In the State of California, as well as many other states, it is legal for a Sole Proprietorship, Partnership, or Corporation that does not have any employees to elect not to purchase Workers’ Compensation insurance.

As a prime contractor hiring such an entity, however, there are several risks:

• If the individual (whether a Sole Proprietorship, Partner or Corporate Officer) is injured, and it is subsequently determined that this individual is not an independent contractor but an employee, then you will be responsible for the costs of that injury. Although this will be covered under your Workers’ Compensation policy, you will be billed for the applicable premiums, and the loss will be reflected on your loss history and affect your Workers’ Compensation Experience Modification Factor.
• If the uninsured entity subsequently hires an employee or subcontracts some of the work, you will once again be responsible for any work related injuries to either the employee or the subcontractor, if not insured.

So as a Prime Contractor, what are your options?

1. Insist that anyone you subcontract work carry Workers’ Compensation insurance, whether or not he/she is legally required to do so.
2. Have any subcontractors who do not carry workers’ compensation represent that legally they are not obligated to do so. Also, require such subcontractors to represent that they will self-perform all work.

Representative wording you might consider including in your subcontract agreement is shown below:

THE FOLLOWING SECTION APPLIES TO SUBCONTRACTORS THAT DO NOT CARRY WORKERS’ COMPENSATION INSURANCE.

• If Subcontractor does not carry Workers’ Compensation insurance, it represents that, pursuant to the laws of the State in which the Project is located, it is not now required to carry Workers’ Compensation insurance.        

• If Subcontractor has no employees and does not carry Workers’ Compensation insurance, Subcontractor represents that he/she will personally perform all of the work required under this Subcontract. Subcontractor further represents that he/she will not hire any employees, day laborers, independent contractors, subcontractors, or any additional labor or persons for whose acts Subcontractor may be liable to assist Subcontractor with Subcontractor’s obligations under this Subcontract. Subcontractor understands that he/she will not be covered under Contractor’s or Owner’s Workers’ Compensation policy and assumes the risk of injury or death while performing its obligations under this Subcontract. Subcontractor agrees to indemnify and hold harmless Contractor and Owner and their agents and employees from any bodily injuries sustained by Subcontractor, anyone directly or indirectly employed by Subcontractor, or anyone whose acts Subcontractor may be liable while performing his/her obligations under this Subcontract. If Subcontractor, subsequent to the execution of this Subcontract, hires any employees or independent labor of any kind whatsoever to assist Subcontractor in the performance of its obligations under this Subcontract, Subcontractor will immediately notify Contractor and cease work at once until it has supplied Contractor with proof of compliance with the minimum insurance coverage described in this contract.

As a Prime Contractor, you are vicariously liable for the work you subcontract. It is imperative you make certain anyone that works for you has appropriate insurance coverage. In those rare instances where you elect to work with subcontractors that self-perform all the work and are not legally required to carry Workers’ Compensation insurance, there are steps you can take contractually to lower your exposure.

Note that Cavignac Risk Advisors are not attorneys and do not provide legal advice. Any proposed contractual wording should be reviewed by legal counsel.