Subcontractors & Other Myths GL, WC w/ Some State Examples

Subcontractors & Other Myths GL, WC w/ Some State Examples 2018 Annual Regional Seminar Marriott Spring Hill Suites San Diego, CA September 12 – 14, 2018 Presented by: Richard Pope, Director, Premium Audit Union Standard Insurance Group, a Berkley Company

Webster’s Definition of a Subcontractor From Webster’s Dictionary One who takes a portion of a contract, as for work, from the principal contractor! How Simple is that? Pretty Simple… Right? Unfortunately, it’s not that simple.

GL Rule for Subcontractor Exposures • Insured versus Uninsured – Where is this addressed? • In the basic manual under classifications for 91581-91589 & 91591 • where each states: • from the Standard ISO Manual • “This classification applies to that portion of the operations performed • by adequately insured subcontractors of the insured. Operations performed • by subcontractors without adequate insurance shall be classified and rated • under the specific classification description for each operation. • Determination of the adequacy of insurance shall be made in • accordance with criteria established by the company prior to policy • inception.” • end of ISO Manual citing • No insurance always means classify to appropriate payroll classification. • Underinsured is defined by the insurance carrier. • Usually a set amount or the insured’s limits, whichever are less. • It better be an endorsement.

Standard ISO Basic General Liability Underwriting Manual • Rule 24 Basis of Premium • E. Payroll • Determination of how payroll is determined for an uninsured/underinsured subcontractor is generally a carrier rule. • Most carriers will allow payroll if it can be identified in the records. Some carriers may allow a specific percentage if materials were provided. Others may allow a deduction if profit for the sub is clearly identified in the contract while others may require that the entire amount of payment to the subcontractor be considered payroll remuneration. • Ideally, this would reflect total payments to the sub less profit less materials which would equal the wages paid to the subcontractor’s employees. Payroll versus Total Cost!!

Standard ISO Basic General Liability Underwriting Manual • Rule 24 Basis of Premium • F. Total Cost • The total cost of all work let or sublet in connection with each specific project including: • The cost of all labor, materials & equipment furnished or delivered for use in the execution of the work, however, do not include the cost of finished equipment installed but not furnished by the subcontractor if the subcontractor does no other work on or in connection with such equipment and • All fees, bonuses or commissions made, paid or due. Payroll versus Total Cost!! (cont.)

NCCI Basic Manual Rule 2 Premium Basis & Payroll Allocation H. Subcontractors (Additional Rules: AZ, ME) (Exceptions: CO, NC, MO, TX, UT ) • In those states where workers compensation laws provide that a contractor is responsible for the payment of compensation benefits to employees of its uninsured subcontractors, the contractor must furnish satisfactory evidence that the subcontractor has workers compensation insurance in force covering the work performed for the contractor. The following documents may be used to provide satisfactory evidence: • Certificate of insurance for the subcontractor's workers compensation policy • Certificate of exemption • Copy of the subcontractor's workers compensation policy • For each subcontractor not providing such evidence of workers compensation insurance, additional premium must be charged on the contractor's policy for the uninsured subcontractor's employees according to Subcontractor Table 1 and 2 below. WC Rule for Subcontractor Exposures

WC Rule for Subcontractor Exposures (Arizona Exception) Add the following to Rule 2-H: H. Subcontractors This information addresses the conditions necessary for the existence of an employer-employee or independent contractor relationship for purposes of establishing when such workers are to be included or excluded under the principal contractor's workers compensation policy. ARS § 23-902(B) and (C) are shown below to provide this clarification. (B) When an employer procures work to be done for him by a contractor over whose work he retains supervision or control, and such work is a part or process in the trade or business of the employer, then such contractor and the persons employed by him, and his subcontractor and persons employed by the subcontractor, are, within the meaning of this section, employees of the original employer. (C) A person engaged in work for another, and who while so engaged is independent of the employer in the execution of the work and not subject to the rule or control of the person for whom the work is done, but is engaged only in the performance of a definite job or piece of work, and is subordinate to the employer only in effecting a result in accordance with the employer's design, is an independent contractor, and an employer within the meaning of this section.

WC Rule for Subcontractor Exposures • (ColoradoRule) Change Rule 2-H as follows: • H. Subcontractors • The contractor must provide satisfactory evidence that the subcontractor has workers compensation insurance in force covering the work performed for the contractor. If evidence is not provided, additional premium is charged on the contractor's policy as follows: • Include payroll for each contractor, subcontractor, lessee and sublessee up to an annual maximum of $5,200 each. • Include the entire payroll of all employees of such contractors, subcontractors, lessees and sub-lessees. • If the principal or general contractor cannot provide an actual record of the payroll of the employees, the entire contract price of the subcontracted piecework is considered the payroll. • The above rule does not apply to contracts for piecework in manufacturing plants or to messengers, drivers, or chauffeurs of automobiles. For piecework, the entire amount paid must be included as payroll. For drivers or chauffeurs of hired vehicles, refer to the rules of this manual under Standard Exceptions.

WC Rule for Subcontractor Exposures • (Utah Rule) Change Rule 2-H-2 as follows • H. Subcontractors • In those states where workers compensation laws provide that a contractor is responsible for the payment of compensation benefits to employees of its uninsured subcontractors, the contractor must furnish satisfactory evidence that the subcontractor has workers compensation insurance in force covering the work performed for the contractor. The following documents may be used to provide satisfactory evidence: • Certificate of insurance for the subcontractor's workers compensation policy • Certificate of exemption • Copy of the subcontractor's workers compensation policy • If the contractor does not supply the payroll records of its subcontractor, 50% of the subcontract price of the work performed during the policy period by the subcontractor must be established as the payroll of the subcontractor's employees. The additional premium must be charged on that amount as payroll.

3. Vehicles with drivers, chauffeurs, messengers, or helpers entitled to benefits under workers compensation insurance law may be engaged under verbal or written contract. The amount used to calculate the premium is determined in the following manner: 4. In all cases, the payroll determined for subcontractors is assigned to the classification that would have applied if the individuals had been employees of the contractor. 5. In all cases, if an experience modification has been established for the contractor, this experience modification must be applied to the premium developed for the uninsured subcontractor.

Independent Contractors Some employers try to avoid carrying workers' comp insurance by calling their employees "independent contractors". If you were hurt on the job but denied benefits because you were supposedly an "independent contractor", talk to a lawyer before you give up on your claim. The reality is that in many cases, these employers are just scam artists -- they are cheating their employees out of legally-required benefits, and they are cheating the government by not paying their taxes. There are basically three ways these employers try to avoid their responsibilities: Some will require their employees to sign a written contract that says the employee is an independent contractor and not entitled to any benefits or tax withholding. Or, some will have their employees sign a waiver or other document that claims to waive the employee's right to workers' comp. Especially in the construction industry, some will require the employee to get a “Certificate of Non-Coverage” from the Workers' Compensation Commission. The good news is that the law doesn't recognize any of these schemes. It doesn't matter if you signed a contract or a waiver, and it doesn't matter if you obtained a Certificate of Non-Coverage -- if you meet the law's definition of an "employee", you are entitled to benefits regardless of what the employer calls you. Posted by Mark White (Used with permission of Mark White) From Attorney Mark White’s WesbiteHttp://Arkansasdisability.Blogspot.Com/

Per a Prominent Arkansas Defense Attorney Concerning the Arkansas Certificate of Non-Coverage I always warn people that they are not worth the paper written on it I have lost cases where the Claimant knew what he was signing and held Himself out as an Independent Contractor. It does not matter if the person executing it says they understand they are a sub, at the end of the day – if they can come in and prove they were an "employee" rather than an independent contractor, then the form is no good. It all is determined on a case by case basis, depending on the "Franklin" factors from case law.” Remember an employee cannot “sign away” his or her right to workers’ compensation insurance.

Some of the Franklin Factors There are numerous factors which may be considered in determining whether an injured person is an employee or an independent contractor for purposes of workers' compensation coverage. Obviously, the relative weight to be given the various factors must be determined by the Commission. Some of the factors which might be considered, depending on the facts of a given case, are: • The right to control the means and the method by which the work is done; • The right to set hours as opposed to deadlines; • The right to terminate the employment without liability; • The method of payment, whether by time, job, piece or other unit of measurement; • The furnishing or the obligation to furnish the necessary tools, equipment and materials; • Whether the person employed is engaged in a distinct occupation or business; • The skill required in a particular occupation; • Whether the employer is in business; • Whether the work is an integral part of the regular business of the employer; and • The length of time the person is working for “the Contractor”. These are not all the factors which may conceivably be considered in a given case, and it may not be necessary in some cases for the Commission to consider all of these factors. Traditionally, the "right to control" test has been sufficient to decide most of the cases, although many variations of “control” have probably been squeezed into that test.

From California Department of Industrial Relations https://www.dir.ca.gov/dlse/FAQ_Independent Contractor.htmIndependentcontractor versus employee Not all workers are employees as they may be volunteers or independent contractors. Employers oftentimes improperly classify their employees as independent contractors so that they, the employer, do not have to pay payroll taxes, the minimum wage or overtime, comply with other wage and hour law requirements such as providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in performing their jobs. Additionally, employers do not have to cover independent contractors under workers' compensation insurance, and are not liable for payments under unemployment insurance, disability insurance, or social security. The state agencies most involved with the determination of independent contractor status are the Employment Development Department (EDD), which is concerned with employment-related taxes, and the Division of Labor Standards Enforcement (DLSE), which is concerned with whether the wage, hour and workers' compensation insurance laws apply. There are other agencies, such as the Franchise Tax Board (FTB), Division of Workers' Compensation (DWC), and the Contractors State Licensing Board (CSLB), that also have regulations or requirements concerning independent contractors. Since different laws may be involved in a particular situation such as a termination of employment, it is possible that the same individual may be considered an employee for purposes of one law and an independent contractor under another law. Because the potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee, each working relationship should be thoroughly researched and analyzed before it is established. There is a rebuttable presumption that where a worker performs services that require a license pursuant to Business and Professions Code Section 7000, et seq., or performs services for a person who is required to obtain such a license, the worker is an employee and not an independent contractor. Labor Code Section 2750.5

From California Department of Industrial Relations (continued) • Q. How do I know if I am an employee or an independent contractor? • A. There is no set definition of the term "independent contractor" and as such, one must look to the interpretations of the courts and enforcement agencies to decide if in a particular situation a worker is an employee or independent contractor. In handling a matter where employment status is an issue, that is, employee or independent contractor, DLSE starts with the presumption that the worker is an employee. Labor Code Section 3357. This is a rebuttable presumption however, and the actual determination of whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be considered, and none of which is controlling by itself. Consequently, it is necessary to closely examine the facts of each service relationship and then apply the law to those facts. For most matters before the Division of Labor Standards Enforcement (DLSE), depending on the remedial nature of the legislation at issue, this means applying the "multi-factor" or the "economic realities" test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. In applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Additional factors that may be considered depending on the issue involved are: • 1) Whether the person performing services is engaged in an occupation or business distinct from that of the principal; • 2) Whether or not the work is a part of the regular business of the principal or alleged employer; • 3) Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work; • 4) The alleged employee's investment in the equipment or materials required by his or her task or his or her employment of helpers; • 5) Whether the service rendered requires a special skill; • 6) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; • 7) The alleged employee's opportunity for profit or loss depending on his or her managerial skill; • 8) The length of time for which the services are to be performed; • 9) The degree of permanence of the working relationship; • 10) The method of payment, whether by time or by the job; and • 11) Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests. • Even where there is an absence of control over work details, an employer-employee relationship will be found if (1) the principal retains pervasive control over the operation as a whole, (2) the worker's duties are an integral part of the operation, and (3) the nature of the work makes detailed control unnecessary. (Yellow Cab Cooperative v. Workers Compensation Appeals Board (1991) 226 Cal.App.3d 1288) • Other points to remember in determining whether a worker is an employee or independent contractor are that the existence of a written agreement purporting to establish an independent contractor relationship is not determinative (Borello, Id.at 349), and the fact that a worker is issued a 1099 form rather than a W-2 form is also not determinative with respect to independent contractor status. (Toyota Motor Sales v. Superior Court (1990) 220 Cal.App.3d 864, 877)

In this instance the carrier insures ABC LLC (general contractor) for worker’s compensation. ABC used a subcontractor, Temp Tech on their project at XYZ Apartments.ABC provided a CNC for Temp Tech for their exclusion from WC coverage per the CNC. The carrier requestedverification the subs entitlement to use the CNC form since Temp Tech was paid $69,834 for the short lived job that was performed. The insured initially indicated that the sub had indeed brought someone on the job site with him as the work he performed was not easily done alone (verbally communicated). The sub then also provided a CNC for the person he brought onto the job site; however, the sub subsequently denied he ever brought any employee, contract employee or subcontractor on the jobsite and stated he had provided the additional CNC in error. Ironically, USIC also insured the sub for GL. It turns out that the sub does have contract labor exposure via payment as 1099 labor. The CNC provided by the sub to the general contractor on the worker’s compensation policy was not valid. An Actual Real Life Example

Generally, no form or “agreement” between the employer and “contractor” can overcome a bona-fide employer/employee relationship as defined by the Franklin Factors, U S Labor Law and established legal precedents. • In most states, a worker or contract employee may not abrogate their right to workers compensation contractually. • Some states allows an employee to file a form with the state to be excluded from WC. • Arizona • Are there others? In Summary

What is an OCIP?Owner Controlled Insurance Program • A policy issued to cover all operations involved in a specific project owned and operated by a specific legal entity • Normally utilized by municipalities or large corporations • Usually encompasses all insurance operations including WC, GL and Umbrella

What does an OCIP accomplish? • Places all insurance control (coverage & cost) in the hands of the project owner • Normalizes/equalizes the expected contractor cost by taking out the insurance component of the subcontractor quote • Its primary purpose is to protect the owner by assuring/assuming insurance coverage for all contractors and minimize costs to the project owner

Why is an exclusion needed for project subcontractors? Isn’t other coverage for the project subcontractor enough? • Potential Problems by not excluding: • Policy deductibles • What if OCIP deductibles are much higher than sub’s deductible? • Who pays? • The court will determine who pays! • Products/Completed Operations Tail • Is our insured a named insured on the OCIP? • Our policy still has a duty to defend • Remember, if we allow the exclusion of our subcontractor’s OCIP exposures without an exclusionary endorsement on the policy, then we are collecting no premium at all and have unknown claims potential

Exclusion Procedure – GL & WC • In order to exclude exposure the specific OCIP (project and/or location) must be excluded on the policy using: • GL ISO OCIP (Wrap Up) Exclusion CG 2154 (blanket language may be used). • WC 00 03 02 (TX WC 00 03 02) specific operation exclusion • No exclusion = No reduction in premium • Why? • Subcontractor’s carrier is not a party to the OCIP Policy and has no knowledge of the terms and conditions of the policy

In Conclusion: Trust your insured! Trust your agent! BUT Research, validate and confirm your risk!

Subcontractors & Other Myths GL, WC w/ Some State Examples