Karen Phillips, General Counsel for FUBA Workers’ Comp, and Brett Stiegel, FRSA Self Insurers Fund Administrator
Under Florida’s workers’ compensation law, companies working in the construction industry can be held liable if they hire subcontractors who do not have proper workers’ compensation insurance to cover all their employees.
In Florida, everyone on a construction job site is required to be covered by workers’ compensation insurance or have a valid workers’ compensation exemption issued by the Division of Workers’ Compensation. If a subcontractor without proper workers’ compensation insurance for all his/her employees comes onto a job site, and one of the sub’s employees gets hurt, the responsibility for that
injury falls on the contractor who hired the sub, and the contractor’s workers’ compensation insurance company can be held responsible for paying for the worker’s medical care and lost wages.
This scenario isn’t a problem when a contractor subs out to a company with a valid workers’ compensation policy issued by a traditional workers’ compensation carrier. The subcontractor’s policy will take care of all workers the subcontractor brings to the job site, even if it’s just for one day or even one hour. However, when a contractor subs out to a subcontractor who receives workers’ compensation insurance through a PEO/employee leasing arrangement, it’s a very different scenario, and one that leaves the contractor (and their insurance company) very exposed.
When a company signs up with a professional employer organization (known as a “PEO”), that company’s employees are technically no longer employees of that company; they become “employees” of the PEO. While the employees still report to work at the same place, their payroll checks now come from the PEO. The PEO also assumes the responsibility for providing workers’ compensation
coverage for these employees through the PEO’s workers’ compensation carrier. Under this arrangement, the PEO is the actual policyholder; the employer itself (the subcontractor in our example) is not insured by the PEO’s carrier and does not have its own workers’ compensation insurance policy.
This type of situation can create a PEO “coverage gap.” The coverage gap can occur when the subcontractor hires new employees but doesn’t timely report them to the PEO. Because the PEO is now the employer, the PEO’s contract with the sub can state that workers’ comp coverage only exists for “employees” listed on its contract with the sub. The subcontractor is still free to hire new workers, but any new workers will not be “employees” covered by the PEO until they are specifically reported to the PEO. It is possible that the subcontractor could hire a new worker on Monday, put him or her right to work, but not send the paperwork to the PEO about the new hire until Monday afternoon. If that new worker gets hurt on the job before the PEO knows about him/her, the PEO’s workers’
compensation policy will not cover that new worker. That forces the injured worker to seek payment for his/her medical bills and lost wages from the contractor who hired the sub, even though the sub had “coverage” through the PEO.
It’s the same situation for any casual labor or uninsured subcontractors that the subcontractor hires. Because these people are not considered “employees” by the PEO, the PEO does not provide workers’ comp insurance to them and will not pay if one of them is hurt on the job.
So, if a contractor hires a sub whose workers’ compensation is through a PEO, the contractor will be on the hook in all the scenarios described above: if the subcontractor hires a new worker but doesn’t report him/her timely to the PEO; if the subcontractor hires casual labor without insurance or an exemption; or if the subcontractor contracts with an uninsured subcontractor. If any one of these workers suffers an injury on the job, the subcontractor has no workers’ comp policy and their PEO’s policy will not cover them. This means the contractor’s workers’ comp policy will have to step in and pay for these injuries, and it also means that the contractor will owe additional premium to their insurance company for that exposure.
If the subcontractor were directly insured by a traditional workers’ compensation policy, all of these workers would be covered, thus the existence of the PEO coverage gap.
Another potential issue with hiring subcontractors who have a PEO arrangement is that the subcontractor’s workers’ compensation insurance can be cancelled at any time and without much notice. Because they are not providing insurance, PEO’s are not subject to the same cancellation notice provisions that traditional insurance companies are subject to. Traditional insurance companies have to give their policyholders advance notice before they cancel a policy – 10 days’ notice if the cancellation is for not paying premium, 45 days’ notice of non-renewal, etc.
However, the PEO, because it is not an insurance company, does not have to comply with these notice provisions. The PEO can give immediate notice that they are cancelling the contract, which also cancels the subcontractor’s workers’ comp insurance.
A subcontractor whose workers’ comp insurance can be cancelled at any time with short notice brings a lot of potential exposure to a contractor hiring that sub. If the sub’s insurance is cancelled, all the employees/casual labor/ uninsured subs for that sub become employees of the contractor who hired the sub. Which means the contractor will be billed for premium for all that payroll and their
insurance company will be on the hook for all on-the-job accidents.
Contractors who rely on a Certificate of Insurance showing a subcontractor’s PEO arrangement need to understand that the subcontractor itself is not insured and is not provided the coverage referenced on the Certificate of Insurance. The Certificate is only for the PEO’s coverage and does not cover workers hired by the sub the PEO doesn’t know about, casual labor, or uninsured contractors. And contractors need to be aware that this “coverage” can be cancelled with very little notice, leaving them with a lot of exposure.
PEO’s provide services for many small employers they might not otherwise have access to, such as weekly payroll processing and access to group benefit plans, and the segment of the Florida workers’ compensation marketplace who turn to PEO’s is growing. But because of the liabilities that Florida law puts on contractors in the construction industry, Florida contractors subbing out work to companies with PEO’s need to understand the limitations of this “coverage” and the potential expense it could mean for them.
Karen Phillips, General Counsel for Florida United Businesses Association (FUBA) Workers’ Comp, and Brett Stiegel, FRSA Self Insurers Fund (SIF) Administrator. For more information on switching from a PEO to a solid and legitimate workers’ comp fund, please call FRSA-SIF at 800-767-3772 ext. 200.
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