Independent Contractors: Delaware Backs Down, New Jersey Ups the Ante

August 13th, 2007 by

Workers comp coverage for independent contractors is the issue that just won’t go away. A while back we blogged reform efforts in Delaware, which almost became the first state to require comp coverage for sole proprietors. Almost, but not quite.
Delaware has a long-established (and well-deserved) reputation for being a comp disaster zone. That may no longer be the case, as they have implemented far-reaching reforms that should bring down costs substantially. They decided, however, not to become the pilot state for requiring coverage on all sole proprietors. There was a tremendous push-back from independent contractors, who argued (not without reason), that the cost of coverage would be prohibitive. It would put many of them out of business.
So Delaware backed down. The revised statute [s. 2311(a)(4)] reads as follows:

All independent contractors governed by this subsection shall be covered under this chapter. Independent contractors shall have an option to purchase coverage to satisfy this requirement, or alternatively shall be insured by the general contractor, subcontractor or other contracting entity for which they perform work or provide services…Partners and sole proprietors, when working in an independent contractors role, shall be subject to the requirements of this subsection…

Delaware, in effect, has chosen to implement the Massachusetts’s solution: allow sole proprietors to choose coverage, but don’t force it. However, when sole proprietors exercise their opt-out option, the burden of their coverage falls unambiguously on the general contractor. At premium audit, Delaware GCs who cannot produce a certificate of insurance with proof of coverage for their sole proprietor subs will be billed for the payroll portion of the subcontract. My guess is that many will try to pass this cost back down to the sole proprietors, who might well end up paying for the coverage they said they cannot afford.
New Jersey
John Geaney, Esq., our go-to guy in New Jersey, summarizes a new law that comes down hard on employers who deliberately misclassify employees. Bill no. 4009 makes it a criminal offense to knowingly fail to properly classify an employee. In other words, general contractors are presumed to be the employer of everyone on the job site, unless they can prove otherwise. Proof would likely require a certificate of insurance and a contract for the work. In addition, New Jersey will probably follow something similar to the three step test currently in use in MA:
1. The sub must run an independent business and be in complete control of the work at all times
2. The sub must work for others
3. The sub must be in a trade distinct from the trade(s) performed by employees of the GC.
Crack Down
These recent actions in New Jersey and Delaware are part of a strong national trend. States are determined to crack down on the wide-spread practice of avoiding the payment of benefits in the construction industry: not just workers comp benefits, but social security and unemployment insurance as well. Historically, when independent contractors have been injured on the job, state funds have provided coverage. Now it appears that general contractors are going to be held accountable: when sole proprietors opt out, GCs – willingly or not – will have to pick up the tab.