North Carolina General Statute § 97.19 provides:
Any principal contractor, intermediate contractor, or subcontractor who shall sublet any contract for the performance of any work without obtaining from such subcontractor or obtaining from the Industrial Commission a certificate, issued by a workers’ compensation insurance carrier, or a certificate of compliance issued by the Department of Insurance to a self-insured subcontractor, stating that such subcontractor has complied with G.S. 97-93 for a specified term, shall be liable, irrespective of whether such subcontractor has regularly in service fewer than three employees in the same business within this State, to the same extent as such subcontractor would be if he were subject to the provisions of this Article for the payment of compensation and other benefits under this Article on account of the injury or death of any employee of such subcontractor due to an accident arising out of and in the course of the performance of the work covered by such subcontract.
Stated another way, businesses that subcontract any work without obtaining from the subcontractor a certificate of workers’ compensation coverage may be responsible for workers’ compensation injuries sustained by the subcontractor’s employees.
A subcontract is an agreement for a company to do work as part of a larger project. There can be no subcontract without an initial contract. Thus the provision applies to contractors and subcontractors, but not to the owners of property. In general, homeowners and other property owners are not subject to the NC Workers’ Compensation Act for people they directly hire to do work on property they own. So a property owner who contracts with a company to improve or repair property is not covered by the provision, while the contractor they hire is.
Note that the provision applies to the employees of a subcontractor, not to the individual subcontractor himself. The provision applies regardless of the number of employees employed by the contractor or the subcontractor. Like most other employers under NC workers’ comp law a contractor is required to provide workers’ compensation coverage for its OWN employees if it employs three or more workers.
There is no requirement that the subcontract agreement be in writing. Even an informal agreement for a subcontractor to do work will expose the general contractor to risks associated with injuries to the subcontractor’s employees. The parties may not enter into an agreement to shift responsibility away from the general contractor and any such agreement is void.
Not surprisingly these situations frequently appear in the context of construction projects. Typically a landowner will contract with a general contractor to improve real property by building a house or commercial building. The general contractor will then subcontract portions of the project to other people or businesses, like framing contractors, electrical contractors or plumbing contractors. Unless the general contractor obtains a certificate of insurance from its subcontractor prior to entering into the subcontractor agreement the general contractor may be held responsible for workers’ compensation injuries to the subcontractor’s employees.
While the subcontractor situation most frequently occurs in the construction trade it applies in many other situations as well. Applying NC workers’ comp law the courts have found a contractor liable for injuries to his subcontractors in situations involving the operation of a convenience store, pesticide spraying and logging.
A contractor can protect itself from liability for its subcontractor’s employees in two ways: 1) obtain a current certificate of workers’ compensation coverage from its subcontractors prior to letting the contract and obtain renewed certificates as they expire; 2) purchase a blanket workers’ compensation policy insuring all of its employees as well as those of its subcontractors. A contractor should also carefully control access to the job site and know who is working for whom.
A problem can arise under NC workers’ comp law when a sole proprietor or other business with no employees seeks to subcontract for work. The general contractor may be legitimately concerned that, while it would not be responsible for injuries sustained by the sole proprietor subcontractor himself, it would be liable for any employees subsequently hired by the sole proprietor. So how can a general contractor protect himself from the risk that a subcontractor will bring later-hired employees onto the job site without the knowledge of the general contractor? The answer is a workers’ compensation “ghost policy.”
A ghost policy provides insurance only if the sole proprietor or other business subsequently hires employees. The sole proprietor is excluded from coverage under the policy. Ghost policies typically cost $800 to $1000 per year.
Unfortunately, ghost policies are frequently used in association with the improper designation of employees as “independent contractors” or “1099 employees.” In this scheme a sole proprietor or other business will allege that it has no employees when purchasing an inexpensive ghost policy of workers’ compensation insurance. In reality, the business seeks to disguise its actual employees as independent contractors.
The arrangement invariably unravels when the sole proprietor/subcontractor’s “independent contractor” is injured on the job. In this circumstance the general contractor, the Industrial Commission and the attorney for the injured worker will all have a number of questions for the subcontractor, as well as the insurance agent who issued the ghost policy. Insurance agents should take great care in issuing ghost policies of workers’ compensation, and make sure their own errors and omissions coverage is current.