The Stack of Cards: Why Florida's Most Common Contractor Setup Is a Liability Time Bomb

Single-member LLCs with exemptions hiring other single-member LLCs with exemptions. It's a ticking time bomb waiting to go off.

If you've been working in Florida construction for longer than a week, you've probably seen this setup:

A General Contractor forms an LLC, files a Workers' Comp exemption for themselves and then hires subs—who also have single-member LLCs with exemptions. Everyone's got their bases covered, or so they think. No premiums, no hassle.

It's the most common structure in the industry, and it's built on a shaky foundation that can easily collapse the moment something goes wrong.

Let's take a closer look at what's actually happening here, why the state views things differently than you might expect, and what happens when someone gets hurt.

First: The "One Employee" Rule—Where Contractors Go Wrong

There's a lot of confusion about this, so let's set the record straight.

In most Florida industries, you don't need Workers' Comp until you have four or more employees. That's the general rule under Florida Statutes 440.02.

Construction is a whole different ball game.

For any business in the construction industry, the threshold is one employee—and that includes you, the owner. Not four. One. And here's the bit that really trips people up: under Florida law, you—the owner—count as an employee.

So when you form a construction LLC, even if you're the only person, the state says: "You have one employee. You need to take action."

You've got exactly two options:

Get a policy: Cover yourself (and any workers you bring on).

File an exemption: If you're an eligible corporate officer owning at least 10% of the company, you can formally opt out of benefits.

A Note: You can be an active, hands-on officer—swinging a hammer on the roof—and still exempt yourself. The key is 10% ownership, not "office duty."

The Trap: Silence is not an exemption. If you do neither, you're non-compliant by default. There's no middle ground where you're just a sole proprietor who doesn't have to worry about it. In Florida construction, if you haven't filed the paperwork, you're an uninsured employee—of your own company, and by extension, of the GC who hired you.

One more wrinkle: True sole proprietors who haven't incorporated CAN file for an exemption (Form DWC-250S), but it's more restrictive. While legally possible, it's administratively difficult and many carriers won't write around it. This is why smart GCs require subs to form an LLC—it keeps the liability lines clean.

The Exemption: What It Really Means

A Workers' Comp exemption doesn't mean you've got coverage. It means you've given up your right to benefits.

When you file for an exemption as a corporate officer in a construction company, you're telling the state: "I understand that if I get hurt on the job, I'm entitled to $0 in Workers' Comp benefits. I'm opting out."

For the exemption to be valid:

• You must be a corporate officer (not just an employee or contractor)
• You must own at least 10% of the company
• You must file with the Florida Division of Workers' Compensation and get a Certificate of Election to be Exempt

That certificate is what you show GCs when they ask for proof of coverage. It's not insurance—it's proof that you've waived insurance—for yourself only.

The Real-World Scenarios: From Risky to Outright Criminal

The "GC hires a single-member sub with an exemption" scenario is just the tip of the iceberg. Reality on job sites is messier—and way more risky.

Scenario A: The "Crew Leader" Illusion

You hire a framer who has an LLC and a valid exemption. But he doesn't work alone—he brings three "helpers" along. He claims they're his independent contractors, or maybe he just pays them cash.

The trap: His exemption covers him. It doesn't cover his helpers. Since he hasn't got a policy for them, YOU—the general contractor—are now the statutory employer of those three helpers under Florida Statutes 440.10.

One of them falls off a ladder? Your insurance carrier pays the claim. Your experience mod goes up. You may owe back premiums on all the payroll you paid to that sub—not just the injured worker's wages.

"But what if each helper has their own LLC and exemption?"

Even if every helper has their own LLC and exemption, you're still not in the clear. If they all ride in the same van, use the same tools, and work only for that one crew leader, the state calls this a "Sham."

DFS investigators will pierce the corporate veil, declare them employees of the crew leader, and hand you the bill. Paper compliance doesn't protect you if the operational reality looks like an employer-employee relationship.

Scenario B: The "Shell Game" (The Orlando 5 Model)

You hire a company that presents a COI showing three "officers" own the business.

The trap: Those "officers" are often straw men—names on paper who don't actually own 10% of the company. Or the broker "rents" that certificate to completely different crews. This isn't a coverage gap—this is straight-up insurance fraud.

The "Orlando 5" indictment in 2024 charged five individuals with cashing over $292 million in payroll checks through shell companies, evading $52 million in Workers' Comp premiums and payroll taxes. Multiple operations across South Florida have resulted in RICO charges.

If you know or should know that the COIs are fraudulent—if you're paying a company with no equipment, no address, and no apparent business operations—you can be charged with aiding and abetting under F.S. 440.105.

Scenario C: The "Ghost Policy" Audit Bomb

The sub gives you a COI showing a real policy. You feel safe.

The trap: It's a "ghost policy"—a minimum-premium policy that declares zero employees and zero payroll. The owner is excluded. The policy exists only to generate a certificate.

When your insurance carrier audits you at the end of the year, they look at every check you wrote to that sub. When they see a policy that covers $0 in payroll, but you paid them $100,000, they do the math for you.

The result: Your carrier treats that $100,000 as uninsured payroll and sends YOU a bill for the premiums. We see GCs hit with $50,000+ audit bills because they accepted ghost policies from subs who had crews on site.

The ghost policy doesn't just leave workers in limbo—it triggers a massive financial hit the minute your carrier comes calling for an audit.

The Nuclear Risk: Treble Damages and License Loss

Beyond insurance, there's a legal nightmare hiding in these arrangements when you're dealing with unlicensed activity.

Many labor brokers aren't licensed contractors—they're staffing agencies playing dress-up. While the law allows you to sue them, it's often a waste of time. These brokers are typically shell companies with no assets. You can win a lawsuit, but you can't collect from an empty bank account. You're left holding the bag for their defective work.

The Treble Damages Hit: Under F.S. 768.0425, if an unlicensed contractor causes injury or damage to a third party, the court can award triple damages. The problem? The broker is a shell company with no assets. So the plaintiff's lawyer comes after YOU—the licensed GC with insurance and a bank account—for those triple damages.

The Career Hit: As a licensed GC, if you hire an unlicensed broker, you can face disciplinary action against your own license for "aiding and abetting" unlicensed activity. You aren't just risking a lawsuit—you're risking your ability to pull permits in the future.

The "Independent Contractor" Reality Check

Florida doesn't take your word for it that someone is an independent contractor. There's a presumption of employment in construction, and to rebut it, the worker must meet at least four of ten specific criteria under F.S. 440.02(15)(d).

Things like:

• Maintaining their own business facility
• Having their own equipment and materials
• Working for multiple clients (not just you)
• Being paid per project, not hourly
• Controlling their own means and methods
• Having the ability to profit or lose money on the job

The blue-collar reality check: You can have a signed contract stating a worker is "independent," but the Department of Financial Services cares about reality, not paper.

Ask yourself:

• Does the worker bring their own heavy tools (saws, compressors), or just a toolbelt?
• Do you tell them when to show up?
• Do you tell them how to do the install?
• Do they work exclusively for you?

If you control the time, the tools, and the method, they're employees. A "1099" form doesn't change that.

Most workers in stacked arrangements fail this test. They show up to your site, use your materials, follow your schedule, get paid hourly, and work exclusively for you. That's not an independent contractor—that's an employee you've misclassified.

The Case for Carrying Coverage (Even If You Qualify for Exemption)

You're a legitimate single-member LLC. You really are the only person in your company. You qualify for an exemption. So why should you carry coverage anyway?

1. The Exemption Is a Waiver of Benefits

If you fall off a roof, you're entitled to $0 from Workers' Comp. Your health insurance probably excludes work-related injuries. You're paying out of pocket for a spinal injury that could cost $500,000.

The math doesn't work. You're saving maybe $2,000-$3,000 a year in premiums while betting against a life-altering event.

2. You're More Marketable

Sophisticated GCs and developers are increasingly banning exemptions on their jobs. They understand the statutory employer risk and don't want the liability exposure.

If you carry a real policy, you can bid on commercial work, government contracts, and high-end residential projects where "exempt" subs are disqualified.

3. You Avoid the Audit Trap

When carriers audit a GC's payroll and find that subs were exempt or uninsured, they often charge the GC for that payroll retroactively. The GC then comes after the sub for reimbursement.

If you have your own policy, that's not your problem. Your coverage stands on its own and protects you from the GC's audit.

4. You Stay Out of the Fraud Zone

The line between "legitimate exemption" and "premium fraud" gets blurry fast. If you ever bring a helper, hire a day laborer, or work with anyone who isn't covered, your exemption doesn't protect anyone.

A real policy protects you and anyone working under you.

What the State Sees When They See a Stack of 1099s

When DFS investigators look at a GC's records and see a stack of 1099-NECs going to dozens of single-member LLCs—all with exemptions, all at the same job site—they see a pattern.

They're looking for:

• Exemptions that don't match actual ownership (straw owners)
• Workers who don't know which company they "work for"
• Checks going to companies with no real business operations
• Check-cashing endorsements instead of bank deposits
• Payroll that doesn't match the declared amount on the exemption or policy

If the stack doesn't hold up under scrutiny, the GC is liable for back premiums, penalties, and potentially a Stop-Work Order that shuts down the entire job site.

The Bottom Line

The single-member-LLC-with-exemption model is legal when it's real. One person, one company, no employees, valid exemption. That's fine.

But the moment you stack exemptions—a GC with an exemption hiring subs with exemptions who bring helpers who definitely aren't covered—you've built a structure that can collapse with a single accident.

The questions to ask:

• Does everyone on this job site actually qualify for their exemption?
• If someone brings a helper, who's covering that person?
• If there's an accident, where does the liability land?
• Is this sub actually licensed to do the work they're doing?
• Am I comfortable explaining this structure to a DFS investigator?

For most contractors, the cost of a real Workers' Comp policy is a fraction of the exposure you're carrying without one. It's not just about compliance—it's about not betting your business on a stack of cards.

Questions about your coverage setup? Racks Insurance can review your current structure and identify gaps before they become claims. Reach out for a free consultation.