Good risk management plans allow workers’ compensation coverage for any hired subcontractors. Since subcontractors are not able to hide behind statutes for contracts, workers’ compensation coverage may be required whether there are statutory provisions or not.

For those who are in contractor and subcontractor relationships, over 40 states have statutory regulations regarding workers’ compensation benefits. Employees of subcontractors must also be offered workers’ compensation benefits if they are injured. The benefits are paid by the immediate employer or the company hiring the immediate employer for the job. As a rule, general contractors face the responsibility of offering workers’ compensation to employees of uninsured subcontractors. This is true regardless of the number of employees the subcontractor has. Premiums are also assigned to the general contractor.

General Contractors & Independent Contractors
It is important to avoid confusing the subcontractor-general contractor relationship with an owner-independent contractor relationship. A general contractor is the entity the owner contracts with to complete various projects. A portion or all of the tasks are then assigned to subcontractors. In order for a general contractor’s relationship to function, there must be three separate parties. These parties include the owner, an independent contractor and a subcontractor. If any portion of a job is subcontracted, a general contractor’s status changes to independent contractor.

An independent contractor is a party contracting directly with an owner or principal to complete a job. In most cases, independent contractors perform jobs that the principal or owner does not normally do. The entire job is completed by the independent contractor and employees. Keep in mind that they are not considered employees of the principal or owner.

As a rule, principals are not usually financially responsible for an independent contractor’s injured employees. They are also not responsible for the injuries of employees of subcontractors hired by the independent contractor. General contractors are financially responsible for an uninsured subcontractor’s injured employees.

Principals & General Contractors
If the subcontractor and general contractor both lack workers’ compensation coverage, the principal may be sued for out-of-pocket expenses incurred by an injured worker. Since the principal does not qualify as a general contractor or employer, financial responsibility is not usually an issue. While employer status is nonexistent, there are other theories of liability that may constitute the need to pay compensation. For example, failing to provide a safe workplace could result in the principal paying an injured non-employee individual. In such a case, a workers’ compensation policy or a general liability policy usually provides adequate defense.

It is important for general contractors and principals to require any contracting entities to provide workers’ compensation coverage. When an independent contractor or subcontractor purchases this coverage, the act shows that the party does not have any misconceptions about an employer-employee relationship. Contracts between principals and general contractors should be specific in placing responsibilities. In the contract, a general contractor should agree that failing to require this insurance could result in personal statutory responsibility for the subcontractor’s injured employees. The general contractor should also agree to hold the principal harmless in an injury case.

Establishing Relationships With Subcontractors
While relationships between contractors and subcontractors are most commonly found in the construction business, they are also found in other industries. For example, cities hire special consultants to analyze traffic patterns. The consultant then hires engineers to perform various studies. They may also perform maintenance on traffic lights, or the work may be contracted out. There are plenty of other examples. However, all contractors and subcontractors
are subject to the laws regarding workers’ compensation. To avoid facing financial responsibility for injured workers, it is important for general contractors to require all lower tiers of workers to carry their own workers’ compensation insurance.