Subcontractors Can’t Hide from Workers’ Comp

Sound risk management necessitates that owners or general contractors contractually mandate workers’ compensation coverage anytime an independent contractor or subcontractor is hired to perform work on their behalf. Subcontractors cannot hide behind statute in contract situations; workers’ compensation coverage can be contractually required regardless of statutory provisions.

Forty-four states and the District of Columbia statutorily address workers’ compensation benefits within the general contractor-subcontractor relationship by mandating that employees of a subcontractor be provided workers’ compensation benefits if an injury occurs. Benefits will be paid either by the injured employee’s direct employer (the subcontractor) or the general contractor that hired the subcontractor. The general contractor is statutorily assigned the responsibility of providing benefits to the uninsured subcontractor’s injured employee regardless of the number of employees working for the subcontractor. Plus, any premium for these de jure (legal) employees will be charged to the general contractor, even if no injury occurs.

Do not confuse a general contractor-subcontractor relationship with the relationship between a principal and an independent contractor. An independent contractor is an entity with which a principal/owner directly contracts to perform a certain task or tasks. Independent contractors are most often engaged to perform operations not within the usual trade or business of the principal and such tasks are contract-specific. All work required of the contract is performed by the independent contractor and employees. Independent contractors are not typically considered employees of the principal.

A “general contractor” is an entity with which the principal/owner directly contracts to perform certain jobs. Some or all of the enumerated tasks are subsequently contracted to other entities (subcontractors) for performance. For there to be a general contractor relationship, there must be three parties: a principal/owner, an independent contractor, and a subcontractor hired by the independent contractor. The independent contractor’s status changes to that of a general contractor when any part of the work is subcontracted to another entity.

The principal is not commonly held financially responsible for an injury to the independent contractor’s employees or employees of any subcontractors hired by the independent contractor (now a general contractor). But the general contractor is financially responsible for any injuries to the employees of an uninsured subcontractor.

Principals and General Contractors

If neither the general contractor nor the subcontractor has workers’ compensation, the principal could potentially be sued by an injured worker to recover any benefits due. However, it is unlikely that the principal will be held financially responsible as the principal does not statutorily qualify as an employer or a general contractor. The principal could be sued under other theories of liability such as negligent supervision, failure to provide a safe work environment or other negligence theories often ascribed to property owners. If this happens, the principal’s general liability policy should provide defense.

Principals and general contractors should contractually require any entity with which they contract to provide workers’ compensation. This avoids any question of whether an employee/employer relationship exists. The mere act of purchasing coverage proves that the independent contractor or subcontractor does not believe such a relationship is created.

Any contract between the principal and general contractor should specifically state that the responsibility to confirm that all subcontractors provide workers’ compensation coverage falls solely to the general contractor. Further, the general contractor should understand that if he does confirm the presence of such insurance, he could be held statutorily responsible for injury to any of the subcontractor’s employees. Lastly, the general contractor must also agree to defend and hold the principal harmless in case of injury to any direct or “de jure” employee.

General contractor/subcontractor relationships are not confined to the construction industry. A municipality hires a consultant to study traffic patterns, the consultant hires a survey crew to do on-site measurements; this creates a general contractor relationship. A company hires a consultant who subcontracts statistical work to another party; a general contractor relationship is created. The activities that create a general contractor relationship are endless.

Topics Workers' Compensation Contractors