November 17, 2005

Tennessee Backpedals on Independent Contractors

States continue to struggle with the dilemma of independent contractors. How can you ensure that small artisan contractors in construction have adequate workers comp coverage? How can you prevent abuses, such as employers calling their own employees "independent" to avoid paying comp premiums? And who pays for independent contractors when they get hurt?

Tennessee had a solution called form I-18, "Election of Non-coverage by Subcontractor." Under this program, subcontractors self-certified that they were truly independent and not to be considered employees of the general contractor. In a rare but welcome move toward full disclosure, Tennessee acknowledged a number of problems with this program, leading directly to their revoking it:
- Employers forced their own employees to sign the I-18 form, thereby fostering the illusion that the employees were independent. (This of course saved the employer a lot of money on taxes, benefits and comp premiums, while at the same time depriving employees of statutorily ensured coverage.)
- Insurance premiums for comp were routinely understated, due to frequent misclassification of employees
- The forms themselves were not filled out properly, causing delays in the processing of insurance premiums
- the Tennessee Department of Labor had no way to verify the accuracy of the information on the form

So Tennessee has eliminated the form. In doing so, they remind local employers of the state's criteria for "independent contractors." In the language of their statute, the following factors are to be "considered":
A. the right to control the conduct of the work
B. The right of termination
C. The method of payment
D. The freedom to select and hire helpers
E. The furnishing of tools and equipment
F. Self scheduling of working hours
G. The freedom to offer services to other entities

This is pretty standard stuff, running parallel to the IRS criteria. It's interesting that Tennessee simply asks that these factors be "considered." They have set up a flexible and to some degree ambiguous program. When it comes to collecting workers comp premium, the insurance auditors will make the determination of independence on a case by case basis. Sometimes they will seek additional premium for uninsured subs; in other cases, they might not.

By contrast, Massachusetts has set up a program that puts all of the heat on general contractors. Coverage defaults to the GC, even if the sub appears to meet the criteria for independence. Most premium auditors have been given a simple but harsh instruction: if subs are uninsured, put them on the GC's payroll for comp. And don't waste your time trying to figure out if the sub is really independent.

The Massachusetts plan has infuriated GCs. They angrily point to their uninsured competitors, whose cost of doing business is already substantially lower, even before the GC absorbs the cost of his subs's insurance. Right they are. But until the enforcement mechanism catches up, the disparities will continue. This issue -- with its many ramifications for fairness and for the cost of doing business -- won't go away anytime soon.

Special thanks to Dave Austin at Penn National Insurance for a heads up on the Tennessee story.

| 2 Comments

2 Comments

Am I missing something? It seems to me that the Massachusetts GCs are not in a very bad situation. If their competitors do not want the protection from civil lawsuits filed by workers injured on their jobsites (especially if they would be responsible for the injuries of their subs) then so be it. It will just be a matter of time before they will be facing expensive lawsuits under their liability policies. Now if the criminality of these businesses goes further then it may be a different situation, but in addition to being a business issue it would also be a legal issue for a variety of government agencies.

Isn't it also standard practice for GCs to ensure all of their subs are properly insured (independant or not) on penalty of withholding payment?

I agree, if uninsured competitors are the problem, then General Contractors can "turn them in". Problem with having injured worker file civil action, is that uninsured employers are also likely to be "judgment proof".

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This page contains a single entry by Jon Coppelman published on November 17, 2005 1:51 PM.

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