San Francisco Apartment Association
SFAA Magazine Archives

November 2004

Feature

Workers’ Compensation Insurance

by David Gordon

Apartment building owners often have exposure to potential workers’ compensation claims that they do not realize. In general, you must have workers’ compensation insurance for any employee who works directly for you—not as an independent contractor—in the maintenance or operation of your properties or businesses. The definition of employee includes those who receive remuneration other than money, such as a reduction in rent or a vehicle in return for services, workmen who are not licensed and, of course, your regularly paid personnel who carry out the day-to-day functions of your business. Whether their remuneration consists of a one-time $20 bill or a discount in the rent for an apartment in your building, they are considered employees.

The workers’ compensation rate typically runs about 15 to 20 percent of the payroll for the total remuneration for any labor provided. This rate falls under the building operations payroll class code and applies to on-site managers and those who do light maintenance such as replacing light bulbs, sweeping common areas and/or painting and cleaning units when tenancies turn over.

Under the contracting payroll class code, the workers’ compensation rate can go up to 40 percent for those employees involved in construction and remodeling work that would require a contractor’s license, such as work that exceeds $600. This includes remodels, additions and major upgrades, such as a new bathroom or kitchen.

Employees who only perform clerical work off-site can be classified at a much lower clerical rate at approximately 2 percent of payroll. As an owner, if you want to determine if someone is an independent contractor rather than an employee, three considerations are worth weighing. First, an independent contractor must have a state license to perform the type of work that requires licensing, such as plumbers, electricians, masons or roofers. You should keep their contractor’s license number on your checkbook stub for easy proof he or she is licensed. You can make sure the license is valid by calling the California Contractor State License Board at 800-321-2752 or online at www.cslb.com.

Second, an independent contractor must have liability and/or workers’ compensation insurance in force for his business. Always ask for a certificate of insurance for both general liability and workers’ compensation insurance and keep this with your checkbook for future audits. This should be an original certificate made out by the insurance company to you. If you do not have this on file, you could be charged a premium for your contractor’s charges and for those people your contractor hires, as if they were all your employees. In fact, State Fund, the largest writer of workers’ compensation insurance in the state, and several other carriers have taken the position that they will definitely charge for licensed contractors without proof of workers’ compensation insurance, even if they do not have any employees and are not required to have workers’ compensation insurance. This can add 15 to 45 percent for the total cost of their invoices.

Third, in general, an independent contractor bids on a job and is not supervised in the performance of his or her duties. This contractor may work for many people rather than just one or two. The contractor provides his or her own tools and supplies, has a business license and advertises in the yellow pages (if licensed, the license number must appear in the ad).

If the independent contractor does not meet all of the three criteria above, the contractor will most likely be treated as an employee in case of an injury and, therefore, a charge will be made for all payrolls accordingly. You would be well advised to have a workers’ compensation insurance policy in force, as required by law.

As mentioned earlier, living accommodations provided free or at a reduced rent are considered compensation, the same as cash. You need to report the value as fair market value or, if discounted, the amount of discount below fair market value.

You only need to have one workers’ compensation insurance policy to cover all locations and businesses you own in the same name. For example, you may own a shoe repair shop and an apartment building. You need only one policy covering both if they are owned in the same name.

In summary, to save money on your workers’ compensation insurance:

  • keep copies of the insurance certificates and license numbers with your payroll records for use in an audit, if you use independent contractors;
  • segregate your payroll for off-site clerical people, onsite managers and those involved in construction or remodeling by using payroll class codes;
  • carry a minimum workers’ compensation insurance policy, when in doubt, even if you do not feel that you have any employees—just in case they claim they are an employee after an injury—thus avoiding penalties and uncovered losses (unlike liability insurance which is optional, workers’ compensation is required if you have employees);
  • remember that the method you use to withhold taxes—W2 versus 1099 forms—makes absolutely no difference in the determination of employee versus independent contractor status, for taxes are federal laws and workers’ compensation insurance is regulated by the state (if it walks like a duck and quacks like a duck…); and
  • check out discounts, with the help of your broker, available through your membership in a group such as the San Francisco Apartment Association or other professional organizations.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Consult the advice of an insurance agent for any
specific problem. David Gordon, CLU, has owned and operated a commercial insurance brokerage specializing in insurance for real estate owners in the San Francisco Bay Area since 1981. He is a member of the California Apartment Association, SFAA and other similar organizations. He can be reached at 877-877-7755 or at dave@gordon-insurance.com. Copyright © 2004 by the San Francisco Apartment Magazine. All rights reserved.