Dispute Workers' Compensation Audit In Michigan.
If you believe your business received a workers' compensation audit with errors, it's important to know what your company should dispute and when you should file a dispute.
If you're in shock over your workers' compensation audit and feel like you've been punched in the gut, you're far from alone. There are many reasons why a workers' compensation audit ruined your day.
Two of the most common issues business owners have with audits include:
Change of classification of a sub-contractor to an employee
Change of an employee's class code from one code to another resulting from a substantial and unexpected increase in the cost of workers' comp per hour.
As with most insurance policies, especially commercial insurance, there are many factors and components that come together to create a final premium amount. A workers' compensation audit is designed to reconcile the differences between the start of the insurance policy and the actual realized business and employment results.
In an ideal world, how the policy is setup is the same as the findings by the insurance auditor at the end of the workers' comp policy term, and when it's not, mid-year policy changes are performed so as to remove any unexpected and unpleasant surprises. However, errors made during the initial underwriting and/or changes in the business can change what was initially correct, and if not corrected during the policy long before the expiration date, can leave a business owner in frustration.
This is why it's so important for business owners to rely on an agent who fully understands the nuances of commercial insurance, and especially workers' comp insurance. Otherwise, both the agent and the business owner are being setup for potential failure that's unnecessary. Most of the problems I see when talking to business owners with workers' comp stems from their previous agent either not understanding the rules and nuances of workers comp, or not taking the time to fully understand the business they're working with. Often, and sadly, it appears the business owner's frustration is a combination of both ignorance and effort.
Navigating workers' compensation is like most things, you need to know the rules of the game if you intend to find success. If your dispute involves an issue of if someone is an employee or subcontractor, you will find that Michigan appears receive guidance from a 20 factor test. Keep in mind, that the presumption by Michigan and the federal government is any given person is an employee UNLESS it's shown that they are not. In other words, you're not starting on equal footing trying to push the person over to the subcontractor side. Rather, you have to move the person from firmly within the employee side all the way over to the subcontractor side, leaving little or no ambiguity. That can be a challenge for many occupations and situations.
Here's a link to the 20 factors which include:
- Services Rendered Personally
- Hiring, Supervising, and Paying Assistants
- Continuing Relationship
- Set Hours of Work
- Full Time Required
- Doing Work on Employer's Premises
- Order or Seqence Set
- Oral or Written Reports
- Payment by Hour, Week, Month
- Payment of Business and/or Traveling Expenses
- Furnishing of Tools and Materials
- Significant Investment
- Realization of Profit or Loss
- Working for More Than One Firm at a Time
- Making Service Available to General Public
- Right to Discharge
- Right to Terminate
From another (that is also downloadable from this page or from the state of Michigan's website) "required reading" for any Michigan business that hires subcontractors titled "Employer Insurance Requirements… Subcontractors, General Contractors, Independent Contractors" put out by the Michigan Department of Licensing and Regulatory Affairs, Workers' Compensation Agency….
Who is an independent contractor?
An independent contractor is one who maintains a separate business and holds himself or herself out to and renders service to the public. Generally, a person cannot become an independent contractor just because he or she wants to be, or because an employer wants the person to be an independent contractor. It is not enough that the employee and the employer agree. If a person only works for one business and is directed and controlled by that business, the person probably is an employee and not an independent contractor. The “20-factor test” announced by the IRS in Revenue Ruling 87-41, 1 C.B.296 further defines the employee-employer relationship. You may wish to consult your attorney for further explanation. Question 13 discusses some key elements of an independent contractor relationship
A general contractor employs a subcontractor which is a sole proprietorship with no employees. Can the insurance company auditor charge the general contractor premium on money paid to the subcontractor? No, however, it is the responsibility of the general contractor to provide reasonable proof to his or her insurance company that the subcontractor is a sole proprietorship with no employees. The following proofs may be used. For additional proofs, see Bulletin 89-03 on page 7 of this booklet.
a. The Federal Identification Number of the sole proprietorship.
b. A copy of the written contract between the sole proprietorship and the general contractor.
c. A list of other general contractors for whom the sole proprietorship has worked recently and/or is currently working for.
d. A copy of the assumed name certificate which the sole proprietorship has on file with the county.
e. Proof that the sole proprietorship is paid by the job and an IRS 1099 form is given to the sole proprietorship by the general contractor at the end of the year.
f. A sworn statement from the sole proprietor that he or she has no employees.
g. An advertisement that shows the sole proprietorship is available to work for others.
(my bold highlights) If the insurance auditor does not accept reasonable proof, the general contractor should request in writing another payroll audit from the insurance company. If the premium is not waived after the re-audit, the general contractor may appeal to the Department of Insurance and Financial Services and request a hearing to resolve the premium dispute.
Can a general contractor require a certificate of workers’ compensation insurance from its subcontractor?
If the subcontractor is a sole proprietorship with no employees, the Act does not require a certificate of workers’ compensation insurance. However, the general contractor may on a contractual basis require a certificate of workers’ compensation be provided. This is a contractual issue not regulated by the Agency. If the subcontractor is a sole proprietorship and has one or more employees, or if the subcontractor is a partnership, corporation, or limited liability company, the general contractor should require a certificate of workers’ compensation insurance or a copy of a properly executed exclusion form.
If a subcontractor doesn’t carry workers’ compensation insurance and does not have an exclusion form on file with the Agency, any work-related claim filed by the uninsured subcontractor’s employee may become the responsibility of the general contractor.
Michigan law allows the workers’ compensation liability to transfer from an uninsured subcontractor to the general contractor. In this situation, the general contractor retains the right to sue the uninsured subcontractor for reimbursement of all compensation paid to the uninsured subcontractor’s employee.
If you understand that Auditors are trying to make sure a workers' comp policy is "correct", and by correct, that includes the class codes and that anyone who may collect from the policy is listed on the policy for calculating premium It's understandable, or at least it should be, that insurance companies will lose money if they have to pay out for injuries from people that weren't, albeit should have been on the policy to begin with. Knowing that many policies have mistakes and many employers haven't taken the time to fully understand the worker's comp insurance system (and I think it can be argued that they shouldn't have to because they should be able to rely on their agent), auditors attempt to remain villigent in their efforts.
It makes sense from the standpoint they will look like the villege idiot if they miss something / someone and that person winds up collecting on the policy.
If you have more questions, please give us a call and myself or another qualified licensed agent will discuss your business workers' comp policy. If you're just starting out with your first policy, we're happy to assist you as well.
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Just so you know, Michigan began it's move to what is essentially and largely an employer/employee "no-fault" system in 1912. Before 1912, employees injured on the job were required to seek a remedy in court, akin to anyone else injured and must prove employer negligence in order to secure a judgment. That meant it was much more difficult for an employee to receive money, albeit for the employer who may believe that's a perfect world, it came at a cost.
A jury could award virtually any amount it felt was warranted. As most business owners know or will at some point learn, juries are highly unpredictable and there's always a chance a jury could award much more than a defendant feels is warranted. Michigan's workers' compensation law removes most of the unpredictability and replaces it with a set amounts that we have today.
The result of the workers' comp insurance system in Michigan is that injured employees are much more likely to receive benefits, while at the same time, an employer is less likely to lose their entire company due to a employee's injury.