By John Ahlers Ahlers & Cressman PLLC
The Washington Department of Labor and Industries (L&I) imposes assessments against general contractors for unpaid industrial insurance premiums owed by their subcontractors under RCW 51.12.070. This concept is known as “prime contractor liability.” However the statute provides an exception to prime contractor liability if the prime contractor can show compliance with the following five criteria:
- The subcontractor is engaged in a business for which it is registered or licensed.
- The subcontractor has a principal place of business which is eligible for a business deduction under IRS rules (other than the location furnished by the contractor for which the businesses contracted to furnish services).
- The subcontractor maintains a separate set of books and records that reflect all items of income and expenses of the business.
- The subcontractor is contracted to perform work for which it is registered or licensed.
- The subcontractor has an industrial insurance account in good standing and the contractor has verified with L&I that the account is in good standing and has not received written notice from L&I that the subcontractors account has changed. Acceptable documentation of verification includes a department document which includes an issued date or a date of printout of information from the departments internet website showing a subcontractors good standing.
When work is performed by a subcontractor and that subcontractor fails to tender its L&I premiums as indicated above RCW 51.12.070 imposes primary and direct liability on the prime contractor unless the prime contractor falls within the statutory five-part exception. Recent L&I decisions have confirmed that contractors will not be liable if they diligently check the L&I website for subcontractor compliance with industrial insurance payments.
For example In Re: Universal Drywall Inc. et al Dkt. No. 08 21769 (September 1 2010) was a consolidated appeal in which seven subcontractors disputed L&I’s assessment of prime contractor liability for premiums owed by their second-tier subcontractors. The subcontractors argued that they met the requirements of the exception or in the alternative that L&I should not be allowed to impose prime contractor liability because L&I had indicated on their website that the second-tier subcontractors at issue were all current in the premiums that they owed to L&I. The Board found that the subcontractors did not meet all five requirements for the exception but the Board found that L&I could not impose prime contractor liability on four of the subcontractors because of the L&I website indicated that those second-tier subcontractors were current on their premiums owed.
The subcontractors submitted evidence that they had visited L&I’s website for the purpose of confirming the premium status of the second-tier subcontractors prior to issuing payment. And because the website indicated that the second-tier contractor’s premiums were current the subcontractor made payment to the second-tier subcontractor. The subcontractor’s evidence included testimony and copies of screen with dates that were printed from the L&I website indicating the second-tier subcontractor’s premium status was current. The Board citing previous L&I cases held that L&I could not assess interest and penalties to the subcontractors because payment was made as a result of the incorrect information supplied on the L&I website.
Thus contractors can avoid liability for unpaid subcontractor premiums if they: (1) check a subcontractor’s premium status on the L&I website prior to payment; (2) confirm premiums are current; and (3) reasonably rely on L&I’s statements to its detriment. Contractors who print out the website information together with the check stubs of the payments made to the subcontractors will likely enjoy success in defending against L&I workers compensation assessments.
John Ahlers Ahlers & Cressman PLLC is a member and former chair of AGC’s Legal Affairs Committee.