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Considerations for Using Subcontracted Labor

Contracted and Subcontracted Labor

Hiring a contractor is a critical decision, one that can make or break the budget and timetable for any operation. If the business requires subcontractors to complete an application, this can be an excellent way to get information, and if references are provided, they should take advantage of them and make inquiries on the subcontractor’s past work. General contractors use written contracts that contain appropriate Indemnity Agreements to help protect themselves against these potential problems. The use of written contracts is a major component to help control exposures that can arise from utilizing subcontractors, particularly when the expectations are clearly defined in the agreement and go beyond the simple transfer of risk. The contract should specify consequences should the contract not be followed as dictated.  For example, in some jurisdictions, language can be inserted that will impose monetary penalties on sub-contractors that fail to follow recognized standards.  These monies can then be charged back to the project to assist with cleanup or other activities that need to be performed to correct poor work.  The contract should also require that all accidents be reported, in writing, to the general contractor as soon as possible.

Florida law provides that a subcontractor or material supplier who for the improvement of private real property located within Florida has a lien on that property for the value of the materials, labor, or work provided.  Liability insurance protects the employer and subcontractors in the event of a lawsuit. However, unless the contract with the client mandates liability insurance, sub-contractors aren’t legally required to carry liability insurance. Before beginning a new project, it is important to investigate the status of each subcontractor’s liability insurance and add language to the contract that protects you in the event of a lawsuit. A project that runs into problems, an injured customer or a minor legal violation can quickly lead to costly lawsuits. Liability insurance provides an attorney who can negotiate a settlement or defend the business at trial, and if the suit is lost, then liability insurance covers all or a portion of the costs. Since the primary contractor can still be sued for a subcontractor’s errors; if the sub-contractor doesn’t have liability insurance, the employer is vulnerable. In general, a sub-contractor isn’t covered by the company’s liability insurance, and most insurance policies specifically exclude damages caused by other parties: so the insurer won’t step in to help. A construction defect suit may come about because of poor workmanship or failure to install per code.  Since the owner has no direct relationship with the sub-contractor, they may turn to the general contractor for a remedy. It is always recommended that general contractors consult with an attorney as well to assess potential liability exposures based on the particular work involved. The importance of screening subcontractors and the use of good contracts to help prevent and provide defense for general contractors in the event of a claim.  Several main types of insurance are particularly important to consider when using sub-contractors: general liability; professional liability insurance; and worker’s compensation.

General Liability Insurance covers some accidents, including property damage or physical injuries the contractor might cause to a business and its employees. Some General Liability Insurance policies include Product Liability coverage, which covers lawsuits if the contractor makes a physical product that causes bodily harm. In policies offered by some insurance companies, damage caused by an independent contractor (while representing a company on the job) is excluded from general liability coverage. This means if a sub-contractor accidentally drops a client’s server, the client could go after the subcontractor for damages. If that fails, the business is the one who will be held financially accountable. This is why many small companies won’t work with subcontractors unless they carry their own general liability insurance. To be sure a sub-contractor is insured require it in their contract and ask to see proof of coverage. Another good reason subcontractors should be insured is that if the employer’s general liability carrier determines that they are using an uninsured subcontractor, the carrier often has the right to consider that subcontractor to be part of the company and to increase your premium accordingly. Even if there’s not a claim, the business can be left paying for the general liability coverage that the subcontractor should have had in the first place.

Professional Liability Insurance covers mistakes and oversights subcontractors make when carrying out professional services. Sub-contractors are expected to carry their own professional liability insurance, in case a mistake they make on the job costs the employer money. The organization wants to be sure a sub-contractor can compensate them in the event of a financial loss, so it is important to be covered by insurance. All subcontractors should carry their own insurance policies as well, and this should be included in the contract along with proof of coverage. A client may bring suit months or even years after the work has been completed, so it is important to keep professional liability coverage active as long as a company or subcontractor is in business. Having a poorly performing subcontractor can upset the entire project, resulting in increased costs, increased risk of accidents, poor finished product and not meeting construction schedules.  All of these outcomes impact the reputation of all contractors on the project, most notably the general contractor.

Finally, Workers’ Compensation may need to be considered. As an example, a business engaged in the construction industry that employs one or more part or full-time employees must have Florida workers’ compensation insurance. An employer in the construction industry must require that a subcontractor has Florida workers’ compensation insurance. Usually, small businesses don’t need to offer Worker’s Compensation coverage for independent contractors and temporary workers: however, there isn’t a strict definition of what constitutes an independent contractor. In some situations a contractor or even a temporary employee may be ruled to be an employee and this means they should be offered Workers’ Compensation and other benefits. Workers’ compensation insurance covers employees’ medical and disability costs related to work-related illnesses and injuries. Regardless of state law, it’s always a good idea to require that subcontractors carry workers’ compensation insurance. This is because if a subcontractor isn’t covered and an injury occurs, the employer could be held financially responsible. As with general liability insurance, independent contractors should carry workers’ comp insurance, which companies, such as Insurance Land offer.

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