Tradespeople who call themselves and their workers “independent contractors” have long been an issue for the workers’ compensation industry, often cutting carriers out of premium and leaving injured workers without coverage.
Some in the industry now worry, though, that at least a few carriers have taken anti-fraud precautions too far, charging premiums for subcontractor company officers, who, by law and industry rule, can exempt themselves from workers’ compensation coverage requirements in several states.
When a carrier includes an exempt subcontractor officer or owner on payroll, it can end up costing the general contractor perhaps $2,000 more per year in premium for a tile craftsman, for example, or $6,000 more per year for a carpenter, agents calculated. And when that happens, commercial agents feel the blowback from unprepared employers.
“The key is for agents to make sure that the employers are fully prepared and have all their documentation together at audit time,” said Steve Hall, principal at East Coast Insurors, an agency in Daytona Beach.
Some 16 states allow comp exemptions for small businesses, including skilled trade workers who have few or no employees. Owners and officers of firms can opt out of coverage. Ten of those opt-out states are in the South, according to information from the Workers’ Compensation Research Institute. Florida, which allows construction company exemptions for firms with three or fewer employees, may be the epicenter of the controversy, according to a recent blog posting by the Florida Association of Insurance Agents.
“We have received numerous phone calls from FAIA members regarding work comp premium audit problems arising from clients’ use of contractors with exempt officers,” wrote Frank Pennachio, a longtime comp expert and consultant who works with Florida agencies. “Some carriers are charging premium for exempt officers in a similar way as uninsured subcontractors.”
“It’s just wrong,” Pennachio said.
He noted that the National Council on Compensation Insurance in 2019 put out a memo explaining that its basic manual for Florida employers dictates that officers of a corporation who elect to be exempt from comp insurance “must not be included in premium calculation.”
Despite that, some carriers appear to have pressed ahead with the practice in recent years. A 2017 letter to agents from Summit Insurance indicated that, without complete documentation, general contractors will be charged premium for subcontractors, particularly if they earn above a threshold amount.
“Your clients should be aware that if any exempt subcontractors who receive $50,000 or more in compensation, do not have their own workers’ comp coverage, and cannot verify that any additional employees … were not used, then the entire amount paid to the exempt employee can be included for audit purposes,” reads the letter from Summit Vice President Mike Arnold.
Summit and four other carriers did not respond to request for information about this practice. Only FCCI Insurance Group commented.
“We have checked with our SVP of corporate underwriting and our director of premium audit and they both confirm FCCI follows NCCI rules and Florida statutes,” wrote Lisa Adamaitis, director of marketing and communications for FCCI, based in Sarasota, Florida.
Some employers, knowing the sub’s exempt status, simply aren’t expecting carriers to be so strict, agents said. And retroactively proving an independent contractor’s officer status can be easier said than done.
To be considered independent, and not an employee, a subcontractor must meet several of 10 requirements spelled out in Florida statutes. The most important factor, according to the Florida Department of Revenue, is that the worker maintains some decision-making authority and his methods are not subject to the control of the employer.
To prove exemption from workers’ comp, a tradesperson may also need to provide his or her company’s federal identification number – not just a Social Security number, Hall explained. It also helps at audit to have a copy of the sub’s company check or invoice or other documentation showing who the owner or officer is, along with 1099 tax forms, payroll journals, and other financial records. The Florida Division of Workers’ Compensation allows exempted contractors to print their exemption certificates, which regulators said can be crucial in an audit.
Still, one Florida agent commented on the FAIA site that “all appropriate documents were provided at audit but the carrier is coming back stating that the subcontractor exceeds the standard allowance to be exempt.”
Summit’s 2017 letter suggested that extra premiums can often be avoided if the right information is provided.
“To help your clients prepare for this… please remind them that, as always, documentation is key,” Summit wrote.
Others have said that employers have reported “getting hammered” more often in recent audits, but agents can help with that.
“It’s part of the relationship with clients for agents to report these things and make sure that clients provide all the documentation required,” said Clayton Fischer, an agent with Blue Marlin Insurance, in Coral Gables.
Pennachio said that the OIR has received complaints about carriers charging premiums inappropriately, but the office said it needs specific instances to investigate. Some insurance agents may be reluctant to rat on their carriers. OIR officials did not respond to questions about that from Insurance Journal.
Part of the problem is industry-wide and a sign of the times, agents and others said. With workers’ comp loss costs and rates dropping every year for more than a decade in most states, many employers and agents may not be paying attention to the details that could save even more on payroll and experience modifications.
“Is the C-suite still paying attention to workers’ comp?” Pennachio asked at a session at the FAIA convention in June. “Has comp become just a rounding error now?”
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