What Is a Workers’ Compensation Ghost Policy—and What Is It Not?

owners assume it is fake insurance, while others believe it provides full
workers’ compensation protection at a very low price.

Neither assumption is correct.

A workers’ compensation ghost policy is a real insurance policy designed
for a business that has no employees and no payroll to insure.
It is most commonly used by sole proprietors, single-member businesses and
independent contractors who are required to provide a certificate of
workers’ compensation insurance before they can begin a job.

The policy is sometimes called a “ghost policy” because the owner is
generally excluded from coverage and there are no employees on the payroll.
In other words, there may be no individual currently receiving workers’
compensation benefits under the policy.

Why Would Someone Need a Ghost Policy?

Many general contractors, property owners and larger companies require
subcontractors to provide a certificate of workers’ compensation insurance.

They may require this certificate even when the subcontractor:

• Works completely alone
• Has no employees
• Does not want workers’ compensation coverage for themselves
• Is not legally required to carry workers’ compensation insurance based on
  their current operation

The hiring company usually requests the certificate because it wants to
reduce the possibility that an uninsured worker or subcontractor will create
an exposure under its own workers’ compensation policy.

In Georgia, a contractor that subcontracts part of its work may potentially
be responsible for workers’ compensation benefits owed to the employees of
an uninsured subcontractor.

Learn more from the Georgia State Board of Workers’ Compensation.

A ghost policy allows a qualifying independent business owner to provide
evidence that a workers’ compensation policy is in place.

What a Ghost Policy Is

A properly written ghost policy is:

• A genuine workers’ compensation insurance policy
• Issued by an insurance company
• Assigned a policy number and effective dates
• Capable of producing a certificate of insurance
• Subject to the insurance company’s underwriting rules
• Generally subject to a year-end premium audit
• Intended for an eligible business with no employees or payroll

Although “ghost policy” is a commonly used industry nickname, the actual
policy is still a workers’ compensation policy.

What a Ghost Policy Is Not

Understanding what the policy does not do is just as
important.

It Is Not Personal Accident or Health Insurance for the Owner

The business owner is generally excluded from workers’ compensation
benefits. If the owner is injured while working, the ghost policy ordinarily
will not pay the owner’s medical bills or lost income.

An owner who wants protection for their own work-related injuries should
discuss whether they can elect workers’ compensation coverage or purchase
another appropriate type of insurance.

It Is Not Permission to Have Unreported Employees

A ghost policy is based on the representation that the business has no
employees and no covered payroll.

The owner cannot purchase a ghost policy, hire workers and continue
representing that the business has no employees. Hiring workers can change
the company’s coverage requirements, classifications and premium.

It Is Not a Way to Avoid Workers’ Compensation Premiums

A ghost policy should not be used to hide payroll or misclassify employees
as subcontractors.

Workers’ compensation policies are normally audited. If the insurance
company finds employees, labor or uninsured subcontractors that were not
reported, the company may charge additional premium based on the work
performed and the applicable classification.

It Is Not a Blanket Guarantee That Every Injury Will Be Covered

A certificate of insurance only shows that a policy existed on the date the
certificate was issued. It does not change the terms, exclusions or
conditions of the policy, and it does not automatically guarantee payment of
a particular claim.

It Is Not a Substitute for a Subcontractor’s Own Insurance

A contractor should not assume that a subcontractor is adequately insured
simply because the subcontractor says they are an independent contractor.

Georgia’s Office of Insurance and Safety Fire Commissioner recommends
obtaining a certificate of workers’ compensation insurance from
subcontractors and verifying the coverage. Without evidence of coverage, the
hiring contractor’s insurer may include payments made to the subcontractor
in the hiring contractor’s workers’ compensation premium audit.

Read Georgia’s guidance on avoiding audit surprises.

How Are “1099 Employees” Treated?

The phrase “1099 employee” is commonly used, but it is
technically contradictory.

A person is generally either:

1. An employee, whose compensation is normally reported on a
   Form W-2; or
2. An independent contractor, whose qualifying nonemployee
   compensation may be reported on a Form 1099-NEC.

Giving someone a Form 1099 does not automatically make that person an
independent contractor.

The IRS looks at the entire working relationship, especially the business’s
right to direct and control how the worker performs the work. No single
document, agreement or factor automatically determines the worker’s status.

Review the IRS independent contractor guidance.

The U.S. Department of Labor also states that receiving a 1099—or even
agreeing in writing to be called an independent contractor—does not
necessarily establish that the worker is legally an independent contractor.

Review the Department of Labor employment relationship guidance.

The Actual Working Relationship Matters

When determining whether a worker is truly independent, questions may
include:

• Who controls the worker’s schedule?
• Who determines how the work must be performed?
• Does the worker provide their own tools and equipment?
• Can the worker perform services for other companies?
• Can the worker hire assistants?
• Is the worker paid by the job or through a regular paycheck?
• Is the relationship temporary or ongoing?
• Is the work a central part of the hiring company’s regular business?
• Does the worker operate an independent business?
• Does the worker carry their own insurance?

No single answer settles the issue. The complete relationship must be
considered.

For example, calling someone a subcontractor while controlling their
schedule, training them, supplying their tools, supervising their daily work
and preventing them from working for anyone else may create a serious
worker-classification problem.

Do 1099 Contractors Count as Employees for Workers’ Compensation?

A legitimate independent contractor is generally not treated the same as an
employee. However, merely issuing a 1099 does not prevent a workers’
compensation board, insurance company, auditor or court from determining
that the worker was actually an employee.

This creates two major risks.

Claim Risk

If the worker is injured, the worker may argue that they were misclassified
and should receive workers’ compensation benefits as an employee.

Premium-Audit Risk

The insurance company may request payroll records, tax reports, general
ledgers, cash-disbursement records and certificates of insurance.

If the business paid subcontractors who did not carry their own workers’
compensation coverage, some or all of those payments may be included in the
premium calculation. Georgia insurance regulators specifically warn that an
insurer may charge for uninsured subcontractors according to the services
they performed.

This is why a contractor should collect a valid certificate of insurance
before the subcontractor begins work, not after the audit
has started.

What Happens if the Ghost-Policy Holder Hires Someone?

The business owner should contact their insurance agent immediately.

Depending on the circumstances, the policy may need to be updated to include:

• The new employee’s estimated payroll
• The employee’s job duties
• The correct workers’ compensation classification
• The states in which the employee works
• Any subcontracted work
• The owner’s decision to accept or reject coverage when permitted

Waiting until the annual audit can result in a large additional premium
bill. More importantly, waiting may create uncertainty when an employee is
injured.

Georgia’s Three-Employee Requirement

Georgia generally requires a business that regularly employs
three or more people to carry workers’ compensation
insurance. The count can include full-time, part-time and seasonal
employees.

For a corporation or limited liability company, corporate officers or LLC
members may count toward the three-person threshold even when they have
elected to reject coverage for themselves.

Review Georgia’s workers’ compensation coverage information.

A business with fewer than three employees may still choose to carry
workers’ compensation insurance. A contract, customer, landlord or general
contractor may also require coverage even when the business is not otherwise
required by Georgia law to purchase it.

Business Owners Can Be Excluded Without Making the Policy a Ghost Policy

An owner’s exclusion does not automatically mean that a policy is a ghost
policy.

For example, a corporation may have an excluded owner and five covered
employees. That would be a regular workers’ compensation policy with an
owner excluded—not a ghost policy.

Georgia uses Form WC-10 for certain elections or rejections of coverage by
eligible owners. The Georgia form specifically warns that it is not a
general waiver of workers’ compensation coverage.

View Georgia Form WC-10.

What Contractors Should Collect From Their Subcontractors

Contractors should maintain a consistent process for every subcontractor.
Important documentation may include:

• A written subcontractor agreement
• A completed Form W-9
• A certificate of general liability insurance
• A certificate of workers’ compensation insurance
• Verification that the workers’ compensation policy is active
• Updated certificates when policies renew
• Records showing the dates and amounts paid
• A clear description of the services performed

A Form W-9 or 1099 alone is not proof that the worker is properly classified
or adequately insured.

The Bottom Line

A ghost policy is a legitimate solution for a genuine owner-only business
that has no employees but needs to provide evidence of workers’ compensation
insurance.

It is not:

• Coverage for an excluded owner
• Permission to use unreported labor
• A way to classify employees as independent contractors
• A guarantee that every claim will be covered
• Protection against an unexpected audit
• A replacement for collecting insurance certificates from subcontractors

The biggest mistake is focusing only on how a worker is paid. Whether
someone receives a W-2, a 1099, cash or a check is only part of the picture.
Insurance companies and government agencies look at the actual working
relationship.

Before buying a ghost policy—or before hiring workers or subcontractors—talk
with an experienced independent insurance agent. A few questions at the
beginning can help prevent uncovered injuries, contract problems and
expensive premium-audit surprises later.