Given the nature and seasonality of the paint business, it’s a given that from time to time you’ll need to bring on other crews to help complete big jobs. Whether it’s a team of two or 20, extra hands are great for raising productivity. However, without the right contract and proper insurance in place, they also have the potential to raise your liability.
Assuming you know who you want to hire, the most important steps are drawing up a contract and making sure your sub is adequately insured, say attorneys who specialize in construction litigation and insurance coverage analysis and litigation. “Often, the initial contract begins with an American Institute of Architects (AIA) Standard Form of Agreement,” said Peter Balouskas, an attorney with Burke, Scolamiero, Mortati & Hurd, LLP in Albany, NY.
A contractor/subcontractor agreement (available through AIA.org) is typically revised by the contractor’s attorney before it goes to the subcontractor’s attorney for review and further negotiation, he said. If an AIA agreement isn’t used, the hiring contractor’s attorney most often drafts the contract. “The basic contract terms can often be used for subsequent jobs; however, it should always be revised to comply with the scope of work specific to the job and any other job specifications or requirements,” Balouskas said.
“A standard contract should explain that the sub is an independent contractor and should specify what control the hiring contractor has and does not have,” said Andy Rowlett, an attorney with Howell & Fisher PLLC, in Nashville, TN. Rowlett explained that the general contractor is still protected from liability if he or she stops work or inspects the progress of the work, receives reports from the sub and makes recommendations, “that don’t have to be followed by the sub. If you want to avoid liability for a sub’s work, make sure you allow the sub to use his own methods and equipment to complete the job.” Once a hiring contractor specifies how a job should be done, Rowlett said, exposure to liability may be an issue.
To guard against such exposure, said Kevin Burke, attorney and managing partner for Burke, Scolamiero, Mortati & Hurd, LLP, the contract also must have indemnification language within it that essentially says to the hiring contractor, “I defend, hold harmless and indemnify the hiring contractor to the fullest extent permitted by law for any and all losses arising out of or resulting from the performance of the work under the subcontract.” Burke explained that this is called ‘contractual risk transfer’ and is critical for a general contractor’s protection from being named in a lawsuit connected to the sub’s performance. Legally, Balouskas said, both the contractor and subcontractor may limit or accept risk transfer between themselves in a contract. But typically, as a matter of law, said Balouskas, to protect the contractor, the contract obligates the subcontractor to accept risk transfer from the contractor.
He adds that the contract should state that the sub’s commercial general liability insurance will name the hiring contractor as an ‘additional insured’ on the sub’s policy.
FOR A HIRING CONTRACTOR’S PROTECTION, CONTROL MUST BE RELINQUISHED
Contractual risk transfer goes hand in hand with what is informally known as the Internal Revenue Service’s ‘retained control rule.’ The IRS asks a number of questions on its Form SS-8 to determine if a worker is truly an independent contractor or an actual employee of the hiring contractor in the eyes of the IRS. “The IRS says there are limits to how the scope of work is expressed in a contract,” Burke said. “The hiring contractor cannot dictate the type of equipment, supplies, or the methods used (crew members hired, hours worked, etc.) to complete the job, for example.”
When in doubt, Burke suggested, don’t over-specify how a sub’s work should be completed; limit yourself to describing the scope of work in a contract. “The IRS says every employer has to be aware of the importance of not characterizing workers as independent contractors when they’re functioning more like employees,” Rowlett said.
“As much as possible,” he advised, “avoid micromanaging a subcontractor, so he cannot be considered an employee under any circumstances.” For a hiring contractor’s protection, Rowlett added, specifying in the contract that the subcontractor has control over how the job is completed should be accompanied by the hiring contractor giving up actual exercise of control.
INSURANCE IS THE RESPONSIBILITY OF THE SUB
Control issues and potential liability are separate from insurance, but the insurance a subcontractor carries is just as important as abiding by IRS expectations for a hiring contractor/independent contractor relationship, Rowlett said. “Make sure your sub has appropriate and adequate insurance,” he said. It is the responsibility of all subcontractors to carry insurance, Balouskas added.
How will you know if a sub’s commercial general liability insurance is appropriate and adequate? First, you, as the hiring contractor, must be named in the policy as an ‘additional insured,’ Rowlett explained. Here’s why that’s vital: “If a painting subcontractor puts a scaffold on a job site and the scaffold collapses, for example, someone who is injured as a result could sue the hiring contractor,” Burke said. Adequate insurance will protect the hiring contractor.
Secondly, adequate insurance coverage will include workers’ compensation insurance for the sub and all of the sub’s employees, Balouskas said.
“The availability of workers’ compensation to the subcontractor’s employees may help prevent additional litigation against the hiring contractor,” he said. “In the absence of workers’ compensation insurance, the subcontractor is subject to direct suit by an employee and increases the likelihood that the contractor and subcontractor will be dragged into a lawsuit by a subcontractor’s employee who sustained a loss.”
Sometimes, a subcontractor who is a sole proprietor won’t be eligible for workers’ compensation insurance, said Daryl Johnson, CPCU, president of Brown-McNerney-Johnson Insurance Agency in West Des Moines, IA. That’s why, Balouskas said, “the [hiring] contractor must make sure that they are named as an additional insured on the subcontractor’s insurance, and that the subcontractor has agreed in the contract to hold harmless, defend and indemnify the contractor for any work relating to the subcontract work.
Be aware that the smaller a subcontractor’s business is, Rowlett said, “the likelier it will be that the sub won’t carry additional insurance to protect a hiring contractor.”
WHAT AN INSURANCE POLICY SHOULD INCLUDE
“The limits of the insurance for an additional insured typically are equal to the painter we insure,” explained Johnson. “And there’s not a lot of difference in premium between a $250,000 policy and a $1 million policy,” Johnson said. In addition, he said, there’s only a small charge—usually $35 to $50 per addition—to name a hiring contractor as an additional insured. If a subcontractor requires, say, 10 or more different additional insureds to be named in a policy, Johnson’s agency will charge a blanket fee of about $200.
DOCUMENTATION TO REQUEST WHEN HIRING A SUB
In addition to a signed contract, a hiring contractor should require a certificate of insurance, Rowlett and Burke said, when you hire a subcontractor.
Not only should the contractor obtain a certificate of insurance from the subcontractor, but where practical, the hiring contractor should obtain a copy of the subcontractor’s actual insurance policies (commercial general liability, and when applicable, workers’ compensation), verifying that the hiring contractor is named as an additional insured on the general liability policy, said Balouskas. “If the certificate of insurance contains an error, it is not controlling,” he said. In all probability, “the general liability policy will also identify how and when the insurance company must be put on notice for any losses on the job.”