Q&A: Beckye Sprouse on contractor classification and worker's comp changes

Effective July 1, Tennessee will enforce a recently passed state law (SB233) that penalizes construction services providers that misclassify employees to avoid proper classification of workers' compensation insurance premium calculations. Specifically, the new law will fine a construction services provider up to the greater of $1,000 or 1.5 times its average yearly workers' compensation premium for misstatements and inaccuracies involving payroll, employees or duties.

With the law in place, companies may need to classify some people they previously listed as contractors as employees, which could lead to additional costs due to the state's increased opportunity to crack down on worker’s comp coverage. Post Managing Editor William Williams recently talked to Beckye Sprouse, director of risk management at The Crichton Group, which bills itself as Middle Tennessee’s largest independent insurance provider. Sprouse, who is responsible for large commercial accounts and key accounts for the agency, is a certified risk manager who has worked within the insurance industry since 1968.

Do industry professionals understand the ramifications of the change and why it is being made?

Senate Bill 833 is designed to put teeth into an existing law by imposing monetary consequences for not following the already existing rules. Many construction businesses are already classifying their employees correctly as employees rather than independent contractors and allocating their payroll to the correct construction classification. However, the contractors that abuse the rules — or make a mistake — by misclassifying an employee as an independent contractor maintain an unfair competitive advantage because their insurance costs are lower and their payroll taxes are lower than [those of] their counterparts that follow the rules. 

How will enforcement of the law play out in the construction industry — both in terms of cost and policy?

Enforcement with consequences for non-compliance will increase costs for the companies that misclassify. It should have no effect on the construction companies that are already properly classifying their employees, paying the taxes and paying the correct work comp premium. It will shift the cost of workers compensation insurance and coverage for injured workers to the party where it should be. According to the Tennessee Employee Misclassification Advisory Task Force, based on estimates using 2006 data, Tennessee lost between $2.1 million and $3.7 million in uncollected workers’ compensation premium taxes. And its estimated losses from unpaid unemployment insurance premiums range from $8.4 million to $14.9 million.

What are you hearing from industry officials regarding the law? Do they feel it will help the construction sector? Hurt it?

There is nothing clearly announcing the change on the AGC and ABC websites. We have only heard about it from one insurance carrier. So, there needs to be some additional publicity so that those not currently in compliance can take steps to correct their situation.

Do you anticipate lots of fines?

It is difficult to predict what will happen when the law is enforced, but we know that violations will be subject to a penalty up to the greater of $1,000 or one and one half time the average yearly workers’ compensation premium for such construction services provider. So the potential is there.