Unrecognized Contractor Risk Brings Hefty Financial Consequences

Owner/Operators demand WCB Clearance Letters from Contractors. All the major registries are required to obtain and track WCB Clearance Letters. Inability to provide one or having one that states the account is not in good standing (late premium payment) is a show stopper resulting in instantaneous failure on registry scores. Contractors are often immediately walked off site, are forbidden to go back to work and are suspended from the Owner/Operator approved vendor list until a clearance letter in good standing can be obtained.

Why are these clearance letters so critical impacting the very ability for contractors to work? What risk is the Owner/Operator attempting to mitigate?

The common perception among Supply Chain, Legal and Safety professionals is that WCB operates identically to insurance. The understanding is that if a contractor hasn't obtained a WCB account or paid premiums then they are not covered and importantly if they are not covered then any incidents that happen on site will be applied against the Owner/Operators account. In short, they do not want to be responsible for contractors’ injury incidents as it can result in significant costs. What the Owner/Operators are misunderstanding is that the WCB Clearance Letter does not protect against this circumstance. Yet they go through great pains and expense in administering and tracking clearance letters.

WCB is not typical insurance it is mandated legislatively. All employers (companies) that work in an industry to which the WCB Act applies must by law have a WCB account. If they do not have an account and one of their employees are injured then WCB will fine them, make them setup an account and charge the claim to that account. In the case where premium payments are late WCB will merely assign the claim to the Contractor account. If the contractor continues to not make payments the WCB has the capability to seize equipment and bank accounts. Should the contractor go out of business the claim costs will be picked up through industry rates. The real risk is the Owner/Operator may be held responsible for a portion of the unpaid premiums.. However, it is generally insignificant and only applies to very small contractor operations e.g. a guy with a couple of trucks and 10 employees. Companies such as Baker Hughes, Weatherford, Schlumberger may be late in payments but they always eventually pay the WCB bill. There is little risk of them going out of business and leaving an Owner with the premium tab.

The requirement for clearance letters has become a red herring providing false assurance from the very real risk that contractor claim costs can and have been transferred to Owner/Operators accounts. In Alberta this capability is part of the legislation and is referred to as “Transfer of Claim Costs Section 95(2) of the WCB Act”. Historically in Alberta this is done upon application by the Contractor. There is substantial financial impact on the Owner/Operator as illustrated in this all too real example:

Imagine a case where a contract worker slips your stairs that have not been adequately cleared of snow and ice. In slipping the worker grabs at the handrail and wrenches his back. He seeks medical attention and the doctor puts him on restricted work duties. However the Contractor does not have a modified work program so the case is manage by WCB until the worker is found fit to return to regular duties. Several years later the contractor (who no longer does any work for you becomes concerned about high surcharges and premium costs as well as ability to bid for work. Upon review of the file it is noticed that the Owner/Operator is responsible for the injury given the stairs were not cleared. They then file an application to have the costs transferred to your account.

The total claim cost is what WCB paid out on the claim with compensation and medical aid payments. However, the impact on premiums paid is shocking:

	Subcontractor	Owner/Operator
Total Claim Costs	$6,299	$6,299
Premium Impact	$11,780	$61,698
WCB Return	187%	979%

In this case the Contractor applied to have the costs transferred however there is nothing in legislation that prevents the WCB from applying the legislation unilaterally. In fact, over the last several years WCB has, even without the Contactor’s awareness, transferred costs in motor vehicle incidents. As the chart indicates as there is a substantial financial incentive for WCB to in transfer costs to an Owner/Operator. Given the magnitude in which contractors are used and the fact that there is an inherent disincentive formost contractors to transfer costs presents a skewed picture of industry safety it is only a matter of time before WCB follows other jurisdictions and unilaterally transfer of costs in all cases where fault can be applied to another Employer.

What can an Owner/Operator do to protect themselves given that clearance letters provide ZERO protection:

1.     Complete comprehensive investigations in all injury incidents that occur on their site with contractors emphasizing negligence and fault,

2.     As part of contractor pre-qualification ensure that the Contractor has an effective Return-To-Work Management system, and

3.     Apply oversight to the Contractor’s return-to-work with any of their injured workers that have the potential to be transferred to your account.

Effective return to work programs will not eliminate the transfer of costs but it will significantly reduce the impact:

Cost Categories	Aggressive Management	Management by WCB
Compensation	$0.00	$4,799
Medical Aid	$500	$1,500
Total WCB Cost	$500	$6299
Subcontractor Premium Impact	$935	$11,780
Owner/Operator Premium Impact	$4,897	$61,698

Transferring of subcontractor claim costs is a very real risk. There are significant financial benefits to WCB there is no time limit on how fare back they can retroactively transfer claim costs, they have the capability to to unilaterally apply the costs and are currently doing so with motor vehicle incidents. It is time to stop focusing on clearance letters and start ensuring contractors have effective claims management systems.

Suspicious Industry Results Requires Examination

Earlier this year I had a meeting with Deputy Premier Thomas Lakaszuk (former Minister of Employment & Immigration) responsible for Occupational Health and Safety. The meeting was to discuss the state of health and safety in the province of Alberta. During this meeting he cited the exemplary safety record of the oil sands as an example for the world to follow and how well Alberta is doing in this portfolio. He supported his statement based upon the accident claim history as reported by WCB. Interestingly he is not wrong “by the numbers” however; he is seriously misinformed on how those numbers are derived.

WCB is an insurance company and set their rates based upon risk. In setting up Industry Classification they group employers together with similar loss expectations. This makes sense as one would expect the Construction Industry to have higher rates than say Financial Services based purely upon risk. However when one looks at the WCB rates it creates a head scratching moment:

Industry	Rate Classification Description	Rates
Oilsands Mining & Processing	06600	$0.41
Hair Salons	87200	$0.60
Disk Jockey	85907	$0.66
Dry Cleaners	87401	$1.53
Camp Catering - Industrial	87505	$2.10
Fruit Farms	01901	$2.72
Suspended Ceiling Installation	42141	$4.20

This is counterintuitive. Based upon the above one has to conclude that Disk Jockey industry is 161% more risky than Oilsands Mining and Suspended Ceiling installation is over a 1000% riskier. Part of the explanation is that premium rates are also set upon the actual loss experience. However for these numbers to then make sense one would have to believe that Hair Salons etc. are having more injury incidents and are not effectively managing their claims. This would effectively impact industry rates higher. Perhaps an examination of similar risk industries that are highly regulated with implemented Safety and WCB Management Systems provides a better comparison:

Industry	Rate Classification Description	2013 Rates
Oilsands Mining & Processing	06600	$0.41
Coal Mining – Open Pit	06110	$1.44
Construction General Industrial	40400	$1.62
Contract Plant Maintenance	42129	$1.62

Open Pit Coal Mining provides the best comparison both from a risk and management perspective yet, Coal Mining is over 350% higher. The difference is that within Oilsands Mining operations there is an extraordinary reliance on the use of subcontractors for engaging in high risk work. It is not that there are fewer accidents or that they are even being better managed. What is happening is that when an incident occurs with a subcontractor that incident is being assigned to the Contract Plant Maintenance and General Industrial Construction industry accounts. If one included the subcontractors as part of the Oilsands Industry one can easily conclude that Open Pit Coal Mining is more safe that Oilsands Operations. This is a more accurate depiction given inherent risk of work and actual loss experience.

So Deputy Premier Lakaszuk a bit of advice. If something appears to be counter-intuitive do a bit more digging. It is worthwhile to maintain your credibility and to avoid looking ill informed.