Why Are My Subcontractors Included in My Workers' Compensation Payroll?
If you're a contractor in Michigan, you've probably faced an unexpected surprise when your workers' compensation (WC) audit includes payroll for subcontractors. Many contractors assume that subcontractors are independent businesses and, therefore, not their responsibility when it comes to WC coverage. However, insurance audits often tell a different story.
Understanding Workers' Compensation and Subcontractors
Michigan law requires employers to carry workers' compensation insurance to protect employees in case of work-related injuries or illnesses. The challenge arises when contractors use subcontractors who lack their own WC coverage. In these cases, the contractor may be held responsible for covering the subcontractor’s payroll under their own WC policy.
Annual WC audits are conducted for the prior policy term, meaning your subcontractor records from the previous year will determine your final premium calculation. Proper documentation is essential to avoiding unexpected costs.
How to Exclude Subcontractor Payroll from Your WC Policy
If you don’t want your subcontractors’ payroll to be included in your WC audit, you must collect the proper documentation. Here’s what is required:
- Proof of Insurance: Subcontractors must provide a certificate of insurance showing that they carry their own General Liability (GL) and Workers’ Compensation (WC) policies. This proves that they are covering their own employees and liabilities.
- Workers’ Compensation Exclusion Forms:
- Sole Proprietors & Partnerships: If a subcontractor is a sole proprietor or a partner in a partnership and does not have WC coverage, they must complete a WC exclusion form from the State of Michigan. This form confirms that they are not required to be covered under your policy.
- LLCs: If a subcontractor operates as a Limited Liability Company (LLC), they must apply for a workers’ compensation exclusion through the state and provide that documentation to you.
Important: These exclusion forms must be updated every year with the State, and a new letter must be kept on file if approved.
For more information and to access the required forms, visit the Department of Labor and Economic Opportunity.
Why This Matters for Your Business
Failing to collect and maintain these documents can result in costly surprises during your WC audit. If your subcontractors don’t have proper WC coverage or the required exemptions, their payroll will be included in your audit, increasing your WC premiums.
To avoid this, make it a standard practice to:
- Request and verify certificates of insurance before hiring subcontractors.
- Keep copies of all exclusion forms on file and update them annually.
- Review your subcontractors’ insurance coverage each year to ensure compliance.
Stay Ahead of the Confusion
Many contractors find themselves caught off guard by workers' compensation audits because they assume subcontractors are not their employees. Understanding the insurance requirements and proactively managing subcontractor documentation can help you control your WC costs and avoid audit headaches.
If you have questions about workers’ compensation coverage, subcontractor requirements, or how to protect your business from unnecessary premiums, our team at Rathbun Insurance is here to help. Contact us today to ensure you're in compliance and prepared for your next audit.
