1. Develop the correct premium for uninsured sub-contractors.
2. Apply the proper classification for uninsured sub-contractors.
3. Identify problems with a certificate of insurance.
Most state Workers’ Compensation laws provide that a contractor is responsible for compensation benefits to employees of uninsured subcontractors. The statement is clear and simple but its application creates numerous challenges for the auditor. The auditor must first determine whether or not this exposure exists. If it does, the insured must either furnish satisfactory evidence that the exposure has been insured or pay a premium based on the subcontractor’s payroll.
CERTIFICATE OF INSURANCE
When a subcontractor has insured his compensation obligation and the contractor can furnish satisfactory evidence of such insurance, a premium charge should not be made in the adjustment of the contractor’s policy. The most satisfactory evidence of insurance is a certificate issued for the subcontractor by his insurance carrier. However, there is always the possibility that the term of that subcontractor’s policy was not for the same period that the work under contract was performed, so care should be exercised to make certain that the dates agree. Whenever a certificate of insurance is issued for a contractor or subcontractor and the policy is canceled, notification of such cancellation is supposed to be furnished to the person or concern that required the certificate.
BASIS OF PREMIUM FOR SUBCONTRACTORS
The Basic Manual, in Rule 2-H.2, provides guidance as to the premium determination for subcontractors. This rule always seems to generate a variety of interpretations, so we will first look at the rule as written, then analyze it with several examples.
For each subcontractor for which evidence of insurance is not furnished, additional premium shall be charged on the policy which insured the contractor as follows:
a. The contractor shall provide a complete payroll record of the employees of each uninsured subcontractor. Premium on such payroll shall be based on the classifications which would have applied if the employees of the subcontractor had been employees of the contractor.
b. If the contractor does not supply the payroll records of its subcontractor, the full subcontract price of the work performed during the policy period by the subcontractor shall be established as the payroll of the subcontractor’s employees. The additional premium shall be charged on that amount as payroll.
Exception to 3b above:
If investigation on a specific job discloses that a definite amount of the subcontract price represents payroll, such amount shall be the payroll for the additional premium computation. In contracts for mobile equipment with operators (such as but not limited to earth movers, graders, bulldozers, or log skidders), the payroll shall not be less than 33-1/3% of the subcontract price. In contracts for labor and material, the payroll shall not be less than 50% of the subcontract price. In contracts for labor only, the payroll shall be established as not less than 90% of the subcontract price.
c. If vehicles, including drivers, chauffeurs, messengers, and helpers are employed under contract, and if the owner of such vehicles has not insured their compensation obligation and furnished evidence of such insurance, the actual payroll of the drivers, chauffeurs, messengers, and helpers shall be included in the payroll of the insured employer at the proper rate for the operations in which they are engaged. If such payroll cannot be obtained, 33 1/3% of the total amount paid for the hire of such vehicles under contract shall be considered as the payroll of the drivers, chauffeurs, messengers, and helpers.
If the cost of fuel, maintenance or other services provided to the owner or owner-operator of a vehicle under contract are not included in the contract price, the value of such items should be added to the contract price before calculating the 33 1/3% amount.
d. If an experience modification has been established for the contractor, such experience modification shall be applied to the premium developed for the uninsured subcontractor.
The above rule on subcontractors does not apply to contracts for piece work in manufacturing plants nor to drivers, chauffeurs or helpers on vehicles engaged under contract. For piece work, the entire amount paid each worker shall be included as payroll. For drivers, chauffeurs or helpers of hired vehicles, refer to the rules on Standard Exceptions. As with all NCCI rules, caution must be urged to be alert to any state exceptions that exist. In certain jurisdictions, drivers, chauffeurs and their helpers are not considered as standard exceptions. Rather, they are general inclusions. Also, for the rule on vehicles under contract, certain states now use only 1/4 of the total contract price.
Example A: Payroll Records of Subcontractor are Furnished
The first thing an auditor must determine is whether the contractor was furnished complete and verifiable payroll records of the subcontractor. If so, premium for the uninsured subcontractor will be based on the actual payroll of the employees of the subcontractor.
The problem that exists here is that it is very unlikely that the contractor can produce these records. Even if they do provide them, how does the auditor verify them? Remember, the policy conditions provide that we may "examine and audit all your records that relate to the policy." The conditions do not provide a legal right to examine the books of the subcontractor!
Example B: Payroll Records of Subcontractors are Not Furnished
If the subcontractor’s payroll records are not available, the full subcontract price for the work performed during the policy period should be included in the basis of premium. However, if your investigation reveals that some definite amount of the total subcontract price represents payroll, that amount will be the payroll for the additional premium computation. An important point here is that "definite amount" is not the same as "actual payroll." If you had the actual payroll, you would have included that amount, as clarified in Example A above. This exception pertains to a situation where the auditor has determined that the subcontractor provided both labor and materials, or provided labor only, but could not provide the actual records. In this scenario, the amount to be included as payroll must be at least 50 percent of the contract price in contracts for labor and materials, at least 90 percent of the contract price in contracts for labor only, and at least 33 1/3% of the contract price for mobile equipment with operators.
HOW TO DETERMINE IF EXPOSURE EXISTS
The first determination by the auditor is whether a true Contractor - Subcontractor relationship exists. One such test is whether a factual, separate business entity exists. Corporations and partnerships, by their very nature, are business entities. Sole proprietors must be resolved as to whether they are independent contractors or employees by another name. Some suggested questions to aid the auditor in making a determination are as follows:
1. Does the "subcontractor" have a distinct occupational or business license?
2. Is there evidence that liability insurance is carried? Bonding, where required?
3. Does the "subcontractor" advertise as a separate entity? Yellow Pages? Trade journals?
4. Does the general contractor (our insured) have the right to control the details of the work performed?
5. Does the general contractor furnish equipment?
6. Is payment by the hour rather than by the job?
7. Is the work similar to the same work normally performed by the insured’s own employees?
"Yes" answers to the first three questions and "No" answers to the last four would tend to indicate that a true independent contractor exists. However, these are not concrete rules and each situation must be decided on its own merits.
Please note that the preceding is only an outline. There are additional important factors to consider in this area. First, awareness of the constantly changing legal situation regarding subcontractors is imperative. Advice in this area can be obtained from your Home Office Audit, Underwriting and Legal departments. These sources should also be contacted when there is uncertainty as to state Workers’ Compensation Law or to company policies and procedures. Second, when a subcontractor presents evidence of insurance, it is important that the auditor ascertains the legitimacy and accuracy of that evidence (by getting a bonafide certificate of insurance, checking to see that the information contained on the certificate covers the job in question, the appropriate time periods, etc.). Lastly, the auditor must follow the procedures outlined in both the appropriate Workers’ Compensation manual and his or her own company’s procedural manual.
CLASSIFICATIONS APPLICABLE TO SUBCONTRACTORS ON CONTRACTING JOBS
The following interpretation is supplied in NCCI’s Basic Manual Rule 1-D-3-d-2. concerning subcontractors who perform a single type of work on a contracting project or job:
....subcontracted work shall be classified on the basis of the classification describing the particular type of work involved. Thus, the subcontractor who only performs excavation work in connection with the construction of a sewer would be classified under "Excavation", Code 6217, rather than under "Sewer Construction", Code 6306.
The ruling in connection with Concrete Construction has been continued. This requires that all operations including making and erecting forms, placing reinforcing steel and stripping forms, when done by subcontractors, shall be assigned to the appropriate concrete construction classification.
These rulings apply only to insured subcontractors. Uninsured subcontractors, covered under the principal contractor’s policy, will continue to be classified on the basis of the classifications which would apply if the work were performed by the principal’s own employees.