New Law Will Require Construction Companies to Provide Workers’ Compensation to Independent Contractors

The Tennessee General Assembly has cracked down on construction companies that do not carry workers' compensation insurance. On May 28, 2008, the Governor signed into law Public Chapter No. 1041, an untitled bill that amends Tenn. Code Ann. § 50-6-113, a provision of the Tennessee Workers' Compensation Law that concerns the liability of contractors and subcontractors.The purpose of the change is to mandate that everyone on a construction worksite – regardless of their status as an employee, independent contractor, or subcontractor – be covered by a workers' compensation insurance policy.

Generally the Tennessee Workers' Compensation Law applies to employers with five or more employees, see Tenn. Code Ann. § 50-6-106(5), and therefore, only employers with five or more employees are required to carry workers' compensation insurance and pay workers' compensation benefits to injured employees. However, because of the frequency of on-the-job injuries on construction sites, as well as the common use of subcontractors in the construction industry, the Tennessee Workers' Compensation Law has treated the construction industry differently. The substantive exceptions with unique importance to the construction industry are found in Tenn. Code Ann. § 50-6-113.

The first is the rule that principal, intermediate, and subcontractors are liable for workers' compensation benefits to a subcontractor's employee injured on the worksite. See Tenn. Code Ann. § 50-6-113(a). For example, suppose a general contractor on a construction project retains another company to do the electrical work, and the electrical contractor (the "intermediate contractor") contracts out a portion of the job to a subcontractor, and one of the subcontractor's employees is injured on the job. Further suppose that the subcontractor illegally failed to purchase workers' compensation insurance. The injured employee can, pursuant to Tenn. Code Ann. § 50-6-113(a)-(d), recover workers' compensation benefits from the intermediate contractor and the general contractor.

In this regard, Tenn. Code Ann. § 50-6-113 creates "statutory employees" –employees who, by statutory directive, are treated (for workers' compensation purposes) as not only employees of the subcontractor, but also employees of all successively higher contractors. The purpose is to give general contractors an incentive to require subcontractors to carry workers' compensation insurance. See Posey v. Union Carbide Corp., 705 F.2d 833, 835 (6th Cir. 1983). In practice, responsible contractors require their subcontractors to provide a current certificate of insurance listing the general contractor as an additional insured.

Tenn. Code Ann. § 50-6-113's second substantive departure from the general Workers' Compensation Law is the rule that employers in the construction industry must carry workers' compensation insurance if they have even one employee. The specific language is contained in Subsection (f) is as follows:

[A]ny person engaged in the construction industry, including principal contractors, intermediate contractors, or subcontractors, shall be required to carry workers' compensation insurance. This requirement shall apply whether or not the person employs fewer than five (5) employees. Sole proprietors and partners shall not be required to carry workers' compensation insurance on themselves....

Tenn. Code Ann. § 50-6-113(f)(1).

The combination of these two rules has had an unintended consequence in the construction industry. Although responsible construction companies carry workers' compensation insurance and require their subcontractors to do the same, others avoid workers' compensation insurance by classifying every worker on a construction site as an independent contractor, rather than an employee. Their reasoning is based on the language in Tenn. Code Ann. § 50-6-113(f)(1) that "Sole proprietors and partners shall not be required to carry workers' compensation insurance on themselves."

To illustrate, assume the previous example of the general contractor who hires an intermediate contractor to do the electrical work, and the intermediate contractor hires a subcontractor to do part of the job. The subcontractor would classify all of its workers as independent contractors, rather than employees. Theoretically, this relieves the subcontractor from the obligation of paying workers' compensation benefits and purchasing workers' compensation insurance because the workers are "independent contractors," not employees. Furthermore, the workers, because "Sole proprietors and partners shall not be required to carry workers' compensation insurance on themselves," are likewise under no obligation to purchase workers' compensation insurance. Therefore, the workers are allowed to work on the construction site without being covered by anyone's workers' compensation insurance policy and without anyone being responsible for paying workers' compensation benefits if they are injured.

Of course, this maneuver has problems. The subcontractors' laborers are almost certainly misclassified as "independent contractors." See Tenn. Code Ann. § 50-6-102(11). But more importantly, sometimes the so-called "independent contractors" are injured on the job. They are often unskilled, uneducated workers, sometimes in the country illegally, and often without the resources to pay their own medical bills. Someone has to absorb the financial loss caused by their injury.

Public Chapter No. 1041 outflanks the construction contractors who classify all of their workers as independent contractors. Section 1(A) of Public Chapter No. 1041 stipulates that "Any person engaged in the construction industry, including principal contractors, intermediate contractors and subcontractors shall be required to carry workers' compensation insurance." (emphasis added). In other words, everyone engaged in construction work must have workers' compensation insurance – even if they have no employees. If they do not have employees, then the insurance covers themselves and their subcontractors, if any. The only exception is almost too minor to mention: sole proprietors and partners engaged in the construction industry do not have to carry workers' compensation insurance on themselves if they are working directly for an owner on the owner's property for the owner's use and for which the owner receives no compensation.

The effective date of Public Chapter No. 1041 is December 31, 2009, so construction companies have more than a year to adapt. For those construction companies who have had workers compensation policies, but whose policies did not cover their subcontractors' workers because the subcontractor classified the workers as independent-contractor sole proprietors, the time to adapt is when the company renews its workers' compensation insurance policy in 2009. Since workers' compensation insurance policies usually have one-year terms, any policy with an inception date in 2009 must cover the company's subcontractors' laborers –regardless of whether the subcontractor classifies those laborers as employees or independent contractors – unless those laborers are covered by the subcontractor's workers' compensation insurance policy or the laborers' personal workers' compensation insurance policies. Naturally, this will likely cause the cost of workers' compensation insurance policies to rise.

For those construction companies who do not have workers' compensation insurance policies because they classify all of their workers as independent-contractor sole proprietors, Public Chapter No. 1041 will likely increase the cost of doing business. Such companies must begin carrying workers' compensation insurance policies on their workers. Alternatively, such companies can require their workers to purchase their own individual policies and provide certificates of insurance, although that would likely cause wages to rise.

In any event, beginning December 31, 2009, the simple rule is this: every laborer on a construction job site must be covered under somebody's workers' compensation policy. The laborer can be covered under his own personal insurance policy, by the policy of his employer/contractor, or by the policy of any successively higher contractor. But every laborer on a construction job site must be covered.

Click here to see Public Chapter No. 1041

For more information about this topic, please contact Joe Kelly or one of our other Employment attorneys.