After much debate, the Tennessee General Assembly recently passed important changes to Tennessee’s Workers’ Compensation Act (“the Act”), which could have a significant impact on Tennessee’s construction industry by requiring almost all construction services providers to carry workers’ compensation insurance, unless a given provider qualifies for an exemption and takes the proper steps to obtain an exemption. Lieutenant Governor Ron Ramsey signed the amendment, and upon the anticipated signature of Governor Bredesen, the changes will be effective as of March 1, 2011. The New Legislation

Under prior law, certain persons and small companies involved in construction projects were not required to maintain workers’ compensation insurance. For example, sole proprietors and partnerships were not required to obtain workers’ compensation insurance on themselves. This legislation recently passed by the General Assembly changes that standard by requiring all construction services providers to be covered by workers’ compensation insurance. For example, nearly all corporate construction services providers must carry worker’s compensation insurance for their employees, regardless of the number of individuals they employ. Likewise, sole proprietors, partners, officers of corporations and members of limited liability companies would now be required to carry workers’ compensation on themselves unless the entity or person qualifies for an exemption, applies for an exemption and obtains an exemption. However, due to the limited circumstances under which an exemption can be obtained, much of the construction industry will now be forced to add workers’ compensation insurance premiums to its lists of burgeoning costs in the current depressed market.

Exemptions

In a few limited circumstances, a provider would be automatically exempt from this requirement, such as a provider who is already covered under a workers’ compensation policy maintained by the person or entity for whom the provider is providing services (i.e. a subcontractor already covered by the general contractor’s policy) and a sole proprietor doing work directly for the owner of the property.

In addition, the legislation does permit the following construction services providers to apply for and obtain an exemption if they so desire:

  • An officer of a corporation; provided that no more than three officers of a corporation shall be eligible for an exemption;
  • A member of a limited liability company or partner of a limited partnership, provided that such member/partner owns at least thirty percent (30%) of the company;
  • A sole proprietor; or
  • Up to three (3) owners of certain family owned business entities. Any “affiliate” of a construction services provider that has already obtained an exemption is prohibited from obtaining an exemption for itself, which further limits the number of exemptions available. Thus, a construction services provider is eligible for only one exemption, regardless of the number of business entities with which the provider may be associated. In addition, no more than three persons on any one commercial job are eligible to claim an exemption, making compliance with this legislation tedious and inviting difficult accounting issues.

To qualify for an exemption, an applicant must have a valid contractor’s license and register with the Tennessee Secretary of State by supplying certain identifying information and by showing that all taxes have been paid. The fees associated with the exemption include a $100 registration card fee (unless a contractor’s license is already obtained and issued) and a $100 exemption card fee, as well as other possible application fees. The exemption lasts for two years and is renewable, but may be revoked by the State in certain circumstances. A construction services provider who obtains an exemption can revoke that exemption at any time, but in doing so is required to follow certain notice requirements, including giving notice to any person or entity for whom the provider is currently providing services, and attesting as to whether the provider has any employment related injuries at the time of revocation.

An injured person who is properly exempted and was not covered under a workers’ compensation insurance policy will not be confined to recovery under the Act, but instead will be permitted to sue the “employer” at common law. However, the exempted construction services provider foregoes the right to sue to establish or reestablish workers’ compensation coverage for any injuries that occurred while the provider was exempted. Penalties for Non-Compliance

The existing penalties will be increased for construction employers that fail to maintain workers’ compensation insurance or fail to comply with an order to obtain workers’ compensation insurance. A portion of the fees and penalties generated by the legislation are to be deposited into a fund that pays for the costs of administering exemptions and the investigation of misclassification issues. The legislation includes penalties for employers who deduct any portion of the worker’s compensation premium from an employee’s wages. The legislation also makes it a crime for a construction employer to force an employee to obtain a workers' compensation exemption or to fire an employee who does not obtain a workers’ compensation exemption. A task force will be created to make recommendations to the State regarding misclassification of employees in the construction industry.

Assuming Governor Bredesen signs the legislation, it will go into effect March 1, 2011. The penalty sections, however, would not go into effect until July 1, 2011.