Workers’ Compensation – Part I


Workers’ Compensation pays very broad and comprehensive benefits that are mandated under state law. They’re often payable for many years after the date of the injury. This is why the premiums can be so expensive.

Benefits are payable to both your employees and the employees of your uninsured subs if they’re injured on the job or have an occupational disease. Its a no-fault system. Payment is made even if you, as the builder, are not at fault in causing the injury.

The policy pays all medical bills, both past and future. It pays for lost wages if the worker is out of work recovering, usually 66.66% of the employees average weekly wage subject to certain limitations. It also pays a lump sum benefit for certain partial and total disabilities as determined by a Workers’ Compensation commissioner. In addition, lump sum benefits are payable for disfigurements and there is a death benefit, which varies according to wages.

Requirements to Carry Workers’ Compensation

It’s important to understand the requirements for builders or subs to carry Workers Compensation under state law, which varies slightly from state to state. In most states, all businesses that regularly have less than four employees are exempt from carrying Workers’ Comp. The less-than-four-count includes corporate officers but not sole proprietors, partners, or LLC members.

However, when a builder uses subs, he or she by definition becomes the statutory employer and have liability for any injuries to employees of your subs, just the same as if you were the employer. As a result, builders who use subs are always required to carry a Workers’ Comp policy, even if you have fewer than four employees.

Many builders think that they don’t have to carry a Workers’ Comp policy if they collect certificates of insurance from all of their subs. This is not necessarily true. A builder can still end up being responsible for the claim if the sub’s Workers’ Comp policy cancels for non-payment of the premium or if the certificate is not legitimate.

If you’re required to carry Workers’ Comp but fail to do so, and if your employee or the employee of your uninsured sub is injured, you’re in a lot of trouble. Their attorney will approach the Workers’ Compensation commission and will file a claim with the Uninsured Employers Fund and all the normal benefits will be paid. However, the Uninsured Employers Fund will then file a lien against you in the amount of the benefits that they paid plus other penalties. This lien can easily result in bankruptcy for your business.

From the point of view of your subs, they may truly not be required to carry Workers’ Comp under the less-than-four-employee count. However, as the general contractor, you will become the statutory employer of their four employees and your Workers’ Comp policy will pay benefits in the event they’re injured. Because your policy will pay benefits, your insurance carrier will make a charge for these uninsured subs based on the amount that you pay them. Because you will be charged by your insurance carrier, you have a legal right to deduct the amount of the charge from what you would otherwise pay the uninsured sub. Therefore, don’t let the sub tell you that you don’t have a right to deduct just because they’re not required to carry their own Workers’ Comp policy.

How the Premium is Determined

Your Workers’ Compensation premium can be logically broken down to being based on three major components:

    1. The first is payrolls paid to owners by their classification code. For example, most builders who are owners of their business would typically be classified as residential carpentry, executive supervisor, outside sales, or clerical, depending on the size of the business and its structure. Each of these classifications carries a different risk of injury and a different rate. The various rates are applied per $100 of payroll.
      It’s important to note that special rules apply for owners. Sole proprietors, partners, and LLC members are automatically excluded from coverage under their own Workers’ Compensation policy but may sign a form electing to be included. On the other hand, corporate officers are automatically included for coverage but may sign a form to be excluded. If an owner is excluded, his or her payroll is not counted for premium determination purposes.The payroll for sole proprietors, partners, and LLC members who elect to be included under coverage is assumed to be a set amount that varies by individual state law.Payrolls for corporate officers who are covered are used but subject to a minimum and maximum payroll that varies per individual state law. It is also important to note that the term payroll includes other forms of compensation, such as bonuses and distributions.
    2. The second major component of your premium is payrolls paid to employees broken out by classification code. Many smaller builders sub out 100% of their labor and don’t have payrolls paid to non-owner employees with the possible exception of clerical or executive supervisor positions. On the other hand, some medium-sized and larger builders may perform some work with their own employee crews that would be classified according to the type of work they perform. Once again, the rates vary according to the classification code of the worker and are applied per $100 of W-2 payroll.
    3. The third major component of your premium is amounts paid to uninsured subs broken out by classification code. An uninsured sub is one that can’t provide you with a currently valid certificate of insurance as proof that they carry Workers’ Compensation on themselves. Once again, the rates vary greatly according to the classification code of the sub and are applied per $100 of amounts paid to the sub for labor only.

When setting up your first policy or your renewal on an annual basis, you’re required to come up with good-faith estimates of your estimated payrolls and amounts paid to uninsured subs for the next 12 months. Those estimated numbers broken out by each classification code of worker will be the basis for the estimated premium that you will be charged when your policy is set up. Your insurance carrier will likely offer either a payment plan or you will be on a monthly self-audit where you report your payroll and sub activity on a monthly basis and pay as you go.

The policy premiums you pay are just an estimate and you’ll be audited at the end of the policy year and an adjustment will be made at that time to take into account your final premium.

I would like to warn you against low balling your estimates for payroll and amounts paid to uninsured subs. This is dangerous because you’ll be facing a huge audit bill that is payable within 30 days. If you can’t pay within 30 days, your policy will be cancelled and you could literally be forced out of business. It is always best to set up your policy based on your best estimates, especially since low or no-interest rate payment plans are available to spread the cost over many months.

The Policy Audit

Your Workers’ Compensation policy will be audited approximately one to two months after your policy expiration date. The purpose of the audit is to make sure that you’re charged the proper premium amount based on your actual exposure to risk. Your actual exposure to risk or having a claim is directly proportional to your actual payrolls paid to employees and amounts paid to uninsured subs.

Another purpose of the audit is to discourage lowballing estimates on the initial policy set up. There are unethical contractors who do this, hoping that the audit will never be performed.

Your insurance carrier will either send a self-audit form in the mail for you to complete or send an auditor to your location or to the office of your CPA. The auditor will inspect your records to determine your payrolls and amounts paid to uninsured subs broken out by classification of worker. The auditor will want copies of all your certificates of insurance since there is no charge for insured subs. He will then verify your numbers by checking them against other tax reports that you send in to federal and state governments.

The auditor will then report his findings back to your insurance carrier and they’ll send a final audit bill that will compare your final audit premium to the estimated premium that was determined when your policy was set up. You will either get a refund (or a credit against future payments) or you’ll owe additional premium. Any additional premium is due within 30 days.