Sound risk management practices necessitate that general contractors contractually mandate workers’ compensation coverage anytime a subcontractor is hired. Subcontractors cannot hide behind statute in contract situations; workers’ compensation coverage can be contractually required regardless of statutory provisions.
Forty-four states* and the District of Columbia statutorily regulate workers’ compensation benefits within the general contractor-subcontractor relationship. “Employees” (as defined earlier) of a subcontractor in these states must be provided workers compensation benefits if an injury occurs. Benefits will be paid either by the injured employee’s direct employer (the subcontractor) or the general contractor who hired the subcontractor. The general contractor is statutorily assigned the responsibility of providing workers’ compensation benefits to the uninsured subcontractor’s injured employee, regardless of the number of employees working for the subcontractor. Plus, any additional premium for these de jure employees will be charged to the general contractor, even if no loss occurs.
Do not confuse a general contractor-subcontractor relationship with the relationship between a principal/owner and an independent contractor.
- An “independent contractor” is an entity with whom a principal/owner directly contracts to perform a certain task or tasks. Independent contractors are generally engaged to perform operations not within the usual trade or business of the principal and such tasks are contract-specific. All work required of the contract is performed by the independent contractor and employees. Independent contractors are typically not considered employees of the principal.
- A “general contractor” is an entity with whom the principal/owner directly contracts to perform certain jobs. Some or all of the enumerated tasks are subsequently contracted to other entities (subcontractors) for performance. For general contractor relationships to exist there must be three parties: a principal, an independent contractor, and a subcontractor hired by the independent contractor. Independent contractor status changes to general contractor when any part of the work is subcontracted to another entity.
Principals are not commonly held financially responsible for any injury to the independent contractor’s employees or any employees of subcontractors hired by the independent contractor (making the independent contractor a general contractor). But, as stated above, the general contractor is financially responsible for any injuries to the employees of an uninsured subcontractor.
*(Alabama, Alaska, Arizona, Arkansas, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming)
Principals and General Contractors
If neither the general contractor nor the subcontractor has workers’ compensation coverage, the principal/owner could potentially be sued by an injured worker to recover any out-of-pocket expenses incurred (medical bills and lost wages). However, it is unlikely that the principal will be held financially responsible as the principal does not statutorily qualify as an employer or a general contractor. Although not held to “employer” status, the principal could be sued under other theories of liability such as negligent supervision, failure to provide a safe work environment or any other negligence theories often ascribed to property owners. If sued, the principal’s general liability policy or the workers’ compensation policy (if one exists) should provide defense.
Principals and general contractors should contractually require any entity with which they contract provide workers compensation insurance. The mere act of purchasing coverage works to prove that the independent contractor or any subcontractor does not believe an employee-employer relationship exists or is created.
Any contract between the principal and general contractor should specifically place the responsibility of confirming subcontractor workers’ compensation coverage solely on the general contractor. General contractors should agree via the contract that if he does not require and confirm the presence of such insurance, he could be held statutorily responsible for injury to any of the subcontractor’s employees. Lastly, the general contractor must also agree to defend and hold the principal harmless in case of injury to any direct or de jure employee.
Creating Subcontractor Relationships
General contractor-subcontractor relationships are not confined to the construction industry; the relationship is just more statutorily regulated in the construction industry than most other. General contractor-subcontractor relationships are created every day in other industries. A city hires a consultant to study traffic patterns, the consultant hires an engineering firm to do on-site studies creating a general contractor relationship. A corporation hires a business consultant who subcontracts the cost control management work to another party, also creating a general contractor relationship. General contractor-subcontractor relationships are created by an endless array of activities.
Workers’ compensation laws regarding general contractor-subcontractor relationships are designed to create a safety net for any injured worker – assuring benefits will be paid by somebody. To avoid being held financially responsible for another entity’s employees, it is prudent for the general contractor to contractually require any lower tier contractor to carry workers’ compensation coverage.