 400 bucks a week, the comp max. in NY [maybe it went up to 460, not sure...].
If you are held to have been the employer, and you didn't have comp, leave for Brazil. You will be fined an amount equal to 100% of the compensation and medical paid by the Uninsured Employers Fund. In case of an injury of any severity, you're cooked.
In short, its hard to build enough walls around the so-called sub to protect you. First, you have no hope if the "sub" really isn't; that is, he's worked for no one but you, you owns nothing but a hammer and a pick-up truck, he's never bid a job in his life, etc. etc. If the sub really is a sub, you start to have hope. First, actually have a contract. after all, this is a "sub contractor". The agreement should recite that this person has represented to you that he is an independent contractor, that he is regularly engaged in that business, that he has filed a business certificate at the county clerk's office, that he has liability insurance, that he is familiar with all required safety codes and procedures and follows and enforces them. Never let him use any of your tools and equipment. Don't ever let anyone in the world use a ladder you own unless the person is a)you, lor b) an employee of yours covered by your compensation policy. Cheaper to hand your "sub" 300 bucks to go buy a ladder then let him climb up on (and fall off of) yours. Don't pay "by the hour". Even if that is the basis on which your sub actually bills you each week, that's his business. He invoiced you for the part of the work performed, you paid.
Personally, having seen more than enough pain on the part of people hiring "subs", I can only advise that you carry a comp policy if there is ever anyone but yourself on your job, try to get subs who have comp policies (but who carry general liability policies as a bare minimum). If someone is on your payroll as an employee and gets hurt, no matter how horribly, no matter who's fault, you are fully protected. Yes, you'll face a premium surcharge as a result of your negative experience rating, but you are fully insulated from responsibility for what can be catastrophically expensive. It also helps to actually follow safety codes and regs... this will give you some defenses in the worst situations. Don't let anybody stay on your job who isn't wearing eye protection and head protection AT ALL TIMES. Follow the OSHA ladder/scaffold/roofing rules. Throw away your aluminum extension ladders if you ever work around power drops. Fiberglass will prevent nightmares.
And, at the end of the year, send absolutely every sub to whom you've paid so much as a nickel an IRS form 1099 reporting that you paid this person for services, but not as an employee. There is a threshold requirement for actually reporting (600 dollars or so), but never mind, send everyone of them a 1099. It further solidifies your claim that they are really "independent".
This is tough stuff. Comp premiums are high because people really do get hurt at work. If they get hurt badly enough, they and their families will be left with absolutely no choice but to sue everyone in sight; there's no such thing as being "nice" or "fair" for the desperate, and injured working people are desperate. they are in pain, need very costly care, have bills to pay, and can't work. This gets very ugly very fast. Your jobs are crawling with guys who "know what they're going", have been "doing this for years" and think its fine to use nailers without eye or ear protection, climb ladders and work on roofs without fall protection, work in every kind of dust and fume without respiratory protection, wonder around in wet concrete without skin protection, etc etc. And its just so un-macho to wear all that crap. Tell all those smart-alecks to check the injury statistics --- go ahead, do it yourself, you're on the web. Do a google search against job injuries, work safety, etc. Thousands and thousands are injured and killed in construction annually. Hell, if you think comp is tough, you'd love my plan to reduce premiums: anyone in control of a jobsite who allows or suffers someone to work on it without all required safety gear would be subject to felony assault charges in the event of an injury. That would end all the discussions about the macho-ness of safety gear: wear it or get the hell out of here. The easiest way to prevent comp premiums is prevent injuries. Twenty five years of nothing but injuries taught me that there are virtually no "accidents". there are simply combinations of unsafe acts and unsafe conditions, all of which were preventable, that, sooner or later, led to disaster.
Pertz... very succinct.. i'm saving your reply and printing it out for my "business plan " binder... it just about sums it up.. i think i'll trot it out for my annual meeting with my insurance agent.. i'm not sure the RI DWC-11-IC will actually cover me..
here's the basic language of the form, which gets filed with RI Dept. of Labor & Training, and a date-stamped copy from DLT is returned and goes in my insurance certificate binder.
every one , not an employee, who cannot give me a Certificate of Insurance for WC, has to fill it out with our corporation as the "hiring entity"
<<<<I declare that I am an Independent contractor pursuant to R.I.G.L.(28-29-17.1) and , therefore, I am not eligible for nor entitled to Worker's Compensation benefits pursuant to title 28, Chapters 29-38, of the Worker's Compensation Act of the State of RI for injuries sustained while working as an Independent contractor for the hiring entity named below. This designationwill remain in effect while performing services for the named hiring entity or until a withdrawal of designation as Independent contractor form is filed with the Department of Labor & Training.>>>>>
pretty clear , ain't it ?... think it would stand up in a serious injury case with an individual who only works for ONE "hiring entity " ?
Mike Smith Rhode Island : Design / Build / Repair / Restore
Having not researched Rhode Island law I wouldn't want to step too far out on the limb, but . . . do you think this thoroughly rotted beam is gonna hold those joists up when they drive a truck onto the floor????
Thanks for your contribution here.
We all needed to hear that.
Even the ones who will ignore it..
Excellence is its own reward!
That is a beautiful piece of work, I too am saving it to my "business plan" folder.
Thank you, SamT