Hiring a Subcontractor, What You Need To Know For Insurance

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Moving from a one person band to having employees and/or subcontractors working with you can be a significant and unexpected change for many business owners. On one hand, with more people, larger and sometimes more profitable contracts can be earned, and having other hands on the job can make quicker and more efficient work when do correctly.

Like most things in life, the upside to having people work for you doesn't come without its fair share of drawbacks. Recruiting quality people that will take pride in their work, show up on time and ready to work, have the exact skillset you're seeking, want to work when you want to work, and are within your budget is a challenge every personnel manager faces regardless of the size of operation. For most small new business owners, it's the toughest part of running their business because there's so much on the line with every hire.TurningNail10-4-16

Assuming you want to hire a subcontractor, which is likely the case or you wouldn't be reading this…. the first thing you need to know is if the person you want to hire can actually be classified as a subcontractor. States and the IRS generally consider anyone working for you as an employee and not a subcontractor unless each of their own criteria are met. This comes as a surprise to many new business owners. Often, managers are under the impression that all it takes is an agreement by the two people (manager and staff member) that it's a contractor / subcontractor relationship and boom, it's all good. Nothing could be further from the truth. I wrote a more in depth article about the differences between an employee and subcontractor, but I'll sum up by saying before hiring someone, make sure you know if the person you want to hire can be classified as a subcontractor before you hire them.

Once you're satisfied that your new hire meets the subcontractor classification requirements, the next step is insurance requirements.

Most commercial general liability insurance policies require companies that hire subcontractors to receive certificates of insurance from their subs for a set amount, or an amount of coverage that matches or exceeds your own commercial general liability. If you fail to do so, during an audit (and always assume your general liability policy will be audited), subcontractors that you hired that you're unable to provide certificates of insurance for will likely be classified as employees and the amount you paid them will become part of the payroll. If your policy premium is impacted due to a rise in payroll, your policy may become more expensive than you originally planned for.

Moreover, if you don't require your subcontractors to carry general liability coverage and they cause a loss, you're going to be in a tough spot. Often, a contractor isn't liable for the actions of a subcontractor, so if the loss is large enough (and sometimes even if it isn't), you can anticipate your insurance carrier to deny a claim and if sued, may or may not provide legal defense, which is often the most important component to your policy. In other words, as an example, if your subcontractor causes $2000 worth of damage, and the subcontractor is a typical laborer working paycheck to paycheck, you may not be able to recover the cost and have to pay it yourself. Also, your insurance carrier may not renew your policy and/or cancel it if you're outside their appetite or if they believe you're not completing your application for insurance accurately.

A loss of insurance coverage may mean instead of a great deal on insurance that places you in a competitive advantage compared to your competitors, you're paying much more than others and either have to make it up with higher bids, or take less profit to stay competitive. If there's a loss and it's too big for you to pay, it could damage your reputation and or cause a bankruptcy. Simply put, if you hire subcontractors, make sure they have general liability.

Workers' Comp Requirements – Untangling the Confusion

Workers' Compensation Insurance is another area that creates a great deal of confusion with contractors and subcontractors alike. Rarely is an owner of a contracting business required to carry workers' comp by law. The same holds true for an independent subcontractor (which is actually the same thing), and the motivation for many subcontractors to purchase a workers' compensation policy is because of contract requirements. As a contractor, you may not be legally required to have workers' comp for your subs, and you may not be legally required to require your subcontractors to carry the coverage, albeit you're likely by law to be responsible if your subcontractor hires someone who is classified as an employee, and they don't have workers' comp for their employee.

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Also, if the subcontractor you hire is later classified as an employee and not a subcontractor due to a misclassification by you and them, your workers' comp policy may be on the hook for injuries on the job. That's why if you hire a subcontractor and you have workers' comp insurance (an argument can be made even if you don't have workers' comp you should require your subs to get it), you should require your subcontractors to have workers' comp on their employees too. If it's a small one-person band you're hiring swinging a hammer that doesn't want coverage for themselves due to cost, they can purchase what's known as an "if any" or "ghost" policy. A workers' comp ghost policy is often a policy in name only (usually because it does become effective if someone is actually hired as an employee). A ghost insurance policy is usually pretty cheap ~ $220 a year, and can save your bacon during an audit. 

Because virtually all workers' comp insurance policies are audited, and auditors are looking for ways to increase the premium, it's an area of great contention for contractors, and for a really good reason. If you're a roofing contractor and your workers' comp insurance company classifies your subs as employees, your labor expense just went up 35%. In other words, using a somewhat, albeit not too extreme example, if you're a smaller roofer and paid out $60,000 to your roofing subs in for their services during your workers' comp policy, you could get hit with a $21,000 insurance premium bill unless you're managing your subs correctly including insurance requirements. Actual workers' comp premium cost is based on how many dollars of premium per $100 in payroll, with roofing as one of the highest (give or take about $35 for every $100 in payroll). 

Going back full circle to general liability, something to keep in mind is one of the criteria for determination of if a person is an employee or subcontractor is if the person has their own general liability coverage.

By now, your one big takeaway from all of this is if you're running a business, especially a new one and it's your first trip to the rodeo, you want to partner with an insurance agent that will take the time to explain as many pitfalls as they can. You want an agent who knows what you need more than you do, and has the experience and understanding to do it correctly. If you're opening a business and think your home and auto agent is up to the task simply because they can sell you a policy, you haven't done your homework. An agent that doesn't mostly work with commercial insurance isn't likely to have the same level of understanding of how all the pieces come together and ability to advise, rather than simply sell the type of coverage your business needs to protect you, your business, and your clients. The best insurance agent for your new business is one who is spending as much or more time consulting on best practices, growth, marketing, hiring, pitfalls, and direction as they are on commercial insurance coverage. 

If you fail to hire an insurance agent with a commercial focus, you should assume your competition isn't making the same mistake and they're likely at a competitive advantage over you. What should you do when selecting an insurance agent? Make sure to ask questions about their experience and what their focus is. If you're a contractor, get an agent that mostly writes contractor coverage, and if you're in the transportation industry and drive a long-haul truck, make sure your agent knows the difference between a MC and DOT number, or you'll spend time teaching instead of the same time learning and benefiting from the relationship.

 

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