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Workers’ Compensation Rule Change for Owners/Officers in the Construction Industry

Effective January 1, 2021 the auditing procedures for owners/officers that are providing direct labor on a commercial construction project will be changing.   For the past 10 years, these owners/officers could rely on their exemption with the TN Secretary of State to exclude paying workers’ compensation premium on themselves, however, that will change effective January 1, 2021.  I anticipate that the workers’ compensation premiums for these owners/officers will be increasing as a result.  Here is some information provided by TN Department of Commerce & Insurance with the background and additional details about these changes:

It has come to the Department’s attention that some persons providing “direct labor” on commercial construction projects may not be covered properly for purposes of workers’ compensation coverage and, therefore, premiums are not being charged for the direct laborers’ exposure on commercial construction projects.

In order to clear up this issue, the National Council on Compensation Insurance will be making a filing effective January 1, 2021 to amend Rule 2.E.1.b and 2.E.3. in the Basic Manual to provide the appropriate statutory references for premium computation purposes.

Tenn. Code Ann. § 50-6-902(a-d) requires all construction services providers to carry workers’ compensation insurance on themselves and their employees for services on commercial construction projects. 

Construction service providers do not have to carry workers’ compensation insurance on themselves for services on commercial construction projects if any of the following apply:

  1. The provider is covered under a policy of workers’ compensation insurance maintained by the person or entity for whom the provider is providing services.  Tenn. Code Ann. § 50-6-902(b)(3).
  2. The provider is providing services directly for the owner of property and is not acting as a general or intermediate contractor and is not subcontracting any of the work to be performed on behalf of the owner. Tenn. Code Ann.  § 50-6-902(b)(4).
  3. The provider’s employment is casual pursuant to Tenn. Code Ann. § 50-6-106, which means one who is not employed in the usual course of trade, business, profession or occupation of the employer.  Tenn. Code Ann. § 50-6-902(b)(6)

Tenn. Code Ann. § 50-6-903 also permits construction service providers to apply for up to three (3) exemptions for construction services providers performing direct labor on a commercial construction.

“Direct labor” is defined as the performance of any activity that would be assigned to the contracting group as those classifications are designated by the rate service organization designated by the commissioner of commerce and insurance. Tenn. Code Ann. § 50-6-901(7). Examples of activities that would fall under this definition can be found here.

“Direct labor”, however, does not include classification code 5604, which includes construction executives, supervisors, or foremen not performing actual construction work, or classification code 5606, which includes project managers, construction executives, construction managers and construction superintendents. Tenn. Code Ann. § 50-6-901(7).

No more than three (3) construction services providers performing direct labor on a commercial construction project may be exempt. Tenn. Code Ann. § 50-6-914(b)(2)(A). 

Additionally, the three (3) construction services providers chosen for an exemption shall be selected by the general contractor. A general contractor, who allows a construction services provider to provide services on a commercial construction project while such provider is utilizing an exemption pursuant to this part, shall notify each such construction services provider in writing that the provider has been chosen by the general contractor as one of the three (3) construction services providers performing direct labor who may be exempt. Records must be maintained pursuant to this part and made available for inspection upon request to your company, the Bureau, and the department of commerce and insurance. Tenn. Code Ann. § 50-6-914(b)(2)(C). 

The Department encourages all carriers to communicate in writing to your contracting policyholders of this change in advance of the effective date of the filing. A working group made up of industry representatives has developed a sample policyholder notice that we have placed on our website should further guidance be needed.

So if you or your company’s owner/officers perform direct labor on commercial construction projects and you have any questions about these changes or looking for advice to prepare for these changes please feel free to contact me.

Chuck Thompson, Construction Risk and Insurance Specialist (CRIS) – CEO of Thompson & Smith, LLC.  An independent insurance agency and risk management firm specializing in the insurance and bonding needs of contractors.  Contact:

Email:  cthompson@thompsonandsmith.com.

Phone: 731-664-4784

Website: https://thompsonandsmith.com