I know, I’m always the buzzkill in these articles I write, but it’s only because I care. I care about getting you covered and keeping you covered, hassle free.
The first time I dealt with a client of mine who was using day laborers, I didn’t realize that his workers comp insurer would have a problem. I merely thought it was my duty to warn him that day laborers are considered employees, and that whatever he paid out to his day laborers would be included in payroll on his workers comp policy at the time of his final audit.
After the conversation I felt good. Why? Because many employers don’t consider day laborers to be actual employees and would be surprised to find that the workers comp auditor will include the amount paid to the day laborers as payroll and charge the employer for it. Many employers think of day laborers as independent contractors, or maybe just temporary employees that don’t need to be covered on workers comp. But the fact is that they’re not independent contractors; they’re employees. And any employee whether temporary, permanent, casual, or formal, is covered on the employer’s workers comp policy, so any amount paid to them must be accounted for.
So when my client left my office I felt good: I had eliminated an insurance surprise. My client would not get stuck with a surprise invoice on his final audit.
I was struck with an insurance surprise of my own, however, a few weeks later when I got a letter from my client’s insurer stating that if my client doesn’t stop using day laborers, they would cancel the policy midterm. That’s right; midterm. Non a non-renewal, but a midterm cancellation. Talk about harsh. I approached other companies. “Would you insure my client, an experienced contractor with no claims on his record, that happens to sometimes use day laborers?,” I asked. The answer was a unanimous, “No.”
After a few intense conversations with my client, he agreed to stop using day laborers and signed a form saying so. His workers comp insurer agreed to continue insuring him.
The recurring question my client had through the ordeal was “Why.” Why is it a problem to use day laborers? That was my question too. Why does it matter? I mean, if the payroll is reported, the insurer is collecting its premium. They’re getting their money, and all should be good. Who cares if you use day laborers?
Fortunately all the insurance companies were more than willing to explain why they don’t want to insure employers that use day laborers…. hahahahahahha!!! That was a joke. The truth is that insurance companies rarely provide explanations for their actions. They typically just write threatening letters and when questioned, repeat what they wrote on the letter. It was no different this time.
So in the short term, we have no choice but to speculate. Question: why would an insurance company refuse to insure an employer that uses day laborers? The best place to start is with risk. Day laborers must be high risk. Risk equates to money. Therefore, day laborers must cost insurers more money than other types of employees, which means day laborers must incur greater claims expenses than other employees. Because if day laborers were low risk and didn’t result in many claims, insurers would happily collect the premium. Sound reasonable so far? But why would day laborers cost more?
Again I can only speculate, but my guess is this: increased claims administrative costs and/or potential for fraud. Day laborers work for different employers on a daily basis. Let’s say a day laborer has an aggravated wrist. When did the injury occur? Last Tuesday…. or was it Wednesday? Or could it be both Tuesday and Wednesday? And if he was working for Employer A on Tuesday and Employer B on Wednesday, might he be able to file a claim with both Employer A and B’s insurer? And might there be considerable time spent between the two insurers figuring out who is the one that’s supposed to pay? And if the day laborer is lucky (and has a good lawyer), might he be able to collect payment from both insurers? It certainly doesn’t hurt to try. My guess is that a few too many insurance companies have been involved in a few too many squabbles over day laborers and paid a few too many dollars over dubious claims that they’ve since decided they don’t want to do it anymore.
But that’s just my theory. The insurance companies will never tell me, not unless I happen to corner one of their representatives at a conference… or start working at a Top 10 national brokerage (in which case, I think they answer every question you ask AND give you more money). Regardless, the moral of the story is this: don’t use day laborers if you want to be insured by a competitively priced workers comp insurer. If you must use day laborers, there’s always State Fund!
Gillespie Insurance Services helps people and businesses in California, Arizona and Nevada.