Workers Compensation 101: Subcontractors Counted As Employees

Workers Compensation 101: Subcontractors Counted As Employees

From a workers’ compensation coverage and claim perspective, the mis-classification of subcontractors can have numerous unintended repercussions such as inflated premiums, increased EMR (experience mod factor), unexpected audit liabilities and potential legal issues.  One common misclassification is  when 1099 subcontractors are actually employees or when systems are not followed and there is no choice but to count subcontractors as employees.  NOTE: If you are not sure what type of classification a employee should be, it’s best to consult legal counsel. 

The distinction between an employee and a 1099 independent contractor is primarily based on the level of control and autonomy in their work. Factors such as the type of work performed, control over the tasks, and financial aspects like payment and profit play a crucial role. In 2024 new rules are going into effect that will expand work comp coverage and other rights to misclassified 1099 workers and treat them as employees.   Independent Contractors who are found to be employees will lead to their payroll being included in the work comp policy.

If a 1099 worker is classified as an employee, consequences can occur. 

1099 worker

Common Consequences of Misclassification

Work Comp Premium Calculation: When subcontractors are incorrectly classified as employees, your workers’ compensation premium may be inaccurately calculated. This is because premiums are partly based on the classification of workers, which determines the perceived risk associated with their job duties.   You’ll commonly find this out at audit leading to increased premiums.  

Claims Responsibility: If there is a workplace injury (and the subcontractor is incorrectly classified as an employee), the employer may be wrongfully held responsible for the claim. This could result in the employer’s workers’ compensation insurance covering the claim, which can increase the employer’s claim history and potentially lead to higher premiums in the future.

Legal Consequences of Misclassification: Should a misclassified subcontractor suffer an injury, they may pursue legal action if they are not covered by their own workers’ compensation insurance. This could lead to lawsuits and further liabilities for the employer.

Audit Complications: If it is discovered during a workers’ compensation insurance audit, that subcontractors were incorrectly classified, the employer may face additional premiums for the misclassified individuals. This can be retroactive, leading to significant unexpected costs.

Experience Mod Factor (EMR) Impact: The frequency and severity of claims affect an employer’s EMR, which in turn affects the cost of workers’ compensation premiums. Misclassified subcontractors filing claims under the employer’s policy can lead to an inflated EMR, resulting in higher premiums. Unsure what a mod factor is? Check this out.

The Importance of Subcontractor Insurance Verification

It’s essential to verify that subcontractors have their own workers’ compensation insurance. Without this verification, you as the employer risk assuming the unintended liability for injuries to subcontractors.  These insurance certificates are required for clear records during the insurance audit documentation process.  Failure to procure these prior to work starting can lead to the problems mentioned above.

How to Avoid Misclassification Errors

One key way to avoid a misclassification error is to establish clear contracts with subcontractors, defining the nature of the work relationship and responsibilities regarding workers’ compensation insurance. It is also important to maintain proper records and verify subcontractors’ insurance to present during audits.  This is commonly done with insurance certificates. 

When in doubt, have your insurance agent review certificates for coverage compliance.

We know that Workers Compensation Insurance can seem overwhelming and confusing. The good news is that we are experts at it. Whether you are looking for a brand new policy, or you already have one in place, we can help. You need a workers compensation policy that meets the unique needs of your business and the hazards that it presents.
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A little more about Holley Insurance…

Holley Insurance was founded in 2000, and retains a core base of loyal clients. We have locations in Roanoke, Rocky Mount, and Forest, VA. As an independent insurance agency, Holley Insurance represents a carefully selected group of financially strong, reputable insurance companies. Therefore, we are able to offer you the best coverage at the most competitive price. Holley Insurance was named “Top Insurance Broker in Southwest Virginia” by Virginia Living Magazine for 2021. 

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