Contractor-subcontractor relationships -- workers' compensation insurance

Issued and entered June 15, 1989 by Dhiraj N. Shah, Acting Commissioner of Insurance

BACKGROUND

The purpose of this bulletin is to notify insurers of negotiations between the Michigan Workers' Compensation Placement Facility (Facility), the Michigan Insurance Bureau (Bureau) and the Bureau of Workers' Disability Compensation of the Department of Labor (W.C. Bureau). The subject of these negotiations is the contractor-subcontractor relationship and insurers' tendency to charge premiums where no exposure exists.

ANALYSIS

The Workers' Disability Compensation Act of 1969 as amended (the Act) specifies that an employee of an uninsured subcontractor may collect workers' compensation benefits from the principal (contractor) pursuant to MCLA 418.171. Historically, insurers have relied on language in basic manual rules to charge a premium where this exposure exists. Many auditors have expanded the scope of this rule to collect premiums on the individual sole proprietor subcontractors, in addition to the employees.

Because the individual sole proprietor subcontractor is not eligible for benefits under the contractor's workers' compensation policy, the Commissioner of Insurance (Commissioner) deemed this an improper interpretation and withdrew approval of Rule IX-D that was filed by the Facility for the residual market. The withdrawal of approval prompted the Facility to file revisions to the rule to address problem areas. After negotiations between the Facility, the Bureau and the W.C. Bureau, the following revised language was implemented March 1, 1989 for the residual market business:

1. Law on contractors and subcontractors

The workers' compensation law provides that a contractor is responsible for the payment of compensation benefits to employees of its uninsured subcontractors.

A subcontractor is one who maintains a separate business and holds himself or herself out to and renders service to the public.

2. Coverage

This statutory responsibility is automatically insured by the Standard Policy issued to the contractor.

3. Premium for uninsured subcontractor with employees

The contractor shall furnish satisfactory evidence that the subcontractor with employees had workers' compensation insurance in force covering work performed by the subcontractor or provide a copy of an exclusion form (MDL 337) which has been properly filed with the Bureau of Workers' Disability Compensation if the subcontractor qualifies for the use of such exclusion form. For each subcontractor with employees for which such evidence is not furnished, additional premium shall be charged on the policy which insured the contractor as follows:

a. The contractor shall provide a complete payroll record of employees of each uninsured subcontractor. Premium on such payroll shall be based on the classifications which would have applied if the employees of the subcontractor had been employees of the contractor.

b. If the contractor does not supply the payroll records of its subcontractors who have employees, the full subcontract price of the work performed during the policy period by the subcontractor shall be established as the payroll of the subcontractor's employees. The additional premium shall be charged on that amount as payroll.

Exception to 3b. above

If investigation on a specific job discloses that a definite amount of the subcontract price represents payroll, such amount shall be the payroll for the additional premium computation. In contracts for labor and material, the payroll shall not be less than 50% of the subcontract price. In contracts for labor only, the payroll shall be established as not less than 90% of the subcontract price.

c. If an experience modification has been established for the contractor, such experience modification shall be applied to the premium developed for the uninsured subcontractor.

4. Premium shall not be charged for a subcontractor which is a sole proprietorship with no employees if the following criteria establish that the particular person is, in fact, a subcontractor and not an employee. The burden of proof rests with the contractor.

5. Criteria to be used to determine subcontractor status

The criteria to be considered in determining whether an individual is an employee or subcontractor is based upon reasonable proof provided to the carrier. Some specific factors to establish the relationship between the general contractor and the subcontractor follow:

a. Factors to determine if the subcontractor maintains a separate business.

1) A federal identification number of the subcontractor.

2) A copy of an assumed name certificate filed with the county.

3) Copies of the subcontractor's articles of incorporation or partnership papers.

4) Subcontractor received an IRS 1099 form in lieu of a W2-form.

5) The subcontractor maintains its own separate place of business.

6) The subcontractor furnishes all its own materials and equipment to perform the job tasks.

7) Copy of a written contract which spells out an employer/employer relationship.

8) The subcontractor can realize a profit or suffer a loss as a result of services rendered.

9) The subcontractor has the right to hire or fire its employees without securing permission from a general contractor.

b. Factors to determine if the employer holds itself out to and renders service to the public.

1) The subcontractor is listed in the yellow pages and/or advertises in the newspapers, trade journals, on T.V. or on the radio.

2) List of other general contractors or individuals the subcontractor worked for recently.

3) The subcontractor performs specific jobs for prices agreed upon in advance and pays expenses incurred in connection with the specific jobs.

c. Other factors

1) A sworn statement from the sole proprietor that the sole proprietorship has no employees.

2) The subcontractor does not primarily depend upon the payments from one general contractor for the payment of the individual's living expenses.

The Commissioner feels that the problem of charging a premium for subcontractors who are not eligible for benefits has been adequately addressed in the residual market. This approach is equally applicable to the voluntary market. The Commissioner therefore urges insurers to review their workers' compensation manuals and, if necessary, file the rule used by the Facility or a similar rule.

Filings should follow the procedures specified in the Property and Liability Insurance Filing Procedures Manual, including at a minimum the submission of INS-700, INS-705 and INS-760.

The Commissioner may exercise his right to withdraw approval pursuant to MCLA 500.2418 of any insurers' rules that allow a premium to be charged where no exposure exists.