Workforce

Poor Hiring Practices Can Lead to Contractor Failure

Contractor failure to maintain high hiring standards—regardless of the economy’s state—can result in liabilities, cost and headaches that could have been avoided.
By Remmie Butchko
September 18, 2019
Topics
Workforce

Just over a decade ago, the United States experienced the Great Recession—an economic downturn that stalled the construction industry, hammered the middle- and working-class and caused many contractors to go out of business. Today, although the economy is healthier, economists are seeing history repeat itself and contractors are once again at risk. Unfortunately, many contractors are falling into the same traps and making decisions which are likely to have a negative effect on insurance costs in upcoming years.

What are the issues?

Many of the issues that contractors face stem from poor hiring decisions. Contractors have a tendency to hire new employees when they are in desperate need of labor. They may take shortcuts or skip their typical vetting processes and hiring anyone who’s available. These poor hiring decisions eventually lead to insurance problems, hitting contractors hard when they’re at their lowest—in an economic downturn.

How do these issues happen?

When the economy is booming, work is available, especially in the construction industry. While this is generally a good thing, it comes with potential landmines that could affect the future. A strong market leads to increased competition for resources, which may lead contractors to hire unqualified workers. This high demand can translate into relaxed hiring standards in order to quickly fill open positions.

Once hiring standards are lowered, contractors may end up with employees who are inexperienced, have a poor work ethic, hold marginal driving records, are physically incapable of doing the work or have had issues with alcohol and/or substance abuse in the past. This, in turn, may result in:

  • poor workmanship, which can lead to general liability claims, posing a hazard to co-workers and inflicting reputation damage;
  • auto accidents, which can lead to bodily injury to others and cause expensive damage to company vehicles; and
  • Workers' Compensation claims, which can lead to an increase in these types of claims, resulting in wasted time and inefficiencies getting jobs completed.

How do these issues Affect insurance?

The economy is cyclical and eventually slows down again. As work decreases, so does the need for employees. Layoffs are often on the horizon. Smart employers generally don’t let go of their experienced and most responsible employees. They typically let the problematic employees go first and those who should not have been hired in the first place. However, just because troublesome employees are gone doesn’t mean their legacy leaves with them. Hiring mistakes can haunt contractors for years by causing:

  • General liability insurance rates and deductibles to increase. Insurance underwriters may be less willing to provide competitive quotes, or quotes at all, because of lack of profitability. In addition, they know they’re likely to have to pay even more completed operations claims in the future due to poor workmanship bleeding down from past hiring decisions.
  • Workers compensation experience modification to increase due to past claims, with costs rising accordingly. This higher experience modification can prevent contractors from being awarded work since more and more companies use this as a pre-qualification. An under-qualified worker who has been laid off is also more likely to submit questionable/fraudulent claims when they are unable to find work elsewhere.
  • Employment practices liability claims can increase. Employees who have been laid off or fired often file claims of wrongful termination, discrimination or harassment. Situations of this nature can lead to financial loss, increased scrutiny and reputational damage. Even if a contractor has insurance for claims of this nature, they will likely to face large deductibles in comparison with other types of coverage.
  • Auto rates to increase in general, and deductibles are increased for both comprehensive and collision coverage. A contractor who’s put marginal drivers behind the wheel is probably likely to do it again when the economy goes back up, causing underwriters to be wary. If an underwriter has been burned in the past, they often won’t make the same decisions twice.
  • Insurance audits from the prior year to show elevated numbers and higher payroll. As a result, insurance companies may be looking for more money based on these previously higher costs.

These are just a few examples of how current business decisions can lead to future insurance pains at the worst possible time, in an economic downturn or recession. Because of this, it’s critically important for contractors to maintain high hiring standards—regardless of the economy’s state. If they don’t, they could end up paying the consequences for years to come in terms of liabilities, costs and headaches that could have been avoided.

by Remmie Butchko
Remmie Butchko has served as Georgetown Insurance Service's’ CEO since June of 2000. He began his insurance career in 1991 with Hartford Insurance Company’s Cluster Training program, following graduation from the Pennsylvania State University. He has been a Certified Insurance Counselor since 1995. In addition to oversight of the agency’s operations, he currently maintains account management responsibilities for approximately 150 local businesses.

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