Should You Consider 1099 Contractors Employees for WC? It depends.
If you cut corners on the front end, it may cause problems on the back end at audit or after a claim.
If you are researching steps to getting your contractor’s license in Arizona and have questions about workers’ compensation insurance, you are in the right place. As a follow-up to last week’s post about the Arizona bond requirements for contractors, this week I am focusing on step eight of the Arizona ROC process for applying for contractor’s licenses. Grab a cup of coffee and let’s dig!
In step eight, Complete Your Application, page one of the application requires you to obtain Workers' Compensation insurance per A.R.S. § 32-1122(B)(1)(I). The problem is that “employee” is a fluid term that can mean different things to different groups.
What Is An Employee?
The ROC provides guidance on 1099 workers – and a worksheet. Per their website:
“The [Arizona] ROC recognizes that licensees may choose to hire independent contractors for many reasons. While a licensee’s decision to hire an employee or an independent contractor does not involve the ROC, licensees should be aware of some ROC statutes that might impact this decision. The following ROC statutes establish grounds upon which a license can be disciplined.
· A.R.S. § 32-1154(A)(4) – Failure to comply with the statutes or rules governing social security, workers' compensation or unemployment insurance. Registrar of Contractors
· A.R.S. § 32-1154(A)(9) – Aiding or abetting a licensed or unlicensed person to evade this chapter, knowingly or recklessly combining or conspiring with a licensed or unlicensed person, allowing one's license to be used by a licensed or unlicensed person or acting as agent, partner, associate or otherwise of a licensed or unlicensed person with intent to evade this chapter.
· A.R.S. § 32-1154(A)(11) – Failure of a contractor to comply with any safety or labor laws or codes of the federal government, state or political subdivisions of the state.
· A.R.S. § 32-1154(A)(13) – Knowingly entering into a contract with a contractor for work to be performed for which a license is required with a person not duly licensed in the required classification.”
The Industrial Commission of Arizona offers guidance too.
This makes sense because they are the governing body that will administer and enforce state laws relating to injured workers. The ICA provides clarity for many scenarios you likely have not thought of and once you have thought of will make you want to walk a straighter line. Their FAQs are sorted from informational to you may need a lawyer faster than a roadrunner on roller-skates. You can view the FAQs here:
Your buddies are not experts.
Your buddy may have a difference of opinion with what the rules state and what may occur on a construction site near you. Your buddy may tell you that a lot of other contractors are cutting corners and not purchasing WC insurance because, well, insurance sucks and it is too expensive.
The problem with making business decisions based on underqualified opinions is you won’t be able to file an E&O claim against your buddy when their advice falls apart. Like buying gas station sushi or getting a face tattoo, the ROC is trusting that you will rethink that idea.
Insurance companies consider who an employee is in terms of risk transfer.
Since insurance companies are writing the checks for injured workers, it would make sense they too would have an opinion. Your COI compliance program should act like a firewall to prevent downstream liability from traveling up channel and burning you.
Avoid covering your subcontractor’s insurance costs with proper risk transfer.
As a best practice, if you plan on working with any subcontractor or 1099 employee you should obtain a certificate of insurance (COI) or AZ Workers Compensation Waiver Form that transfers liability away from you. You should also use a signed, written subcontractor agreement articulating your risk transfer policy. If you don’t have one, don’t sweat it. Wilson Insurance has your back and can provide a customizable form.
If you do not have proper risk transfer, when an uninsured subcontractor gets injured on the job the claim will be passed up to the next upstream party to service that injury – you. To avoid problems with the ROC and ICA, you will want to have a WC policy in place prior to a claim.
Call to Action
If you question if you need a WC policy or not, you can simplify the process and give me a call. If you are operating on a shoestring budget, I get it. If I can save you money by tailoring a risk transfer program that reduces your insurance needs and lowers your payroll exposure, we both win in the long run. I’m interested in your long-term business, not making a quick sale.
With a correctly written policy that is competitively priced, you will have peace of mind. The more satisfied you are with your experience at Wilson Insurance you may even find you have better advice for your buddies. And let’s be honest, that is a buddy everyone needs.
Do You Need A WC Policy?
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No
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Yes
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Sole proprietor with no W2 employees. Obtain an Arizona WC Waiver Form in lieu of a COI.
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W2 Employees
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Single-member LLC with no W2 employees. Obtain an Arizona WC Waiver Form in lieu of a COI.
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Uninsured 1099 subcontractors whom you do NOT collect a COI from
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Two-member LLC with 50/50 ownership with no W2 employees. Obtain an Arizona WC Waiver Form in lieu of a COI.
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Casual Labor
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Insured 1099 subcontractor that you collect a COI from
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No employees but required by contract (COI Compliance) otherwise known as a ghost policy
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Owners who request coverage
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Subcontractors who meet the definition of ‘employee’ per the ROC and ICA guidelines
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Justin Chappell
VP Business Development
480-964-2400
justin@wilsoninsuranceaz.com