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By Jon Coppelman
Audits used to be relatively simple: estimated payrolls were updated with year-end actuals and independent contractors were checked for certificates of insurance. Class codes were rarely checked for accuracy.
It’s not that simple anymore. Two fundamental issues are frequently arising in audits: determining whether independent contractors are indeed independent, and monitoring class codes to make sure they accurately reflect the highest risk – and highest rates – in essential operations.
By law, sole proprietors and independent contractors are not required to carry workers’ comp insurance. However, if they are not truly “independent” they may end up on the general contractor’s payroll for workers’ comp. Auditors are routinely looking beyond certificates of insurance to determine whether uninsured subcontractors and sole proprietors meet the complex criteria for “independence.”
Massachusetts has established three essential elements to qualify as sole proprietor/independent contractor. Other states are developing similar criteria. They are:
- The sole proprietor/independent contractor must be free from control and direction in performing the work.
- The sole proprietor/independent contractor must perform a service that is outside the GC’s usual course of business.
- The sole proprietor/independent contractor must operate a separate entity where the work is readily made available to others and not limited to the GC being audited.
In the Bay State, if the GC’s payroll includes carpenters, sole proprietor carpenters cannot qualify as independent; if, however, the sub-work involves specialties such as plumbing, electrical or tile, they would likely qualify as independent, as long as they meet the other two criteria.
If the sole proprietor/independent contractor works exclusively for the GC, they do not meet the requirements for independence.
These are complicated and changing concerns, with significant funds at stake. Renaissance can help.
Workers’ comp consulting services are available, free of cost, for Renaissance agents and their insureds. We are available to consult with agents and insureds to review class codes and subcontracting procedures, with the goal of anticipating issues that may emerge at audit. In addition, we can review audits and explore opportunities for appeal.
Workers’ Compensation Consultant Jon Coppelman is available to speak with Renaissance members on a variety of concerns for independent agents. Contact Jon via e-mail at jon.coppelman@renaissance.com, or at 508-769-9850.
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