Misclassifying Employees as Independent Contractors
California has strict rules about worker classification. If a worker is misclassified as a 1099 contractor when they should be a W-2 employee, you're liable for their workers comp coverage — plus back taxes and penalties. The ABC test (AB 5) applies to most industries.
Fix: When in doubt, classify workers as employees. Consult with an insurance broker to understand your exposure.
Not Covering Subcontractors Without Their Own Policy
If a subcontractor does not have their own workers compensation policy, responsibility may depend on worker status, contracts, entity structure, and current requirements.
Fix: Always collect COIs from subcontractors before they start work. Verify coverage at cslb.ca.gov.
Letting the Policy Lapse Between Projects
Some contractors review or change their Workers Compensation policy between projects. A lapse can create coverage, contract, and licensing concerns, depending on the business and current requirements.
Fix: Track policy status and renewal dates, and discuss changes with a licensed broker before allowing coverage to lapse.
Underreporting Payroll
Workers comp premiums are based on payroll. Underreporting payroll to reduce premiums is insurance fraud. Audits are common, and the penalties include policy cancellation, back premiums, and potential criminal charges.
Fix: Report accurate payroll. If payroll fluctuates, ask a licensed broker about available payroll reporting and audit options.
Not Understanding the Sole Proprietor Exemption
Sole proprietors with no employees can file an exemption from workers comp requirements. However, if you hire even one employee — even temporarily — the exemption is void and you need a policy immediately.
Fix: Review exemption status whenever staffing or ownership changes. An uninsured employee can create coverage, penalty, contract, and licensing exposure.
Choosing Price Over Coverage Quality
The most cost-effective workers comp policy often has the most exclusions, the slowest claims processing, and the worst return-to-work programs. A denied claim can cost you far more than the premium savings.
Fix: Work with a broker who specializes in contractor insurance and can compare multiple A-rated carriers for the best value.
Not Knowing Your Experience Modification Rate (EMR)
Your EMR (or X-Mod) may affect Workers Compensation pricing and contract review. Its effect depends on the rating method, carrier, business facts, and project requirements.
Fix: Ask your broker for your current EMR and a plan to reduce it through safety programs and claims management.
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