Worker's Compensation Issues for the Real Estate Investor
Though frequently overlooked by many real estate investors, worker's compensation (WC) and related issues should certainly be addressed early in your business planning stages. Bear in mind, that advice from your attorney, accountant and/or from the State Department of WC (if applicable) certainly trumps what I communicate here.
The most important consideration is to understand that how you compensate your labor may or may not excuse you from carrying WC coverage on them. In effect, just because you pay them on a 1099/independent contractor basis, doesn't mean that the courts or WC commission will agree. Be sure you understand (seek legal advice) on what constitutes an “independent contractor” relationship. It may not be what you think (and may vary from state to state, as well).
Be wary not to create an unintentional employer-employee relationship, which could create a WC exposure for your business. Having tenants do odd jobs, such as clean-up, grass-cutting, or landscaping as a way to reduce rent may be construed as “consideration” and potentially subject you to carrying WC insurance. Do not confuse this with upkeep and maintenance requirements of your lease. What I am addressing here is the reduction, discount, or even waiver of rent in exchange for labor provided by a tenant, especially when such labor takes place on/at locations other than the tenant's residence. The last thing you want/need is this tenant to be injured while doing such work, only to find your liability insurance will deny the claim based upon such an “arrangement”.
Pertaining to hiring contractors and third-party service providers, be certain that they carry not only “General Liability” (GL) coverage, but also current WC coverage, whether State-sponsored or from a private insurer. The best time to obtain such validation of coverage is at the onset of the bidding process. Once Certificate(s) of Insurance (COI) are secured from the contractor or service provider a quick phone call (or email, which I prefer as it creates a “paper trail”) to the carrier or Agent can confirm the coverage(s) are current and valid. Being named a “certificate holder” is typically sufficient for most scenarios, especially when you do not utilize a contractor more than a few times a year. For larger/longer term jobs and projects, being named as an “additional insured” may be preferred. Put simply, a certificate holder is simply notified in the event the policy cancels. An additional insured not only is notified when the policy cancels, they are actually protected by the coverage/policy. Review with your legal advisor, and be advised that being named as an additional insured may cost the contractor some additional premium, usually no more than $50-100 per year. Depending on the situation, it may behoove you to pay this additional premium, if the contractor “balks”. My attitude is “no insurance, no project award”. If the contractor or service provider decides to cut expenses by sacrificing these vital coverages, then I do not want them doing any work for my business.
Understanding that the relationship between you/your business and those that provide labor and services is not simply a by-product of how you compensate them is the first step in making sure your real estate (and any other business) is protected appropriately from WC (and GL) exposures. Securing and confirming coverages is a must when dealing with any and all contractors and service providers. Unfortunately, in today's litigious world, the risk of using uninsured “spot labor” far outweighs any short-term time or financial benefit. If you are currently using and satisfied with such labor, review with your legal and accounting advisors and consider securing coverage for them, in the most appropriate and efficient manner they/you decide. It only takes one uninsured claim to put you out-of-business.