Workers Compensation Audit Issues – Sole Proprietor
The Massachusetts Workers Compensation Rating & Inspection Bureau has updated audit guidelines related to the hiring of sole proprietors and/or partnerships. These guidelines will have a greater impact on the construction field, but will impact other industries as well.
It is critical that businesses obtain Certificates of Insurance from contractors or firms hired to work on their behalf. If a hired subcontractor does not carry Workers Compensation coverage, then an injured employee of that subcontractor would collect on your coverage. For this reason auditors will ask about contractors, 1099’s and subcontractors you have hired and request to see the Certificates of Insurance which you have collected. The labor cost you paid to any uninsured parties will be added as payroll to your audit and generate additional premiums.
The Bureau has also clarified the audit guideline regarding the use of subcontracted sole proprietorships or partnerships. Sole proprietors and partners are not required to carry Workers Compensation coverage if they do not have any other employees. They can elect to obtain coverage on themselves, but are not legally required to do so. They are legally required to purchase the coverage if they have any employees, even if the workers are part-time. A Certificate of Insurance provided by a Sole Proprietor / Partnership that has Workers Compensation but has not elected coverage for the owners will be noted as such. The Bureau’s new guidelines stipulate that the auditors will pick up the payroll for the “uninsured” sole proprietor / partner if the Certificate states that they are excluded from coverage. Exceptions to this rule can be found in the following three-part test:
The individual/partner is free from control and direction in connection to performance of the service, both under his/her contract for the performance of service and in fact; and
The service is performed outside the usual course of the business of the employer; and
The individual/partner is customarily engaged in an independently established trade, occupation, profession or business.
Here is an example of how the rule would apply:
John Smith Carpentry, Inc. hires Stanley Jones dba Stanley Jones Plumbing to perform work on three projects over the course of the year. Stanley does not have employees at the time of the work but does have a Workers Compensation policy in case he needs a worker for larger projects. Stanley has elected to be excluded on his Workers Compensation policy. Stanley provides a Certificate of Insurance to John Smith Carpentry that shows Workers Compensation is in place but that he is excluded on the policy.
John Smith is insured with Boston Harbor Mutual. The auditor has requested copies of all insurance certificates for subcontractors hired during the year. A review of the Stanley Jones certificate shows that the sole proprietor is not insured. Boston Harbor Mutual’s auditor adds the payroll cost of the three projects to John Smith’s premium. John smith is unable to provide sufficient evidence relative to the “three-part test” to Boston Harbor Mutual that would reverse the charge. John Smith now must pay additional Workers Compensation premium.
It is important for businesses to be aware of this issue. The issue is more common with construction operations but is certainly applicable to any business that hires other businesses to provide a service or operation on their behalf, such as an insurance agency hiring an individual to clean the office. Be aware of these issues before you hire the business or individual so you can understand what insurance is in place and the potential cost in the future if their coverage is not sufficient or is in question.
At Cleary, we will evaluate your business exposures and work with you to develop a comprehensive plan to safeguard your business. Give us a call today at 617-723-0700.