A recent court ruling might be a good opportunity for you to remind contractors how to protect themselves from additional workers' compensation liabilities when working with subcontractors.
The Minnesota Workers' Compensation Court of Appeals recently ruled that the owners of a siding installation subcontractor were covered under the building contractor's workers' compensation policy even where the builder had required the subcontractor to show evidence of both general liability and workers' compensation insurance coverage.
The subcontractor, Lolar Siding, was owned by a father and son who had purchased a workers' compensation policy that covered any employees Lolar might hire from time to time but excluded themselves as owners. When both the father and son were injured while working at a construction site for Zenith Exteriors, a general contractor, they sought workers' compensation benefits through Zenith. Zenith denied liability claiming the two men were employees of Lolar, an independent contractor. After a hearing, a compensation judge agreed with Zenith's contention, but the Court of Appeals did not.
Nine conditions
Under Minnesota workers' compensation law, a subcontractor working in the building construction industry is considered an employee of the general contractor on each project unless the sub meets each and every one of the following conditions:
1) Maintains a separate business with the subcontractor's own office, equipment, materials and other facilities.
2) Holds or has applied for a federal employer identification number or has filed business or self-employment income tax returns with the federal Internal Revenue Service in the previous year.
3) Operates under contracts to perform specific services or work for specific amounts of money and under which the subcontractor controls the means of performing the work.
4) Incurs the main expenses related to the services or work that the subcontractor performs under contract.
5) Is responsible for the satisfactory completion of work or services that the subcontractor contracts to perform and is liable for a failure to complete it.
6) Receives compensation for services or work performed under contract on a commission or per-job or competitive bid basis and not on any other basis.
7) May realize a profit or suffer a loss under contracts to perform service or work.
8) Has continuing or recurring business liabilities, and
9) The success or failure of the subcontractor's business depends on the relationship of business receipts to expenditures.
The Court of Appeals construed these requirements very narrowly and determined that Lolar did not meet conditions 5, 6 and 7, even though Zenith produced some strong evidence to the contrary.
Lesson learned
"The lesson here is the court has a very stringent interpretation of these nine criteria. Contractors should be careful when hiring subcontractors and be sure they meet all of these criteria," said Bob Lund, SFM vice president, Business Services, and general counsel.
The court ruling illustrates the high costs that contractors potentially face when working with subcontractors who don't meet the criteria:
• The liabilities passed on to the contractor as the insured party.
• The impact on the contractor's e-mod and premium.
• The substantial legal costs and time involved.
Four helpful tips
You can help contractors protect themselves by reminding them to:
1) Be sure to ask subcontractors for insurance certificates. Follow up and make sure you actually received them.
2) Beware of outdated certificates. It's not unusual for a contractor to have worked with a subcontractor and still have the insurance certificate in a file. Before starting a new job with the subcontractor, get a new, current certificate.
3) Beware of coverage elections. The owner of a small subcontracting firm may work alongside his employees, but he may have chosen to exclude himself from his firm's workers' compensation coverage. So even when a subcontractor produces a current certificate of insurance, you should verify coverage for the owner by asking to see the elections provisions of the policy.
4) Use SFM's "Determination of independent contractor status" form. The form helps verify that the subcontractor meets all of the law's criteria for being considered an independent contractor. It is a checklist of the criteria and has a place for the subcontractor's signature. Given court cases like the one above, having a signed form verifying that the sub claims to meet the law's independent contractor conditions, and therefore is not an employee of yours, can be well worthwhile.
Two good resources for contractors on this issue: the SFM Legal Advisory, "Special liability of general contractors," and the SFM CompTalk, "Hiring subcontractors." To order, go to the "Resource catalog" at www.sfmic.com or call: (952) 838-4325 or (800) 937-1181 ext. 4325.
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