The Role of the Sub-Contractor in Your Arizona Business

If you are a General Contractor working in Arizona, chances are your contracting company relies very heavily on the use of sub-contractors.

Phoenix, Arizona

If you are a General Contractor working in Phoenix, Mesa, Scottsdale, Glendale, Chandler, Gilbert, Tempe, Peoria and anywhere else in what is referred to as the “Valley of the Sun”, chances are your contracting company relies very heavily on the use of sub-contractors.

Today, most General Contractors will attest to what actually constitutes a sub-contractor has taken on a whole new meaning these days. Gone are the days where you could simply hire a sub-contractor, 1099 them, and not have to worry about whether they were actually a sub-contractor and/or an employee.

In discussing AZ General Liability Insurance Coverage with General Contractors, one of the areas that involves the most discussion is the use of sub-contractors. Let me give you an example of how a recent conversation with a potential client we were working with went. As we were gathering information about his scope of work including gross receipts, payroll, and sub-costs, he informed us that he subbed out all of the work to sub-contractors. We then informed him that all the sub-contractors he will use will need their own general liability insurance coverage, and that his company will need to be named as additional insured on the subs’ insurance policies. After informing him of this, the real conversation started. He indicated to us that he didn’t know if all the subs he used had their own insurance coverage. He tried to obtain as many certificates of insurance as he could from them, but he figured that for the subs from which he didn’t obtain certificates, he would just 1099 them, and they would just count as a sub-contractor.

Let’s just say he wasn’t thrilled when we told him that this was not even close to the way it works by the insurance carriers’ definition of independent/sub-contractors. We informed him that all his sub-contractors had to have their own insurance otherwise their work and actions could be excluded on his insurance policy.

Needless to say, this got his attention immediately. He indicated that he had used two carpenters pretty much on most of his projects, paid them by the hour, then simply 1099ed them, and considered them as a sub-contractor.

Again, we laid out certain guidelines that should be followed, so, hopefully, there will be no confusion on what constitutes an independent/sub-contractor. We informed him that each sub-contractor he hired should have a separate contract for each job, and they supply him with a certificate of current insurance coverage at limits equal to his policies’ limits for that job, and to make sure he is added as additional insured on their policies.

Also, there should be no hourly pay and no direct supervision; this last one is most important.

We also advise our clients to consult their CPA’s as well to learn more about guidelines concerning the use of sub-contractors so there will be no confusion.

Another area of concern about the use of sub-contractors by our clients is in the area of workmen’s compensation insurance. Here is a recent case in point. A contractor was using several sub-contractors doing carpentry, painting, drywall, etc., on many of the projects he had during the year. Now, he did have two actual employees who were on his payroll and on his workers’ comp policy. The other three subs were used on many projects, but not on a full-time basis, so he simply 1099ed them, and this way he would avoid paying more in workers’ comp as he considered them classified as independent/sub-contractors. As anyone who has worked with workers’ compensation carriers knows, this is not the way it goes. When his policy was up for renewal, the company sent out the auditors to review his payroll figures. In questioning the client about the checks that were written to these three subs, the auditor requested waiver forms or certificates of insurance along with contracts for each job they worked on. Sorry to say, this contractor could produce none of this required paperwork. He also informed them that he paid them by the hour, they used his tools, and were directly supervised, which are all the hallmarks that are required of an employee.

In the end, the General Contractor was billed ten thousand dollars in additional premium. The only good thing was that none of these workers were hurt on the job, because if they were, chances are very high the General Contractor would have been liable for their medical expenses.

Our suggestion to General Contractors is that they research exactly what the rules are concerning the use of independent/sub-contractors concerning their policies with their agent and their CPA. If PJO Insurance Brokerage can be of help with your company in this matter, we look forward to hearing from you.

Written By:

PJO Insurance Brokerage
By Patrick O’ Neill
4103 E. Prickly Pear Trail
Phoenix, Arizona 85050