Legislature(2001 - 2002)
03/28/2002 01:35 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE LABOR & COMMERCE COMMITTEE
March 28, 2002
1:35 p.m.
MEMBERS PRESENT
Senator Ben Stevens, Chair
Senator Alan Austerman
Senator John Torgerson
MEMBERS ABSENT
Senator Loren Leman
Senator Bettye Davis
COMMITTEE CALENDAR
Confirmation Hearings:
Alaska State Board of Public Accountancy
Marjorie J. Kaiser
Steven R. Tarola
Sandra R. Wilson
Alcoholic Beverage Control Board
Ellen L. Ganley
State Board of Registration for Architects, Engineers and Land
Surveyors
Linda Cyra-Korsgaard
Donald J. Iverson
Scott McLane
Patricia Peirsol
Board of Barbers and Hairdressers
William R. Graf
Board of Chiropractic Examiners
Dr. Gregory M. Culbert
Dr. R. Clark Davis
Dr. Carol J. Davis
Alaska Workers' Compensation Board
Dorothy Bradshaw
John Giuchici
Stephen T. Hagedorn
James N. Rhodes
Philip E. Ulmer
CONFIRMATIONS ADVANCED
CS FOR HOUSE BILL NO. 212(L&C)
"An Act requiring a subcontractor to obtain workers' compensation
insurance covering the subcontractor and the subcontractor's
employees and establishing responsibility of a contractor for
obtaining workers' compensation coverage for the subcontractor
and the subcontractor's employees if the subcontractor fails to
obtain workers' compensation coverage; and providing for an
effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
HB 212 - See Labor and Commerce minutes dated 4/28/01.
WITNESS REGISTER
Ms. Amy Erickson
Staff to Senator Murkowski
State Capitol Bldg.
Juneau AK 99811
POSITION STATEMENT: Commented on HB 212 for the sponsor.
Mr. Paul Grossi, Director
Workers' Compensation
Department of Labor & Workforce
Development
PO Box 21149
Juneau, AK 99802-1149
POSITION STATEMENT: Supported HB 212.
Mr. Don Ethridge
AFL-CIO
710 W 9th Street
Juneau AK 99801
POSITION STATEMENT: Supported HB 212.
Mr. Alan Wilson
President, Alaska Renovators
Co Chair, Governmental Affairs, Alaska Home Builders Association
6014 Lund Street
Juneau AK 99801
POSITION STATEMENT: Supported HB 212.
Mr. Charlie Miller
Alaska National Insurance Co.
PO Box 102286
Anchorage AK 99510
POSITION STATEMENT: Supported HB 212.
ACTION NARRATIVE
TAPE 02-16, SIDE A
Number 001
CHAIRMAN BEN STEVENS called the Senate Labor & Commerce Committee
meeting to order at 1:35 p.m. He asked if there were any comments
from the nominees of the Alaska State Board of Public
Accountancy, the Alcoholic Beverage Control Board, the State
Board of Registration for Architects, the Engineers and Land
Surveyors, the Board of Barbers and Hairdressers, the Board of
Chiropractic Examiners and the Alaska Workers' Compensation
Board. There were no comments from the nominees. There were no
objections to the nominees and their names were forwarded to the
full body of the Senate for confirmation.
HB 212-WORKERS' COMP:CONTRACTORS & SUBCONTRACTOR
CHAIRMAN STEVENS announced HB 212 to be up for consideration.
MS. AMY ERICKSON, Staff to Representative Murkowski, sponsor of
HB 212, said that it addresses a decade-long issue regarding
workers' compensation insurance for sole proprietors.
A sole proprietor is an individual working for himself
without employees. Current Alaska statutes do not
require sole proprietors to carry workers' compensation
insurance although they do require that general
contractors carry insurance on their employees. The
Workers' Comp Board has determined in certain cases
that sole proprietors working as a subcontractor is
actually an employee of the general contractor. Because
of these determinations, insurance companies can charge
general contractors additional premiums for sole
proprietor subcontractors. These premium charges have
often occurred after the general contractor's policy
has been audited and in some cases the general has been
required to pay additional premiums after the fact and
those are costs that have not been anticipated nor
included in his bidding costs. This has been an area of
great confusion and frustration - so much so that a
state wide task force was established to look into the
problem. They looked at a number of different
possibilities and HB 212 is the ultimate result of the
task force's discussion and compromise. Requiring sole
proprietors to provide their own workers compensation
coverage eliminates any gray areas so those who should
be covered are covered. This gives equity to all
parties. Risks and associated costs of the coverage can
be anticipated and then recovered through the bidding
process. There is no more guesswork or concern over
litigation.
MR. PAUL GROSSI, Department of Labor, said that Ms. Erickson gave
an excellent explanation of the bill. It has been a problem when
someone files a claim and sometimes it's determined that they're
not really subcontractors, but employees, when the relative
nature of the work test is used, although it's rare.
Even if they are not found to be eligible for workers'
comp, the cost to the employer and to the insurance
company and the like are still extensive, because of
the legal fees and the administrative costs involved in
that, but the more common problem is when the insurance
companies will come after the fact and audit employees
and potential subcontractors. They'll come along and
say there was some risk out there that you owe us some
premium on…
MR. GROSSI said that the group that worked on this legislation
was an incredibly wide range of people representing all facets of
affected businesses. This is what everybody could support,
although it didn't make anyone completely happy.
SENATOR TORGERSON gave an example -
You are a general, you're building a house and I hire
you to do the carpet. If you don't have proof of
insurance, are we saying automatically that means that
I would cover that in my premium because of the audit?
MR. GROSSI replied: "It's not automatic, but it does happen. It
depends on whether the audit occurs."
SENATOR TORGERSON asked if he didn't hide it good enough, did he
get caught. "Is that what we're trying to do?"
MR. GROSSI replied:
Yes, not that anybody would try to hide it. I think
these are legitimate mistakes - is what happens. When
the insurance company looks at them and says, 'Oh no,
this truly wasn't a subcontractor the way the work was
allocated. Maybe you paid the person by the hour,
provided the tools, you allocated the hours they would
be working and the various working conditions. This is
an employer/employee relationship. So, that you would
owe premium on that.
SENATOR TORGERSON said he understands the close association and
that if you control someone's environment, he is your employee.
He asked if they are requiring a sole proprietor to go get
insurance, otherwise there's a fear of being back charged.
MR. GROSSI answered:
If they're a subcontractor, yes. If they're just
contracting to say an individual, then they wouldn't be
required. It's not for all sole proprietors. It's just
when there's a subcontractor/contractor over a
situation.
Professor Larson, the guru of Workers' Compensation, said the
subcontracted service was either consumptive or productive. In
other words, if someone has a home and wants to get a carpet laid
and hires someone to do that, that is being a consumer and
wouldn't be responsible for any workers' compensation.
If it was a sole proprietor, they wouldn't have to have
it either, because it's not a contractor/subcontractor
situation. It's just when you have a general contractor
and then subs and subcontractors in that situation.
SENATOR TORGERSON said he didn't see that in the bill, which
seems to open up pretty wide the application. He wouldn't be as
nervous if it only affected a subcontractor of a general
contractor. He asked where it said that.
MR. GROSSI replied: "Because it has the term subcontractor in
there, there would have to be a contractor over."
He said there wasn't a legal definition.
SENATOR TORGERSON asked if subcontractor was defined in statute
somewhere. "You don't have to be a general contractor to be a
subcontractor?"
MR. GROSSI replied: "No, but you have to be a contractor over. In
other words, you have to be in the line of production of that
service or goods."
SENATOR TORGERSON asked if he owned the carpet store that this
person ordered and he was his subcontractor, was he just a carpet
store owner, not a general contractor.
MR. GROSSI said that subcontractor is not defined in Workers'
Compensation statutes. He said the question would be whether they
are in just the carpet sales business or the carpet laying
business.
SENATOR TORGERSON said, "You lost me."
SENATOR AUSTERMAN said he wanted an answer to Senator Torgerson's
question also, because a lot of stores install carpet as part of
the sale.
MR. GROSSI replied: "Senator Austerman, I'm going to give you the
answer I know you don't want to hear and that is it would have to
be on a case by case basis…"
SENATOR TORGERSON asked how a contractor proves that a
subcontractor has insurance.
MR. GROSSI answered that they would have to show him proof of
insurance.
SENATOR TORGERSON asked if he would have to get a subcontractor
license first and is there such a thing.
MR. GROSSI said there wasn't such a thing as a subcontractor
license.
SENATOR TORGERSON said he had been caught in some audits and
wasn't sure that they were capturing all the things they needed
to.
MR. GROSSI commented that was probably true, but they were trying
to fix the basic problem, more or less.
SENATOR TORGERSON asked what the committee referrals were for
this bill.
CHAIRMAN STEVENS said State Affairs and Judiciary.
SENATOR TORGERSON said there might be more legal questions than
others.
MR. DON ETHERIDGE, AFL-CIO, supported HB 212 saying that he
requested the hearing as many local businessmen have experienced
problems in this area because of the unlevel playing field for
some of the contractors who don't have to carry as much workers'
compensation insurance as other because they hire all
subcontractors.
SENATOR TORGERSON asked if they were talking about non union
workers.
MR. ETHRIDGE replied that it is mostly non union that does this
sort of thing. Most union workers do it the right way and they
are at a disadvantage when they do it.
SENATOR TORGERSON said he thought this would affect the sole
proprietors, not that they shouldn't have insurance.
MR. ETHRIDGE said one of the examples he has seen locally is
where a roofing subcontractor, a sole proprietor, fell off a roof
and was killed. His estate is suing the general contractor of the
project and they are having to come back through all the legal
defenses to protect themselves on that.
SENATOR TORGERSON said he was sure of that.
SENATOR AUSTERMAN said if the general contractor wanted to hire
people that are not insured, he should accept that liability to
start with. If they hired him without knowing it, they should
have known it.
MR. ETHRIDGE agreed, but the marketplace is very competitive and
people are willing to take the risk hoping someone doesn't get
hurt on the job.
CHAIRMAN STEVENS said that they are still subject to the audit.
But it is the general's responsibility to make the determination
or take the risk.
MR. ETHRIDGE reiterated that a lot of generals take the risk and
leave themselves open to liability. A lot of times they will get
by on it to save a few bucks on a contract.
SENATOR AUSTERMAN asked if they are saying they need to save the
general contractors from themselves by requiring subcontractors
to have insurance.
MR. ETHRIDGE replied that they would be creating a level playing
field for everyone who is bidding on a project. If one contractor
is looking out for his employees and not taking that chance, he
should have the same level playing field as the one who takes the
chance.
SENATOR AUSTERMAN said by the same principal if Cost Co. wants,
they can borrow $200 million to run a business with margins of 2%
and he can't afford to borrow that kind of money for his
business. He didn't know how they could get the same level
playing field for everybody.
MR. ALAN WILSON, President, Alaska Renovators, said this issue
came before them about three years ago when two members were
faced with a $15,000 bill and a $30,000 bill for back premium. He
explained the audits take place at the expiration date of the
workers compensation policy. They didn't realize that the
insurance companies had the mechanism to go back three years and
collect for sole proprietors.
It's important to remember when you go to get your
contractor's license right on the form you can exempt
yourself. If you're registering as a sole proprietor,
you can check a little box saying I'm exempt from
workers' compensation. We all understand that you have
to cover employees, but you can exempt yourself. So,
that's what we're all operating under - that
understanding that that's the way things worked.
Unfortunately, we found out after the fact that that
wasn't the case, because we had two members with these
big outstanding bills for small operators. It put them
in a financial bind. Three years back is a long time to
go on a small entity.
He said the problem is that across the whole state there is a
shortage of manpower and qualified individuals. If he is
demanding a certificate of insurance from a carpet installer,
that installer can go to work for five other guys somewhere else
without it. They could be added to the general's policy, but it
is cheaper for a sub to get his own insurance.
The other critical thing about sole proprietors that are
uninsured is that everything is fine until there is an accident.
The medical bills start coming in and they file a claim to see
what happens. It gets to the Workers Comp Board who says the
worker is an employee. Then they look for the next policy that
will cover it and it's the general contractor. What's unfair
about this is that not only are they subject to an audit and this
opens their books up to further scrutiny for sole proprietors,
but that claim gets reflected on their experience rating.
For an experience rating, everyone starts out at a one. If they
get one claim, that as a general contractor they had no control
over an individual, now he has to pay for the next three years
and his experience "mod" has been adjusted upwards.
MR. WILSON said one of his members had this scenario happen to
him. Prior to his audit, he had seven years of no claims and a
sole proprietor roofer fell off the roof, broke his back and it
was determined that he was an employee. This person's experience
mod went from .85 to 1.85 overnight. He had already bid jobs, the
house was in the process of being constructed.
2:12
SENATOR AUSTERMAN said he remembered this case and asked if the
person was originally hired as a solo subcontractor.
MR. WILSON said that was correct.
SENATOR AUSTERMAN asked how the determination was made that he
was an employee of the general.
MR. WILSON replied that the Board applied the nature of the work
test, which is a good test in most instances, until you get into
his industry. "If you're working on a house - I have a custom
home under construction - I'm the general contractor - I have the
keys to the building - My cabinet man comes in when I open the
doors at 8 o'clock and leaves at 5. Maybe I supply the cabinets
or in this case, the roofer supplied the roofing material, hired
the roofer to come over and install the material. He violated two
of the principals right there of the nature of the work test. He
supplied the material and set his hours. He's an employee -
regardless if this individual is out doing work for 10 or 20
other contractors, that doesn't really come into play.
SENATOR AUSTERMAN asked if part of the problem is that there is
no real definition of subcontractor.
MR. WILSON said it very well could be, but the task force looked
at some sort of waiver, which didn't fly for legal reasons. They
looked at trying to create a policy that would cover sole
proprietors and the insurance industry could figure out how to
set a rate.
He said that HB 212 removes the uncertainty about who needs to be
covered and when they need to be covered.
It's important to remember that the carpet installer,
if he's working for me as a subcontractor, would be
required to have a policy. If he's working for you, the
homeowner, he's not required to have a policy.
The other thing it does is taking away the advantage
that some bidders may have on a project by not having
workers comp insurance to cover. Another benefit of
this requirement is that most sole proprietors do not
carry health insurance, let alone insurance that covers
them when they're on the job. The tile installer is
$1,299 per year; a plumber is about $1,080; a carpet
installer is $1,387.
He said the average carpet installation job is about $5,000 and
his installer does about 10 of them a year. To spread out $1,300
over those 10 jobs is $103 a job, it's not a major impact. Then
if you consider the benefits that individual has, he is covered
on the job regardless of what happens, he gets rehabilitated if
it's a serious accident. "It's pretty cheap insurance in that
regard."
Another critical thing to keep in mind about the rates is that
it's based on the amount of payroll; but for a sole proprietor,
the statute says that they are going to be charged on $20,100 of
payroll, regardless of what they make in the year. That is why
the rates are pretty predictable each year.
MR. WILSON added that HB 212 provides added security to
consumers, primarily owner/builders and do-it-yourselfers who
hire sole proprietor subcontractors thinking that they are truly
subcontractors, when in fact they are probably employees of the
homeowner. This gets back to the consumer protection and level
playing field issues.
He concluded saying that the problem is with the uncertainty that
exists with the sole proprietor subcontractors when the claims
arise and that the general contractors are being charged for
premiums that they don't necessarily feel are fair. HB 212
requires all sole proprietor subcontractors to carry workers
compensation policies, which makes them accountable for their
actions and puts the expense where it should have been all along.
CHAIRMAN STEVENS said he couldn't find a definition of
subcontractor in the bill.
SENATOR TORGERSON read: "It is a person who contracts, sublet or
contact, or sublets all or part of the initial undertaking."
He added that there was a court decision mentioned - Thurston
versus State, 1970 that set a lot of that out. He asked Mr.
Grossi if he was familiar with it.
MR. GROSSI said he had read it.
CHAIRMAN STEVENS asked if the working group considered the
definition of subcontractor at all.
MR. WILSON said they did to some degree, but the issue is that it
covers a lot of different industries and in many instances, the
subcontractor is actually a prime contractor. Other states are
struggling with the same issue.
SENATOR AUSTERMAN asked if he had discussed it with Senator Leman
who had worked with this definition issue.
MR. WILSON said he had and the Senator raised the question of
what it would cost him as a potential subcontractor and they
found that the rate would be $225 per year, pretty cheap
insurance.
SENATOR AUSTERMAN said that they are really trying to touch on
one aspect of the business, but are ending up affecting everyone
who is a subcontractor.
MR. WILSON agreed.
2:18 - 2:20 - AT EASE
SENATOR TORGERSON said he still didn't like the bill.
MR. CHARLIE MILLER, Alaska National Insurance Co., said he
participated in the work group and they looked at two fixes. One
was if they took advantage of the sole proprietor status and did
not have workers comp coverage, the attempt was to craft
legislation that would make it clear there was no source of
appeal, no recourse whatsoever and that was the preferred fix by
some of the members, but it was eventually discredited by
everyone. A safety valve was needed in too many areas. The option
in front of them is what was left and even though it might need
some work, the general concept is the best fix.
He thought the process for audit was misunderstood and the work
test needed a better understanding. A National Council of
Compensation Insurance memo said that what should be considered
is the extent to which a person can be expected to carry their
own accident burden. "This consideration focuses on the person
who is unable to meet the costs of industrial accidents out of
their own resources."
TAPE 02-16, SIDE B
Quite a few claims make it to the Board because they can't afford
the costs of falling of the scaffolding. If they go before the
Board and the claim is denied, it still costs tens of thousands
of dollars that the employer through their carrier have to
shoulder to defend what they consider an invalid claim. The work
test lends an unpredictability and flies in the face of what
insurance is about.
We don't sell the payment of claims. What our product
sells is the management of risk and lends
predictability to that aspect of a companies' financial
outlook…When we go back and perform audits on payroll
for companies that have unpredictable payroll, all
we're doing is assigning premium to risk. So, if you
have a scenario here with something as wide open as
this, there's the possibility of additional risk that
no one has collected premium for, someone is getting
access to your product without paying for it. That's
why the insurance industry feels that these audits are
very legitimate.
MR. MILLER said he discussed this with Pat Henderson who runs the
Alaska National portion of their business, but he feels that this
would cover the feelings of his other carriers as well.
Every policy we have has audit provisions on the front
page of the policy. The nature of every business has a
certain amount of flexibility. If you own a sporting
goods store and have three employees, we still have an
exit audit at the end of the policy term in case you've
had to hire temporary help part time or full time or
lay off an employee because of a lack of business. You
find out how many hours you actually covered under the
policy and the premium is adjusted up or down to
reflect an accurate number of hours and an accurate
amount of risk and then assign the agreed upon premium
to it. I'm actually a little surprised that people
refer to these audits as if it's some sort of an ambush
that's waiting for them at the end of the policy term.
It's the first thing you read when you look at your
policy - is that this is a provision that everyone has
and you have it in every single policy.
As far as contractors go, most contractors file payroll
without a monthly basis because of the unpredictable
nature of how they do their work. If a local contractor
here has a rain problem and they wind up normally doing
so many days a week outside because it rains too much,
and they have a particularly clear month, they could
put in twice as many hours in that period of time doing
this particular brand of work as they would have
normally. Their payroll will reflect that. We look at
it; their premium will reflect that. If they get
additional work midway through the season and they hire
a bunch more carpenters and get another 1,000 carpenter
hours in, their premium will reflect that. If they
anticipate spending another 1,000 carpenter hours on
this season and they don't, the payroll audit will
reflect that and their premium will be adjusted
downward. So, it's the only way you can accurately
assess premium to risk and so it's a part of every
policy. It really shouldn't surprise anyone.
What does surprise me a little bit is the three-year
back audit. Ms. Anderson has been doing this in the
state before she went to work for Alaska National for
decades and it's a complete surprise to her. She's
never heard of anything like that. We do back audits
for term of policy and you know that when you buy the
policy. The tension that exists between the carriers
and the policy holders that we hope to have addressed
in this bill is the indeterminate factor of
employee/employer relationships with the sole
proprietor subcontractors and there is a legitimate
difference of opinion on how valid our audit request
for premiums are. This bill actually does clear it up
real easily from our perspective, although I recognize
Senator Torgerson's reluctance to accept an ill-defined
category and perhaps we could work on that to satisfy
his unease with that. But, once we know how much risk
we have and the contractor has a very easy way to get
his hands around that, the tension that exists on these
audits, I think, will evaporate. Our only difference on
these things is the risk involved. Under this work test
I read to you before, I think you can understand how
concerned we are that we're assuming risk and then
we're not collecting premium for it. And so we do have
a real problem with the way the situation has been in
the past and is currently and we're hoping we can clear
up these issues that we have in some of the definitions
and move this bill forward.
MR. MILLER said the goals of this legislation are clear, but
there is a little more work to do on clarifying the actual
language.
CHAIRMAN STEVENS asked on an average how long are workers
compensation policies for.
MR. MILLER replied, "We can do a workers comp policy the term of
an actual contract, but normally for a year period."
CHAIRMAN STEVENS asked him to explain the process that an audit
can go back to three years prior.
MR. MILLER explained:
It wouldn't take place with Alaska National, sir. She
had no recollection of that ever happening in anything
that she's been involved with in the insurance
industry.
CHAIRMAN STEVENS asked if it would only go back 12 months.
MR. MILLER said according to Ms. Anderson, that's true, but he
couldn't speak for other companies.
CHAIRMAN STEVENS asked, "Does it say in the workers' comp
agreement with the general how he's to have a relationship with
the subcontractor?"
MR. MILLER said he didn't know, but he could find out pretty
quickly.
I know from my conversation with Pat that we expect
that the general contractor will see a certificate or a
proof of insurance from every person that works on
their job that may be ruled as an employee under this
work test and if they don't we'll ask for premium for
them. But, whether or not there's a specific
contractual piece in the contract, I can't answer that.
CHAIRMAN STEVENS asked if the work test is internal.
MR. MILLER replied:
If the sole proprietor does work in a context that we
feel they may be, if they were placed under the
relative nature of work test, that they may be
considered an employee, then we would expect premium
for their work performed, yes. That is the rub. The
general contractors that disagree with us have a valid
argument as well…We don't feel that we should give our
product to someone, which is managing their risk,
assuming their risk for premium. We don't want our
product used without paying it and they don't want to
pay for something they don't feel they're getting,
because they don't feel there's a need for them to have
their carrier assume that risk. The reason why it's so
difficult to solve is that both sides have a very valid
point of view.
CHAIRMAN STEVENS asked how many audits take place where the
premium is actually increased for his company.
MR. MILLER replied, "I'd say there would probably be a higher
number of cases where premiums went up."
CHAIRMAN STEVENS asked, "I'm specifically saying if the audit
took place and they went in and said we found a general that has
X number of subcontractors…"
MR. MILLER said if he was talking about sole proprietor
contractors, he couldn't answer, but would find out for him.
CHAIRMAN STEVENS asked how many claims had gone back against the
general's insurance policy to where the roofer was the sole
proprietor.
2:37 p.m.
MR. MILLER thought Mr. Grossi would have a better handle on those
numbers.
MR. GROSSI said it would happen every couple of years.
MR. MILLER said his family had some experience when an employee,
after about a decade of working as a contactor owning her own
business:
…decided that working for Alex Miller had caused her
such mental stress that she needed to file a workers
comp claim. They were retroactively declared an
employee and it was a significant six-figure plus
settlement and Alex never did quite recover from that
one.
SENATOR TORGERSON asked if premiums weren't a function of total
payroll. "Your assigned risk rate doesn't change throughout a
year."
MR. MILLER replied, "No, it's a function of an agreed upon figure
and then times a number of hours."
SENATOR TORGERSON asked if it was hours or payroll.
MR. MILLER replied that it was a little more complicated than
that, but payroll and hours are interchangeable as part of the
formula. "If you get paid so much per hour, then you times the
payroll times the hours."
SENATOR TORGERSON said there's probably never a premium written
in the state that's isn't either adjusted up or down at the end
of the audit time.
MR. MILLER agreed and added:
Also, in the contracting business, if I was a
contractor and if I was negotiating a contract or a
policy, if you will, with a carrier through my broker
and I thought the possibility exists that I would have
10,000 hours to 20,000 hours in a season, I would
prefer to start at 10,000 and then pay later for
everything between that and 20,000. I don't think I
would give them a high number and ask to pay that
premium and then later ask for the money back. I'm not
saying they would low ball, but I'm saying you want to
take a number that you're pretty sure you're going to
hit, and then if it goes up, if you get a little more
work, you pay that premium later as it goes to front
loading.
SENATOR TORGERSON said he believed that they do have the
authority to go back farther than one year, but maybe his company
chooses not to. He asked if they found a company that they missed
the work test on, that had for five or six years been treated as
a subcontractor, but they finally came to the realization that
the person or the firm wasn't - that is was more of an employee,
because they failed the work test, how far back could they go and
collect the premium. He knew of a couple cases where they did
back up, but he didn't know how many years.
But, the risk that you're talking about that you had on
the books for free because of the classification, the
employee was not caught or not reported or whatever,
but wasn't in the total payroll. Once that error is
discovered and that person was being reimbursed as a
subcontractor, but in fact wasn't, I'm sure you'd back
up more than one year.
MR. MILLER said he may have confused him and explained:
When a carrier performs an audit and determines there's
risk and they want premium, there hasn't been a
relative nature of work test done. That is the
carrier's determination that they have risk. To
actually have that test done and that declaration made,
that is only done by the Board or some other body. We
don't official make that test. That ruling as far as I
can tell only comes about when there's been a claim. So
I think I misinformed you.
SENATOR TORGERSON asked, "What do you audit for then?"
MR. MILLER answered: "We audit to see what we think our risk is."
SENATOR TORGERSON said his point is the audit finds errors where
an employee or a subcontractor wasn't treated properly and they
believe that should have run through payroll. He knew they could
go back.
MR. MILLER said he would check on that.
SENATOR AUSTERMAN said he understood that part of the test was
where the contractor actually checks that he is a sole proprietor
and doesn't need workers comp and asked if there was a test that
takes place at that point in time. Is the question ever asked,
"Can you carry the burden?"
MR. GROSSI said:
I believe when you're talking about the check, that is
not with the Workers' Compensation Board. That is when
they are licensing those. No, if they put a check on
there, there is no real audit, so to speak, or any real
thorough examination of that situation. So, the
examination is always after the fact…It usually happens
after there is an injury, there's large medical bills,
some time loss, dire financial straights, and then
they'll file the claim. The Board has to look at it -
the relative nature of the work test is in regulation,
but it actually comes from a supreme court case. The
Supreme Court has defined it in that way.
SENATOR AUSTERMAN said there appears to be a conflict that allows
a sole proprietor to go out in to the bliss of this world without
knowing this is waiting there for him.
MR. GROSSI responded that the problem does not lie with the sole
proprietor, but the contractor over that can be held liable for
the injury of the subcontractor/sole provider. "If it's
determined that they're really not in this particular instance,
according to this injury, a subcontractor, but an employee."
SENATOR AUSTERMAN said, "What you're saying is that it's the
general contractor's responsibility to read this and say to the
sole proprietor, 'can you carry the risk?"
MR. GROSSI said he thought that defined the problem, in that
there's an uncertainty there on the part of the general
contractor.
SENATOR AUSTERMAN asked, "It's uncertain whether he has the
responsibility to ask that question?"
MR. GROSSI said he knew what he was saying, but he didn't have an
answer. "There is no real burden on them. This is a test that the
Board has to apply if those cases come before them where there's
a question of whether this person is an employee or a
contractor."
SENATOR AUSTERMAN asked when he comes in to get his general
contractor's license, is he told that or does he have to research
the issue to know what he's doing.
MR. GROSSI said he didn't know what the licensing division
provided, but they do give them information on workers'
compensation.
CHAIRMAN STEVENS said the problem might be that some general
contractors are doing it and some aren't. He asked if there was a
financial advantage to not doing it.
MR. GROSSI said he probably wasn't the right person to answer
that question. Some of the generals require a subcontractor to
have a policy, even if they are a sole proprietor and even though
they are not required by law to deal with the risk and liability.
"However, it's a competitive world out there….and they may have
to do what they have to do to get the job done…"
SENATOR AUSTERMAN asked if he was reroofing his own house and
decided to hire a subcontractor to help him and he falls off and
hurts himself, who is liable.
MR. GROSSI replied:
As far as Workers' Comp is concerned, Senator
Austerman, through the Chair, you would never be
determined an employer in that situation, because you
are a consumer of that product or service. It's
consumptive as opposed to productive…"
CHAIRMAN STEVENS said he wasn't comfortable moving the bill at
this point and asked the sponsor and concerned parties to work
further on it. He adjourned the meeting at 2:50 p.m.
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