Principal contractors liable to pay for workers compensation premiums of sub-contractors

From 1 July 2003, a principal contractor may have to pay the workers compensation insurance premiums and penalties of its sub-contractors unless it verifies compliance with premium obligations.

When does it apply

A principal contractor can be liable for subcontractors’ workers compensation premiums if:

• There is a contract for work between a principal contractor and a subcontractor. (There is no requirement for any contract to be in writing. In addition we consider the legislation applies to a principal who has a contractor carrying out work for it as a principal contractor.)
• The subcontractor employs or is deemed to employ workers who carry out the work.
• The work done is in connection with and is "an aspect of the work" of the "business undertaking" of the principal contractor. (This appears to mean there must be a connection between the work done and the principal contractor’s business.)
• The subcontractor is uninsured for workers compensation purposes or has an outstanding premium during the period of any contract.
• The section does not apply where a subcontractor is in receivership, being wound up, or is bankrupt and payments under the subcontract are being made to the receiver, liquidator or trustee in bankruptcy.
• The section does not apply where a principal contractor has contracted for work to be carried out at its principal place of residence.
• The section does not apply to farmers who enter into contracts for farm work on their farms.

What might have to be paid

The principal contractor may be liable to pay the subcontractor’s premium including any penalty. Where the subcontractor is uninsured the amount payable will be double the premium. Where there is an unpaid or partially unpaid premium, the principal contractor may be liable for both the unpaid amount and any fees for late payment.

"These changes apply to all contracts where work is being carried out after 1 July 2003".

The principal contractor has a right to attempt to recover any monies paid under this new legislation as a debt from the subcontractor.

How to prevent liability

A principal contractor will be liable for a subcontractor’s unpaid premium unless a written statement from the subcontractor is obtained that states for all periods of the contract:

• All the subcontractor’s workers compensation premiums are paid (a copy of any certificate of currency is to be obtained and attached).
• Whether the subcontractor is itself a principal contractor.
• If the subcontractor is itself a principal contractor, it must state whether it has been given a statement by its own subcontractors.

Statements must be kept by the principal for 7 years.

Workcover have prepared a proforma statement along with WorkCover’s guide to the new changes.

The statement has no effect and the principal contractor cannot escape liability if the principal had, at the time it was given the statement, reason to believe it was false.

Any subcontractor who knowingly gives a false statement is guilty of an offence.

What to do in the face of refusal

The legislation says that if a subcontractor refuses to provide a statement the principal contractor may withhold any payment due to the subcontractor without penalty up until the statement is provided. This clearly creates a number of issues for principal subcontractors including the effect such action may have on the ability of a subcontractor to avoid the contract or refuse to carry out work. A review of all contracts should be undertaken in light of these changes.

What you need to do

• On its face the definition of "principal contractor" is broad. We recommend that any organisation which engages contractors should obtain a statement from those contractors. We recommend this be done even if the contractor may not be a "subcontractor" in the ordinary sense.
• These changes apply to all contracts where work is being carried out after 1 July 2003. All subcontractors whether they say they employ workers or not, should now be asked for a statement.
• The changes apply to the period of the contract not just to the periods when work is being undertaken. Contracts should be reviewed to ensure clear commencement and termination dates and that a statement will be prepared to cover all periods during which a contract is in force.
• If a contract is long term, a fresh statement and certificate of currency will be needed on or before the date the subcontractor’s insurance policy expires.
• There is no requirement for any contract to be in writing so the changes not only apply to written contracts but to all arrangements and agreements, whether verbal or in writing and whether formal or informal.
• Contracts should incorporate a right for the principal contractor to terminate the contract if a subcontractor fails to provide a statement.
• Review all contracts in light of these changes.