Sole Proprietors: A Comp Welcome Mat in Massachusetts

September 4th, 2007 by

What better way to herald the end of summer by returning to the issue that just won’t go away: workers comp coverage for sole proprietors and independent contractors. Massachusetts has just taken an extraordinary step that provides a strong incentive for sole proprietors to “opt in” to the comp system.
Under the old rules, any sole proprietor seeking comp coverage was assumed to make the state average weekly wage (SAWW). In MA, that is a whopping $52,000 per year. While MA enjoys some of the lowest rates for comp coverage in the nation, that high wage base drives up the cost of comp:
– for a $5.00 rate, the annual premium would be $2,600
– for a $10.00 rate, the annual premium would be $5,200
Those can be tough numbers for a lone craftsman trying to operate his/her own business. Especially when you consider that the weighted average median wage of all sole proprietors in the state is only $35,843. The result, of course, was that most sole proprietors gave up the notion of participating in the comp system. The coverage was way too expensive. They opted out in droves.
Recognizing the powerful disincentives to select coverage, the MA Workers Compensation Rating and Inspection Bureau decided to make the coverage more affordable. They have dropped the wage base by 30 per cent, to 70 per cent of the state AWW, effective August 1, 2007. Now, when a sole proprietor chooses to be covered, the premium is based upon an annual wage of just $36,400. This means that the cost of coverage is suddenly pretty reasonable:
– for a $5.00 rate, the comp coverage costs $1,820
– for a $10.00 rate, the coverage costs $3,640
A Comp Bargain
For marginal sole proprietors, with annual billings below the $36,400 level, there is still a strong incentive to opt out of the system. However, for the many skilled tradesmen who routinely bill well above the $36,400 level, workers comp has suddenly become a bargain. A skilled mason or carpenter might bill upwards of $75,000 or more per year. Nonetheless, the cost of comp coverage will be based upon a much lower wage level. In effect, well established sole proprietors now enjoy comp rates that might be 50 per cent or more lower than the rate for competitors with employees working in the same trade.
Which leads to one more very important consideration for general contractors in MA: in the construction field, sole proprietors are a common sight. We have blogged about the MA crack down to push coverage deep into the subcontractor and sub-subcontractor levels. (See just a couple of our prior blogs here & here.) At premium audit, if a GC shows a certificate of insurance from a sole proprietor sub who has “opted out” of coverage, the cost of that coverage is added to the GC’s payroll for premium calculation. Now GCs have a very compelling argument to encourage their sole proprietor contractors to opt in for coverage: “Don’t wait for me to charge back the cost of comp. Take advantage of the suppressed rates and choose coverage on your own. You benefit from a lower rate and you have the advantage of knowing the cost of coverage up front.” For sole proprietors who routinely have billings above the $36,400 level, this is truly a no brainer.
It will be interesting to see if other states follow the MA lead in this important policy area. Surrounding states use a very high wage standard for calculating sole proprietor premiums: in Connecticut, $56,200. In New Hampshire, $58,100. When you factor in the very high rates for comp in these states, the cost of insurance for sole proprietors is truly prohibitive. That’s no welcome mat. It’s a kick in the butt toward the door.