Workers Compensation Audit Issues – Sole Proprietor
The Massachusetts Workers Compensation Rating & Inspection Bureau has updated audit guidelines related to the hiring of sole proprietors and/or partnerships. These guidelines will have a greater impact on the construction field, but will impact other industries as well.
It is critical that businesses obtain Certificates of Insurance from contractors or firms hired to work on their behalf. If a hired subcontractor does not carry Workers Compensation coverage, then an injured employee of that subcontractor would collect on your coverage. For this reason auditors will ask about contractors, 1099’s and subcontractors you have hired and request to see the Certificates of Insurance which you have collected. The labor cost you paid to any uninsured parties will be added as payroll to your audit and generate additional premiums.
The Bureau has also clarified the audit guideline regarding the use of subcontracted sole proprietorships or partnerships. Sole proprietors and partners are not required to carry Workers Compensation coverage if they do not have any other employees. They can elect to obtain coverage on themselves, but are not legally required to do so. They are legally required to purchase the coverage if they have any employees, even if the workers are part-time. A Certificate of Insurance provided by a Sole Proprietor / Partnership that has Workers Compensation but has not elected coverage for the owners will be noted as such. The Bureau’s new guidelines stipulate that the auditors will pick up the payroll for the “uninsured” sole proprietor / partner if the Certificate states that they are excluded from coverage. Exceptions to this rule can be found in the following three-part test:
The individual/partner is free from control and direction in connection to performance of the service, both under his/her contract for the performance of service and in fact; and
The service is performed outside the usual course of the business of the employer; and
The individual/partner is customarily engaged in an independently established trade, occupation, profession or business.
Here is an example of how the rule would apply:
John Smith Carpentry, Inc. hires Stanley Jones dba Stanley Jones Plumbing to perform work on three projects over the course of the year. Stanley does not have employees at the time of the work but does have a Workers Compensation policy in case he needs a worker for larger projects. Stanley has elected to be excluded on his Workers Compensation policy. Stanley provides a Certificate of Insurance to John Smith Carpentry that shows Workers Compensation is in place but that he is excluded on the policy.
John Smith is insured with Boston Harbor Mutual. The auditor has requested copies of all insurance certificates for subcontractors hired during the year. A review of the Stanley Jones certificate shows that the sole proprietor is not insured. Boston Harbor Mutual’s auditor adds the payroll cost of the three projects to John Smith’s premium. John smith is unable to provide sufficient evidence relative to the “three-part test” to Boston Harbor Mutual that would reverse the charge. John Smith now must pay additional Workers Compensation premium.
It is important for businesses to be aware of this issue. The issue is more common with construction operations but is certainly applicable to any business that hires other businesses to provide a service or operation on their behalf, such as an insurance agency hiring an individual to clean the office. Be aware of these issues before you hire the business or individual so you can understand what insurance is in place and the potential cost in the future if their coverage is not sufficient or is in question.
At Cleary, we will evaluate your business exposures and work with you to develop a comprehensive plan to safeguard your business. Give us a call today at 617-723-0700.
The History of Insurance Throughout the World
Insurance has a history that dates back to the ancient world. Over the centuries, it has developed into a modern business of protecting people from various risks. The industry has been profitable for many years and has been an important aspect of private and public long-term finance.
First forms of insurance
In the ancient world, the first forms of insurance were recorded by the Babylonian and Chinese traders. To limit the loss of goods, merchants would divide their items among various ships that had to cross treacherous waters. One of the first documented loss limitation methods was noted in the Code of Hammurabi, which was written around 1750 BC. Under this method, a merchant receiving a loan would pay the lender an extra amount of money in exchange for a guarantee that the loan would be cancelled if the shipment were stolen. The first to insure their people were the Achaemenian monarchs, and insurance records were submitted to notary offices. Insurance was also noted for gifts of substantial value. These gifts were given to monarchs. By recording their gifts in a register, givers would receive help from a monarch by proving the gift’s existence if they were in trouble.
As the ancient world evolved, maritime loans with rates based on favorable seasons for traveling surfaced. Around 600 BC, the Greeks and Romans formed the first types of life and health insurance with their benevolent societies. These societies provided care for families of deceased citizens. Such societies continued for centuries in many different areas of the world and included funerary rituals. In the 12th century in Anatolia, a type of state insurance was introduced. If traders were robbed in the area, the state treasury would reimburse them for their losses.
First documented insurance policy
Standalone insurance policies that were not tied to contracts or loans surfaced in Genoa in the 14th century. This is where the first documented insurance policy came from in 1347. In the following century, standalone maritime insurance was formed. With this type of insurance, premiums varied based on unique risks. However, the separation of insurance from contracts and loans was a major change that would influence insurance for the rest of time.
The first book printed on the subject of insurance was penned by Pedro de Santarém, and the literature was published in 1552. As the Renaissance ended in Europe, insurance evolved into a much more sophisticated form of protection with several varieties of coverage. Until the late 17th century, many areas were still dominated by friendly societies that collected money to pay for medical expenses and funerals. However, the end of the 17th century introduced a rapid expansion of London’s importance in the world of trade. This also increased the need for cargo insurance. London became a hub for companies or people who were willing to underwrite the ventures of cargo ships and merchant traders. Lloyd’s of London, one of London’s leading insurers, is still a major insurance business in the city.
Insurgence of modern insurance
Modern insurance can be traced back to the city’s Great Fire of London, which occurred in 1666. After it destroyed more than 30,000 homes, a man named Nicholas Barbon started a building insurance business. He later introduced the city’s first fire insurance company. Accident insurance was made available in the late 19th century, and it was very similar to modern disability coverage. Nowadays, one can find different forms of disability insurance throughout the world. One such example could be the national disability insurance scheme (NDIS) of Australia. Such insurance can extend support to people with permanent or significant disabilities and might not require people to purchase an insurance policy. This form of support can be availed by both registered and unregistered NDIS providers. One can also start a business by applying to become a Ndis provider (you can click here to learn how to become an unregistered ndis provider).
In U.S. history, the first insurance company was based in South Carolina and opened in 1732 to offer fire coverage. Benjamin Franklin started a company in the 1750s, which collected contributions for preventing disastrous fires from destroying buildings. As the 1800s arrived and passed, insurance companies evolved to include life insurance and several other forms of coverage. No type of insurance was mandatory in the United States until the 1930s. At that time, the government created Social Security. In the 1940s, GI insurance surfaced. It helped ease the financial difficulties of women whose husbands died while fighting in World War II. It wasn’t until the 1980s that the need for car insurance grew enough that steps were taken to make it mandatory. Although insurance is an established business, it is still changing and will change in the future to meet the evolving needs of consumers.
Health Care Reform
On March 23, 2010 President Obama signed the health care reform bill, or Affordable Care Act (ACA) into law. Aca’s health care reforms which are primarily focused on reducing the uninsured population and decreasing health care costs will continue to be implemented over the next several years. Cleary Insurance has been working with our existing benefits clients to manage health care reform. We will continue to work with our clients through the final implementation as the requirements and obligations continue to evolve.
If you are not currently an employee benefits client and are interested in a health care reform business analysis please contact us today.
At Cleary, we know how important a comprehensive benefits package can be to your continued success. Give us a call today at 617-723-0700 and we will work with you to create a plan that meets your business objectives, takes into account state and federal laws, and capitalizes on incentives and innovative solutions now being offered.
Workers Compensation – Out of State Issues
Do your employees travel to states other than where your business is domiciled? Do your employees perform work in other states? Understanding how Workers Compensation laws respond to interstate operations is important to ensure that you are in compliance with state employment laws.
Workers Compensation insurance is regulated at the state level. Benefit schedules for claims, interpretation of laws, rates and requirements will vary from state to state. Considerations for establishing where an employee is domiciled include: Where the employee lives? Where the employee primarily works? In what state was the employee hired?
Extraterritorial coverage issues arise when employees travel and work in a state that is not listed on the Workers Compensation policy. In general, domestic short term business trips to other states should not present a coverage problem. However, a number of states, such as NY and NH, are requiring that they be listed on the Workers Compensation policy even if the work only lasts a few days. Noncompliance with these requirements could open you up to a possible fine.
ND, WA, OH, and WY are “monopolistic” states. Workers Compensation coverage for employees located in one these four states is only available through the respective state agency. For example, a Workers Compensation policy would have to be purchased directly through www.ohioBWC.com for an Ohio based employee.
International travel presents additional complications for Workers Compensation. It is likely that your carrier will not have the resources to respond to an employee injured in a foreign location. Traditional Workers Compensation may not apply if the employee was injured during the trip but not engaged in employment related activities. International insurance policies are available to provide 24 hour protection for workers traveling on an overseas business trip.
Understanding how state laws impact your Workers Compensation coverage is important for compliance issues as well as ensuring that your employees are protected. We encourage you to discuss with us any questions you may have regarding your inter-state operations.
At Cleary, we will evaluate your business exposures and work with you to develop a comprehensive plan to safeguard your business. Give us a call today at 617-723-0700.