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Contractor/Subcontractor Arrangements: Let’s Save Time By Assuming You’re Doing it Wrong and About to Get In Trouble

I frequently present on topics related to OSHA/VOSH, Workers’ Compensation, employee handbooks, etc.  Every single time I give one of those presentations at least one person asks about agreements and relationships with contractors or subcontractors.  I answer every one of those questions by telling the questioner that, if any significant part of their goal is to avoid liability, either to the contracting person or entity or to third parties, they’re probably doing exactly what the rules and regulations are intended to prevent, the relevant agency or administration will know that, and it won’t work.  In this case the law is smarter than all of us.

For instance, the Department of Transportation under the Federal Motor Carrier Safety Act has literally eliminated any distinction between an “employee” and a “contractor.”  Quoting their FAQ:

Question 17: May a motor carrier that employs owner-operators who have their own operating authority issued by the ICC or the Surface Transportation Board transfer the responsibility for compliance with the FMCSRs to the owner-operators?

Guidance: No. The term “employee,” as defined in §390.5, specifically includes an independent contractor employed by a motor carrier. The existence of operating authority has no bearing upon the issue. The motor carrier is, therefore, responsible for compliance with the FMCSRs by its driver employees, including those who are owner-operators.

Virginia is actively working on similarly defining “employee” in the businesses of construction and delivery: “An individual performing delivery services for a contractor is presumed an employee and not an independent contractor for purposes of this chapter…”  That lovely statute would have perjury, fines, and debarment attached for misclassification, if passed.

Ignoring the obvious lack of preferment for contracting and subcontracting schemes, there are three major, frequent mistakes that we see routinely in contracting and subcontracting:

Where it’s a shell-game: Most of the time a purpose, if not the purpose, of a contractor/subcontractor agreement is to avoid liability in some way.  Maybe it’s to avoid having to have workers’ compensation or other insurance, or to avoid responsibility for oversight of federal or state regulatory compliance, or to be able to distance a company from third party liability.  There may not be a piece of paper that states this as a goal, but it’s obvious.  Arguments about how contracting gives a worker flexibility, or lets them set their own schedule belong to the worker, and they don’t help the party using the services once someone gets hurt or a claim or lawsuit is filed.  In fact, more often than not, your “contractor” is the one arguing you’re actually his “employer” at that point.

This issue is particularly problematic when it’s one worker and two (or more) companies, both (all) of which are claiming to contract with each other, with the worker a subcontractor.  In the context of, for instance, workers’ compensation insurance, the Commission will go up the contracting chain until it finds someone with insurance, or hold the entire chain liable.  In a lawsuit, you’re all getting sued.  Your contract isn’t a defense, and only may offer any protection at all. 

Where it’s an afterthought:  On that last point, it’s not uncommon for a contracting party to contract with another party regarding which party is required to provide certain benefits or insurance.  In many cases these agreements only bind the parties, not anyone else.  The single most common hiccup comes when no one provides the benefit or insurance, and the worker or a third-party file a claim or lawsuit.  Again, in workers’ compensation insurance the Commission will go up the contracting chain to hold the entire chain liable or find insurance, and in a lawsuit, you’re all getting sued.  If you’re at the top of the chain and claim the worker is a contractor, if he’s found not to be, you (or your insurer) are on the hook if no one below you is insured.  That’s not going to help with your premiums going forward, either.

Assuming you’re going to ignore me and assuming you’re going to continue using contractor/subcontractor agreements, those agreements need to be airtight, and they need to have independent enforcement obligations.  If you require another party to confirm FMCSA or DOT compliance, or to provide workers’ compensation insurance, you need to require them to provide PROOF EVERY SINGLE TIME THEY DO A JOB, and you need to INCLUDE AN OUT-CLAUSE THAT LETS YOU CANCEL A LOAD OR JOB IF THEY CAN’T PROVIDE THAT PROOF.  You need to require an indemnification clause, and you need to be sure you’re dealing with a party capable of actually indemnifying you in the event of a loss.  If not, know that failure to do this does put companies out of business, and individuals in bankruptcy.  Call that a public service announcement.

Where it’s a farce: A lot of the time, if not most of the time, contracted or subcontracted workers are employees in fact.  In any legal matter, whether it be a 3rd party lawsuit or a workers’ compensation claim, that’s going to come out.  The test for whether someone is a “contractor” or an “employee” is not identical in every situation, but as a general rule the existence of a “contract” is not enough, nor is payment by 1099 rather than by wages.  Again, not always true, but a good rule of thumb is the “control” test: Essentially whether the worker can be hired and fired by the party using their services, whether that party directs generally what work is done, generally how, and generally when, and whether the party using the services provides tools, equipment, or other instruments of the work.  In nearly every case I’ve ever seen involving a contractor/subcontractor, I could easily argue both sides.  That’s not a good thing.

The worst part, beyond the scope of this article, is that employee/contractor status can be both “sword” and “shield.”  In some contexts calling a “contractor” an “employee” can bar an expensive lawsuit and force the worker into a workers’ compensation claim instead – sometimes the defendant argues opposite their own contract.  This muddies the water on the question even more.

If you are a thrill-seeker and insist on living dangerously, at least contact Setliff Law to review your contracts or subcontracting agreements, or to write them for you.  If you were a thrill-seeker and got burned, consider letting us try to minimize the bleeding.

If you have questions about this article, please contact Dov Szego (dszego@setlifflaw.com) at (804) 377-1263 or Steve Setliff (ssetliff@setlifflaw.com) at (804) 377-1261.