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Overview of Workers' Compensation

>>MATT MORROW: Those who are committed to professionalism in the industry and to making this their career and what they do, generally line up pretty well with knowing what--what's required of them and what they should do to run a professional business.

Actually, the biggest challenge that we have in the construction industry is--is a, an honest misunderstanding among many in the industry about what qualifies as an employee.  The--the statute reads very clearly that if you’re in the construction industry and then it defines who’s in that, that one employee is enough to trigger the requirement to carry Worker’s Compensation Insurance.  Now a lot of- a lot of builders and remodelers might read that and stop that and--and say that’s not me and they honestly believe that because they don’t have any W-2 employees.  They oversee the job and subcontract all of the trades out.  So they don’t have anybody that they fill out payroll on.  But the problem with that is they didn’t read the next paragraph.  The next paragraph down in the statute defines what an employee is.  And an employee, under Worker’s Compensation law is not just that W-2 employee, it’s also any volunteer, any family member, anybody who’s there part time or full time doing work including, specifically, subcontractors.

Well, the most--most common one is that they'll say they don't have any employees so they--so they 1099 things out. And in some cases they might be 1099-ing out, which is subcontracting, what really meets the definition of an employee. So, I mean, they might be calling someone a subcontractor when that person really only works for them or is directly supervised by them or takes instruction on a regular daily basis by them or has no autonomy, really of their own. Those are--those are definitions of an employee--of someone who actually should be treated as a W-2 employee.

Generally speaking, that's one of the--one of the most common things that--that general contractors will do under Worker's Compensation law, is buy a policy to cover those employees and subcontractors and trades that they're required to cover under law and then, exempt themselves. That's one of the things that's allowed under--under the law. So, if--if they don't want to insure themselves against a workplace accident they can--they can exempt that and--and that's a way to save a little bit of money on the premium. It's perfectly acceptable under--under state law and it's a pretty common practice.

There is a broader, maybe lack of knowledge on that in the--in the industry. Industry-wide, I think there's a misconception that if my subcontractors are covered by Worker's Comp then I don't need--I don't need to carry it. Even on a practical level because I got certificates of work comp insurance from all of my subcontractors and so I know that anybody that's actually going to be working on the job site is covered. And again, that's one of those common misconceptions out in--in the broader industry that, in fact, as the head guy, as the person who's in charge of the overall job, you have the ultimate liability. And so any--if anybody along in that chain dropped their insurance coverage or had a lapse, had something go wrong or simply didn't have adequate coverage or whatever else that the next person in line is liable, is in charge and that always flows uphill to the general contractor.

In most cases, if you're going to build a house you have to have some kind of a license. You may--you may not be in a jurisdiction that requires contractor licensing but in most cases you'll at least have to have a business license with the city or county before you can pull a building permit. And--and the state law requires that any licensing entity, political subdivision, in Missouri, whether you're doing a business license or a contractor's license, that it requires that you submit your proof that you have Worker's Compensation insurance when you pull that license. Now, what happens very often in that process, is that a--a contractor might get there and be told where's your--where's your Worker's Compensation insurance proof and they'll say I don't have any. And that's when they have the opportunity to sign off, essentially, on an affidavit of exemption. Now that affidavit of exemption, really, is only meant to--to identify the very, very rare, unusual circumstance that someone might actually be exempt from state Worker's Comp law. That's if you have zero employees, zero family members helping you, zero volunteers helping you and zero subcontractors. So, in that extremely rare case that I have never once seen you would be exempt from Worker's Comp law.

Well, certainly if you're caught in violation of state law there are severe penalties with the state, whether those are financial penalties, potentially criminal action or whatever else might--might flow from that. But on a very practical level there's--there may not be another industry that relies more on word of mouth advertising than home building and remodeling. And so, and particularly if you do business in a community that's fairly close niche or a smaller town or something like that and it shows up in the local news paper or on the local television station that this contractor was found in violation of state law it hurts business. It hurts business and--and in the process of--of trying to avoid that of trying to avoid the responsibility that's requires, you've also put your most valuable asset, your employees, at risk.