Salaried workers in every organization are entitled to certain employee benefits and compensation. However, the rules are different for subcontractors, who are essentially independent workers – they do not qualify for company payroll.
As a responsible company, you must be aware of workers’ compensation policies for independent workers and subcontractors for payroll processing. Apart from tracking who is covered and who is exempt from the compensation, insurance certificates are vital to avoid lawsuits and penalties for non-payment during audits.
Let us dig deep into the details of workers’ compensation for subcontractors.
Who is a Subcontractor?
The US law defines a subcontractor as a person or business that takes up temporary contracts for projects and offers specialized services to clients(contractors). However, this definition varies from state to state. Usually, contractors hire subcontractors to complete a part or parts of a project under a defined work contract.
The IRS employs different criteria for determining whether subcontractors are independent contractors or employees. It considers two factors for this classification – the degree of control and independence of the person performing the task.
Now, we move on to the more pertinent question – what is a subcontractor for workers’ compensation?
According to the IRS, there are three categories defining the degree of control and independence:
This finds out if the business holds the power to direct and control how individuals perform the task for which they are hired. The set of instructions given to the individual could include:
- When and where to do the work
- What tools to use
- What workers to hire or assist in the work
- Where to purchase the tools and supplies
- What sequence/steps to follow
- How to assign work to others
If the company exercises control over these areas, they must include the professional in workers’ comp for subcontractors.
This refers to the financial control established by the business over the professional’s job to include them in workers’ compensation:
- Extent of reimbursement
- If the worker can advertise their services to attract other businesses
- Liability insurance for the work
- If the worker has their own worker’s compensation insurance
- How the worker is paid for their services
Type of relationship between company and worker
This defines how the company and worker have defined their relationship in a written contract and if the services performed are integral to the company’s regular business.
Accordingly, if the company exerts direction and maximum control over the subcontractor in the above aspects, they must include them in workers’ comp for subcontractors.
Does Workers’ Compensation Cover Subcontractors?
Subcontractors are classified as business entities functioning independently, so they are not considered employees. Naturally, they are not entitled to workers’ comp for subcontractors in most cases. However, to avoid potential lawsuits, employers can ask for the subcontractor’s Certificate of Insurance that lists their personal compensation – policy details, coverage period, and amount.
If an independent contractor hires employees, they must provide workers’ compensation insurance. The different insurances for subcontractors are:
General Liability Insurance
The most common of workers’ comp for subcontractors, it covers property damage, personal injury, medical expenses, and advertising injury up to the limit specified under the policy.
Workers’ Compensation Insurance
This insurance is required in several high-risk industries. In case of injury on the job, the workers’ compensation insurance policy covers medical treatment, rehabilitation costs, lost wages, etc.
Builders risk insurance
This insurance protects builders and subcontractors who rent equipment for construction projects. It covers loss of equipment due to theft, damage, or negligence.
There are a few other types of insurance for contractual workers, but how do you determine if a subcontractor is an employee?
All US states and IRS have varying criteria to establish if a subcontractor should be considered an independent contractor or an employee. For instance, a company must provide workers’ comp for subcontractors if classified as employees. However, if subcontractors qualify as independent contractors for tax purposes, the state may still consider them employees.
Is a Client Always Responsible for Subcontractors?
There are few state exemptions wherein the client bears no responsibility for subcontractors, such as:
- The subcontractors have their own workers’ comp insurance before they begin work
- They perform a job or provide a service that is not a part of the client’s normal business operations
- If a subcontractor has an active construction/landscaping license in Oregon, the client is not liable for workers’ comp for subcontractors.
Why is Workers’ Compensation Important?
A workers’ comp for subcontractors helps minimize the economic footfalls that can affect a professional’s livelihood and the hiring company. Businesses can be sued for large sums if there is no workers’ compensation insurance policy for professionals who qualify for it. The legal fees and settlement amounts can be tremendous, even leading to bankruptcy in some cases.
There are state-wise penalties for companies if they fail to abide by the law:
- California imposes a punishment of imprisonment of up to one year or fines of a minimum of $10,000 for non-compliance with workers’ compensation.
- New York fines for misdemeanors in workers’ compensation range from $1,000 to $50,000. There’s an additional $2,000 penalty for every ten days without coverage.
- Georgia has civil penalties between $500 to $5000 per violation.
- Pennsylvania considers intentional non-compliance a third-degree charge and can mandate up to seven years in jail.
- Colorado imposes a penalty of $250 for each day the employer has failed to keep the insurance. Subsequent violations are fined $500 per day.
Conditions That Don’t Require Workers’ Compensation Insurance
Most state laws make it mandatory to have workers’ compensation for all employees. However, here are a few conditions under which it may be okay not to have workers’ compensation:
Businesses with more than two employees are included in state workers’ compensation. But a sole proprietor who runs a business single-handedly can function without paying for workers’ compensation.
Independent contractors are essentially self-employed. Thus, employers are only obligated for workers’ compensation under stipulated contracts. But when appointing subcontractors, employers must ensure the person has their own workers’ compensation insurance.
Federal workers are covered by the Federal Employees’ Compensation Act, or FECA, similar to workers’ comp. Hence, they do not directly fall under the state-based workers’ compensation.
Specific state laws
If your business is based in a state that does not mandate workers’ compensation, you are exempt from it. The requirements vary for each state and depend on the number of employees, nature of work, classification as employees, etc. Texas exempts employers from offering any workers’ compensation through state programs.
The Importance of Certificate of Insurance for Subcontractors
If there are no workers’ comp for subcontractors in your company, it is best to have an insurance certificate before working with subcontractors.
A certificate of insurance proves that the person/business has their personal work comp coverage. Companies must add this as a mandatory requirement in their work contract for subcontractors. It includes the following details:
- Name of the insurer
- Details of the policyholder
- Type of insurance
- Validity of insurance
- Policy number
- Dates effective
This is not just proof of subcontractors and workers’ compensation – it can help you avoid additional costs in case of unforeseen accidents involving subcontractors. Moreover, it is risky to hire uninsured subcontractors because:
- There are heavy penalties for non-compliance with workers’ compensation
- You must pay additional premiums of workers comp for subcontractors during auditing
- If the worker is injured on the job, your company will be responsible
- Your business can be financially affected by lawsuits and settlement fees
- Subcontractors can seek financial claims from you for accidents or injuries at work. The additional burden may put you at risk of canceling your own workers’ compensation policy.
How Can Multiplier Help?
Understanding the nitty-gritty of subcontractors and workers’ compensation can be complex since the laws and requirements vary according to the state.
However, partnering with a global EOR like Multiplier can make the process much easier for you. Our experts can guide you with the complexities of employee insurance, local laws, employee onboarding, payroll management, and much more. With a local presence in 150+ countries, we are well-equipped to handle your diverse HR needs.
Frequently Asked Questions
Q. What if the subcontractor does not have their personal work compensation coverage?
If the subcontractor does not have a work comp policy, their wages are a part of the employer’s payroll. In high-risk industries such as construction, nursing, manufacturing, and roofing, an increase in payroll affects the premium.
Q. What is the average salary of a subcontractor?
Subcontractors are usually paid on a per-hour basis. The hourly wage is somewhere between $30 to $35 depending on the experience level.
Q. What is the workers’ compensation state fund?
Some states provide insurance for employee injuries and illnesses to business owners funded by the government. This is the workers’ compensation state fund.