Arizona Workers Compensation – The Dichotomy: Subcontractor or Employee?
I get many questions with regards to a specific workers compensation question: “Why do we have to cover a 1099 contractor?” So I decided to bring some clarity to the issue. Please keep in mind, there are exceptions to every rule. This is a general response to this question.
If you are a business and employ one person in the State of Arizona, you are required to have a workers compensation policy. Two of the many misconceptions I hear is “We do not have employees, just sub-contractors” or “We hire sole proprietors that are owner only and they are not required to carry workers compensation per Arizona law”. While that sounds great, in most cases, those two examples usually fail the “sub-contractor” test.
My rule of thumb to insureds is as follows: “If your sub-contractor does not have a workers compensation policy, you will be providing coverage for him under your policy”. And more often than not, that sub-contractor exposure will be caught at audit and additional premium will be owed.
You are probably thinking, what about “hold harmless agreements” and “signed workers compensation” exclusion forms. I usually answer this question by stating that I am not a lawyer, but with my experience, those agreements are about as good as the paper they are written on as they usually fail “true” sub-contractor/employee tests. Meaning, they usually do not stand up in court or litigation which is why insurance will not accept them. Just because you 1099 for accounting purposes does not mean they are a “true” sub-contractor.
Who do you think is going to pick up a medical/indemnity claim when one of the subcontractors/sole proprietors gets hurt on a job you hired him for? The answer is most likely you and your policy! Best case scenario, your insurance company will get pulled into litigation and will have to defend.
Back in 2014, FedEx ran into this same situation in California: Article here.
Ask yourself the following questions to determine if the person is truly considered an employee or not:
Do you have managerial control over the subject? (i.e. what time to be where)
Does the subject carry General Liability and Workers Compensation?
Who’s tools and transportation does the subject use? If yours, does he lease them from you for fair market value?
Does the subject wear uniforms that bear his company’s name?
*Please note, these are only a few questions that determine eligibility. Other resources include Arizona Revised Statutes: https://goo.gl/YwVUJ7
and The Industrial Commission of Arizona: https://www.azica.gov/claims-division
To protect yourself from future claims and possible large audits, you must remember “If you cannot provide, you abide”. If the subcontractor cannot provide a certificate of insurance (GL & WC), you will most likely be subject to paying insurance for their exposure.
Lastly, if they are a “true” sole proprietor and they fit the test, make sure they file the Sole Proprietor/Independent Contractor Statement off the Industrial Commission of Arizona’s website (send to your carrier/agent for processing). But, please remember that form is only good if they meet conditions for an independent contractor.