Every spring, VLCT's Underwriting staff conducts the annual Workers' Compensation Payroll Audit as the first step in reconciling each member's estimated payroll (on which their previous year's contribution was based) with their actual payroll from the recently completed year. This reconciliation helps PACIF to both (1) operate the fund in a way that's fair for all members and (2) use a more accurate estimate in determining the member's contribution for the following year.
The Vermont Department of Labor seeks to ensure that all employees have workers' compensation coverage. Therefore, in addition to accounting for all municipal employees correctly, PACIF auditors also need to see proof that individuals not on the payroll who performed work for the municipality are truly not municipal employees and are instead independent contractors or sole proprietors, responsible for obtaining (or not obtaining) their own workers' compensation insurance.
To make sure that your annual workers’ compensation payroll audit will go smoothly, we offer this summary of the documentation that PACIF staff need to see when they review your previous year's 1099s for payments to subcontractors. For each contractor or sole proprietor your municipality uses, please assemble and keep on file the packet of documents described below, so they are ready to present at the spring audit. At the bottom of this page you will find links to all of the documents mentioned here.
- “VLCT PACIF Workers’ Compensation Payroll Audit Checklist of Independent Contractor Documentation” should be the top page of every contractor’s packet. The name of the subcontractor or sole proprietor and the date should be filled in at the top of the sheet, and all of the check boxes should be checked to verify that you have included each of the required items in the packet.
- Next should be the Contract for Services between the municipality and the contractor or sole proprietor. We encourage you to use the model contract that PACIF has developed for your municipality to customize and use for service contracts of less than $100,000 annually to help you comply with 21 V.S.A. 601 (14)(F). The file, labeled “Template of Contract for Limited Services,” is a Word file ready to customize, copy passages from, or refer to. Our goal is to help you practice good risk management while not making the contract as restrictive as a typical construction contract. If you choose to customize this contract in any way other than inserting your information in place of the bracketed prompts, please have your municipal attorney check your edits. If you have any contracts for more than $100,000 (for example: hiring a contractor to run your highway department), please use our Model Contract for Highway Maintenance and Repair, posted in Model Contracts for Services.
- The third item in each packet should be the current version of our Non-Employee Work Agreement (NEWA), which includes the statutory requirements listed in 21 V.S.A. 601(14)(F). Please fill it in fully to show that the subcontractor or sole proprietor meets those statutory requirements. Both an authorized representative of your municipality and the subcontractor or sole proprietor must sign it. Please understand that our auditors may not always accept the NEWA as proof that an individual is not a municipal employee, but they will explain to you why a subcontractor does not meet the requirements. For example, the Department of Labor may have given VLCT PACIF specific guidance on why a particular work position does not qualify for a NEWA. But for the most part, we will accept NEWAs as long as they are filled in correctly. The second page of the same Word or PDF file is the Liability Hold Harmless Agreement, which should only be used for sole proprietors that do not have liability coverage. This form should only be needed for limited situations (for example with recreation coaches and referees).
As the fourth item in the packet, please provide the subcontractor or sole proprietor’s Certificate of Insurance (COI) with appropriate coverages and limits. In the resources below you will find an example of a COI with circles showing all the sections that you should verify. The main points to adhere to are:
Refer to our example COI so you know what to look for when you ask subcontractors to prove that they carry their own Liability and Workers’ Compensation insurance.
Always ask to be named as an Additional Insured (circled and shown by an "X" on the example) on all Liability policies.
Always ask the subcontractor or sole proprietor to have their insurance agent send the COI directly to you because it is pretty easy to alter these certificates fraudulently.
Have any sole proprietor that does not have Liability coverage fill in and sign the Liability Hold Harmless Agreement (page 2 of the NEWA file). Although sole proprietors by statute do not have to carry workers’ compensation on themselves, you should make sure that they have liability insurance. There will be limited situations where this will apply.
- Please also include a copy of some kind of marketing material, such as a business card or brochure, that shows proof that the subcontractor or sole proprietor markets his or her services to others.
Be sure to obtain all of the documentation listed above, as one packet, for every subcontractor and sole proprietor who performs work for your municipality. File this information so it is handy when we conduct your Workers’ Compensation payroll audit in the spring. Again, our goal is to help you practice good risk management and also provide clarity on the workers’ compensation payroll audit process.
If you have any questions about this process, feel free to email email@example.com or call 800-649-7915 to speak with an Underwriter.