March 20, 2007

The Sole Proprietor Conundrum: Compulsary or Optional Comp?

Delaware has finally fixed its comp statute, lowering rates by limiting attorney fees and by establishing a medical fee schedule. They've also implemented a pay without prejudice period, under which carriers must begin paying benefits promptly, while reserving the right to stop payments at a later date if compensability comes into question. That's all well and good.

The Delaware reforms have given rise to an interesting policy issue: the revised statute not only invites sole proprietors into the comp system, it requires them to secure coverage. Many states exclude sole proprietors from coverage; some make the coverage optional. Delaware is the first state I am aware of that makes the coverage mandatory. There's been a very strong push back from sole proprietors, who say they cannot affort the premiums. The state's Department of Labor is waffling on implementing the new standard and is looking to the legislature for guidance. I think Delaware should stick to its guns. Here's why.

Independent contractors and sole proprietors have evolved into the biggest loophole in the comp system, big enough to drive through with the proverbial Mack truck. There are literally hundreds of thousands of construction workers across the country who labor under sub-standard conditions without any insurance or benefits. The general contractor calls them "independent," even though he directs the work. A home springs up on the vacant lot. Who built it? "Independent contractors." Who had insurance? No one. Why? Because it's a lot cheaper to build that way. Is it a crime? It's insurance fraud. Premium avoidance is a type of fraud far more prevalent than the rare "faked" injury. Why does it matter? Because legitimately insured businesses cannot match the low pricing of their uninsured competitors. And we all end up paying for the serious injuries of uninsured workers.

It's Broken, But Can You Fix It?
Massachusetts has struggled mightily to capture premium for independent contractors. The state has taken action to redefine independence. In MA law, the presumption is that everyone works for someone, unless you can prove otherwise. The standard for "independence" is so high, most uninsured sub-contractors cannot meet it. (Read the Attorney General's advisory here.) As a result, the payroll of most subcontractors without proof of coverage is now routinely added to the payroll of the GC, resulting, of course, in higher premiums. In other words, the sole proprietor can still "opt out" - but in many instances the GC ends up with the bill.

There are a couple of flaws in the MA enforcement effort. First and foremost, abuse is so widespread, the state cannot find every uninsured contractor. In addition, because comp coverage for sole proprietors remains optional, enforcement is limited to finding the responsible GC. As a result, the independent contractor loophole has been significantly narrowed, but you can still drive a VW bug through it.

That's why Delaware should implement mandatory coverage. It's risky - and the pressure to back off will continue to be intense. But it's the right thing to do. Once you make workers comp coverage mandatory for everyone, you truly level the playing field and you ensure that all workers are protected. To be sure, the cost of doing business for the sole proprietor goes up. But at the same time, the cost for everyone else goes down. And you have the confidence in knowing that everyone is finally protected.

Long the poster child for a comp system out of control, Delaware has an opportunity to lead the way for everyone else. It will be interesting to see if they have the political will to get the job done.

| 1 Comment

1 Comment

I enjoy reading your articles and pass them on to my staff to review.

In a future article, could you please address the pro's/cons, advantages/disaadvantages of occupational accident policies (Occ/Acc) as it relates to workers' compensation?

Thank you.

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This page contains a single entry by Jon Coppelman published on March 20, 2007 3:16 PM.

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