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Should You Hire An Independent Contractor?

Hiring an uninsured subcontractor creates a significant liability to your company

Often, hiring an uninsured subcontractor poses a significant liability to your organization. This liability can affect your workers’ compensation premium substantially. This notice explains what you must do—and have available to your auditor—to avoid unexpected additions to your premium.

Under Arizona law it is mandatory for employers to secure workers’ compensation insurance for their employees. Workers’ compensation is a “no fault” system in which an injured employee is entitled to receive benefits for an industrial injury, no matter who caused the job-related accident. If an illness or injury is job-related, then the injured worker (also known as a claimant or applicant) receives medical benefits and may receive temporary compensation, if eligibility requirements are met. In some cases, a claimant may also receive permanent compensation benefits, “job retraining,” and supportive medical care.

Workers’ compensation is a “no fault” system in which an injured employee is entitled to receive medical and compensation benefits no matter who causes the job-related accident. This means that even if the employee was at fault or partially at fault in causing the industrial injury, he/she will, in most instances, be entitled to benefits under the workers’ compensation system. There are some exceptions, however. For example, an employee is not entitled to workers’ compensation benefits for injuries that are “purposely self-inflicted.”

Generally, you do not have to provide workers’ compensation insurance for an independent contractor. But, there are often disputes over whether a worker is an employee or an independent contractor. To resolve these disputes courts consider the “totality of facts” on a case-by-case basis. Some of the factors a court might consider include: the duration of the employment, the method of payment, the right to hire and fire, the extent to which the employer may exercise control over the work, who supplies the tools, who sets the hours of work, and whether the work was performed in the usual and regular course of the employer’s business. There may be other factors the court will consider and no one factor is, in itself, conclusive. Therefore, even if you believe you have an “independent contractor” relationship, a court could still decide that based on the totality of the facts, the worker was an employee entitled to workers’ compensation benefits.

If your subcontractor uses any employees on the job you have hired the sub to do, then the subcontractor is required by law to carry workers’ compensation insurance.

Before work begins, it is absolutely necessary for you to get a Certificate of Workers’ Compensation Insurance from the subcontractor showing coverage in force at the time of the subcontracted work.

You will need to make this certificate available to your auditor during your audit. If your auditor is not able to verify that the subcontractor had a workers’ compensation policy in force, then the payroll of the subcontractor will be included in the payroll base for calculating your workers’ compensation premium.

If you do not have the payroll information for the subcontracted work, in most circumstances, the subcontract price of the work performed during the policy period may be used as payroll. Including this may increase your premium substantially.

If your subcontractor has no employees and therefore is doing the job by himself, then he may or may not be carrying workers’ compensation insurance.

If he does have workers’ compensation insurance: You need to get from him a certificate showing workers’ compensation coverage in force at the time of the subcontracted work.

If he does not have workers’ compensation insurance, then you need to have him do these four things:

  • Provide you with tax identification number issued to him by the IRS Also, you may request a copy of the subcontractor’s current registrar’s license.
  • Ask whether the subcontractor is registered with the state as a business entity.
  • Provide you with a Certificate of Insurance for General Liability covering the dates the work was performed and with limits of at least $300,000.

Best Practice: Always require your subcontractor to provide you with the necessary certificates.

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