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Compensation Liability of Principals and Contractors-ArchivedJanuary 1997For Benefits Accruing to Non-EmployeeSummary:In order to protect employees of small operations (such as many small subcontractors), the workers compensation laws of a majority of states impose liability on principals for compensation benefits to employees of contractors or subcontractors. These statutes vary from state to state, but usually are qualified by a provision imposing liability on the owner (principal) only in the absence of workers compensation insurance provided by the subcontractor. For example, the statute of Wisconsin reads, in part, “An employer shall be liable for compensation to an employee of a contractor or subcontractor who is not subject to this chapter, or who has not complied with the conditions of the statute in any case where such employer would have been liable for compensation if such employee had been working directly for him.”Few people outside the insurance industry realize this and still fewer bother to find out whether contractors to whom they let or sublet work are properly insured. It has happened more than once that a person has suddenly found himself confronted with a compensation claim made by an employee of an uninsured or insolvent contractorand had to pay it.Since there are as many variations as there are laws, these pages discuss in a general way the operation and objectives of workers compensation statutes regarding the potential liability of principals or contractors to employees of contractors or subcontractors. For a discussion of general liability insurance and its relation to liability imposed upon a principal, see Owners and Contractors Protective Liability Coverage Form .Topics covered:Independent contractor vs. employeeGeneral discussionOther statesIndependent Contractor vs. EmployeeOne point of discussion in this area of contractor liability is the status of the injured worker: is he an independent contractor or an employee? The Internal Revenue Service (IRS) has a checklist that it uses to determine the status of a worker for income tax purposes and that list is worth noting. Some of the items on that list are: who delivers instructions and who complies with them; how is training done; where does direction and control come from; who does the hiring, supervising, and paying; who sets the hours of work; who has the right to discharge a worker and terminate the work; who furnishes the tools and materials; and who has supplied the investment or capital?The main inference to come out of this IRS list is the idea of control; who controls the situation and what is the relationship between the one who exercises control and the one injured? Indeed, that idea of control is also behind the decisions of some courts when it comes to the status of injured persons. In Claim of Griffin, 466 N.W.2d 148 (1991), the supreme court in North Dakota stated that “in determining whether a person is an employee or an independent contractor, the primary test is the right to control. Under that test, if the person for whom the work is being done has the right of control, whether he exercises it or not, and is concerned not only with the result of the work but also with the manner and method of its doing, he is held to be an employer and the person doing the work is his employee. On the other hand, if he is concerned merely with the result of the work and has no control over the details of its doing, the person doing the work is held to be an independent contractor.” Similarly, in Siano by Siano v. Workers Compensation Appeal Board, 586 A.2d 1008 (1991), the commonwealth court of Pennsylvania declared that “there are several factors to be considered in determining whether a person is acting as an employee or an independent contractor. Included among those factors are the employer’ control over the manner in which the work is performed….” So if the status of the injured worker comes into question, one needs to look at the matter of control. If the injured worker controls his own work and actions, he is probably going to be considered an independent contractor; if he has no control, he will be viewed as an employee and, therefore, eligible for workers compensation benefits.General DiscussionIn general, a principal or contractor is not subject to liability to employees of contractors or subcontractors for workers compensation claims unless the subordinate employer has failed to provide coverage. (This can happen, for example, through the expiration of a subcontractor’s workers compensation insurance, the failure of a subcontractor to provide proper coverage, or because a subcontractor has too few employees to fall under the workers compensation statutes.) There are, however, exceptions to this. By statute in several jurisdictions the principal may be liable (1) if the work contracted is his usual business or occupation or (2) if he retains control of the premises and supervises the work. In states where a minimum number of employees governs coverage under the act, liability may be passed upward to a contractor or principal who qualifies either because of his own direct employees or because of the combined number involved with several non-qualifying subcontractors. A principal or contractor may also be held liable if the subcontractor’s insurance is cancelled or the subcontractor’s insurer becomes insolvent. The problem of making general statements about the liability of principals, contractors, and subcontractors is further compounded by a lack of uniform language in the various actssome of the acts refer to principals, others to employers, contractors, prime contractors, principal contractors, independent contractors, persons or owners. For the purposes of this discussion, a principal will be the party offering the contract, a contractor will be the party in charge of completing the work, and a subcontractor will be the persons or firms who agree to do parts of the work under separate agreement with the contractor.In any case, if the principal or contractor is responsible for the compensation due an injured worker, the standard workers compensation and employers liability (WC) policy covers the benefits that are due. If the principal or contractor does not carry workers compensation insurance because he has no employees or not enough to require him to come under the act, this obligation to the employees of subcontractors applies even so. Incidentally, most workers compensation policies provide coverage for this exposure by picking up the amount of wages paid to any uninsured subcontractors on the year end audit. If inaccurate records of the exposure are found, the insured may be charged for the entire cost of the contracted work. In some jurisdictions, however, the principal or contractor can deduct the cost of providing this protection from the cost of the contracted work.Having the WC policy pay workers compensation benefits is fitting if the insured principal is a contractor or a business entity. What if the principal is a homeowner who has hired someone to repair his home or do some type of maintenance work? What if, further, the contractors and subcontractors hired for the job have no WC policies for one reason or another, and one of their employees is injured on the job? Typically, the homeowner will not have a workers compensation policy to cover the payment of any required benefits, so what does the homeowner do for such coverage?It can be stated up front that it is unsafe in any of the states that impose liability on a principal or contractor to permit a contractor or subcontractor to work without workers compensation insurance. A person who fails to check the insurance protection of contractors or subcontractors is gambling for high stakes. This is especially true for homeowners since the homeowners forms do not apply to bodily injury to any person eligible to receive any benefits required to be provided by the insured under any workers compensation law. Therefore, the homeowner is not going to be able to rely on his homeowners policy to pay any required benefits he must pay to an injured worker based on the homeowner’s position as principal.This leaves few options for the homeowner. He can either self-insure or purchase a workers compensation policy, if possible, with a premium on an “if any” basis. The self-insurance option could be expensive especially if the injury to the worker is serious or permanent. The purchasing of a WC policy makes more sense financially, but could run afoul of state regulations or, more likely, reluctance on the part of insurers to issue a WC policy for what is most probably a short term, one shot event for a premium that hardly covers administrative costs. Therefore, the best path for the homeowner would be, as intimated above, to make sure the contractor he hires for repair work carries proper and adequate workers compensation insurance.It should be noted that, in almost every case, if a principal or contractor is compelled to pay compensation to an employee of another, there is an accompanying right of action against the person primarily liable. There is nothing unusual about this statement, but homeowners should be aware of the fact that they or their insurer can seek recovery from another party if that other party is responsible for the injury suffered by the employee. For example, if a painter is hired by a homeowner to paint the house and the painter is injured by falling off a ladder as a result of an action taken by a neighbor of the homeowner, then the homeowner could take subrogation action against that neighbor for any payments the homeowner makes to the painter, whether such payments are under workers compensation or any liability policy.Other StatesMany contractors occasionally sublet work in states other than their domicile. Even if their home state does not have a provision making them liable for workers compensation benefits to employees of subcontractors, they may operate in states that do. In most cases, the law of the state in which the work is done will control. See Workers Compensation and Employers Liability Policy for comments pertaining to coverage in other states.Normal1415819013Microsoft Office Word07521falseNUCOfalse10573falsefalse12.0000Compensation Liability of Principals and ContractorsNUCO EmployeeSteven32004-11-19T14:24:00Z2010-01-06T15:31:00Z2012-03-18T18:05:00ZsubcontractorDiscussionDiscusses in a general way the operation and objectives of workers compensation statutes regarding the potential liability of principals or contractors to employees of contractors or subcontractors.1997-01-01T00:00:00ZNoStandard ArticleDiscussionDiscusses in a general way the operation and objectives of workers compensation statutes regarding the potential liability of principals or contractors to employees of contractors or subcontractors.;#544;#2008-07-07T11:11:33ZNUCOjgrady

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