Independent Contractors: Who Is. Who Isn’t. What Happens When Employers Confuse Independent Contractors with “Real” Employees?
Disclaimer:
None of this information is intended as legal advice. If you have any doubts as to which of your workers are employees (covered by your workers’ compensation insurance) and which of your workers qualify as independent contractors, please hire a good outside lawyer (an independent contractor) to provide you with guidance on this topic.
Employee vs. Independent Contractor
Often the distinction between employee and independent contractor (IC) is blurred. Coverage for workers’ compensation in most states is for employees only, but there are exceptions. For instance, Massachusetts requires employers to carry work comp coverage for both their employees and their independent contractors, with some exceptions and some ways to opt out.
(Editor’s Note: Obviously, if your IC runs a legitimate business, has a federal identification number for IRS purposes, and works from the IC’s office with no or minimal work out of the employer’s workplace, then the issue of providing work comp coverage and status as an IC is clearer.)
It is the exceptions and opting out that creates the most difficulty for the work comp insurers and employers in establishing who is covered by the work comp coverage. Some states address the issue by using licensing as a mechanism to determine independent contractor status. If the license to do business is in the employer's name, the worker is an employee. If the license to do business is in the worker's name, the worker is an independent contractor. Of course there are exceptions to this, too. A license to do business is not absolute proof of independent contractor status in most states.
Another approach taken by some employers is a certification form or contract signed by the worker stating worker is an independent contractor. However, Workers’ Compensation Boards and the courts often look for coverage for the injured worker. The work comp carriers and employers find to their dismay the certification form or contract is ignored by the Board or the court and work comp coverage is provided to the injured worker.
Each jurisdiction takes its own approach to determining independent contractor status for workers’ compensation. Some jurisdictions use what is called a Bright Line Test — a specified and binding set of criteria requiring proof in order for the worker to be an independent contractor. Other states use the Weight of Evidence — all criteria is considered and balanced in determining whether or not a worker is an independent contractor. Of course, there exceptions to this, too. Some states combine the Bright Line Test and the Weight of Evidence to establish independent contractor status.
So Who is an Independent Contractor?
It depends. The 50 states have 50 different sets of guidelines, with some similarities and some total opposite points of view as to what constitutes a worker being an employee or an independent contractor.
Here are some general guidelines to assist your company in determining who might be an employee and who might be an independent contractor.
1. The worker performs work only for your company—employee; the worker performs work for your company and other companies—independent contractor.
2. Your company controls the hours the worker works—employee; the worker determines the hours she works—independent contractor.
3. The worker does not have any employees—employee; the worker has employees of his own—independent contractor.
4. Your company furnishes the worker with the materials, equipment and tools—employee; the worker furnishes her own materials, equipment and tools—independent contractor.
5. The worker cannot make extra profit on a job or suffer a loss—employee; the worker can make a profit or suffer a loss—independent contractor.
6. Your company controls the means and methods by which the work is done—employee; the worker controls the means and methods by which the work is done—independent contractor.
7. The worker's pay is based upon the amount of time to complete the work—employee; the worker's pay is a set amount not based on the amount of time worked—independent contractor.
8. The worker does not carry his own workers’ compensation coverage—employee; the worker does carry his own work comp policy—independent contractor.
When Employers Confuse ICs with “Real” Employees
With the passage of the new health insurance laws, a lot of small businesses will be taking a long hard look at cutting labor cost including the cost of workers' compensation. Reclassifying all your workers from employees to independent contractors is not how to do it. Just because you call a worker an independent contractor does not prevent the injured worker from filing a workers' compensation, especially if the injury is severe.
What happens then? You have just entered the twilight zone of injury claims. If you classified a worker as an independent contractor (and did not pay work comp insurance premiums), your work comp carrier will probably side with you, the employer, and deny the injured worker work comp coverage. The injured worker and her attorney will file a claim with the Workers' Compensation Board. Also, depending on the jurisdiction, they may either file a negligence lawsuit for millions of dollars against your company at the same time, or wait on the decision of the Workers’ Compensation Board before filing the tort lawsuit.
When you send the tort lawsuit to your general liability insurance company, your general liability insurance carrier will probably not be as understanding as your workers’ compensation carrier. Your liability insurance company will probably side with the injured worker's assertion that she is an employee and will deny coverage to you.
Now you get to bring in a real independent contractor, a defense lawyer (unless he only works for your company) to try to resolve the mess you created by classifying the worker as an independent contractor.
If you are very lucky, the Workers' Compensation Board will award coverage to the injured worker and you will only get a premium audit and cancellation by your workers' compensation carrier. But, the work comp carrier, who may now be liable for lifetime medical and the state maximum on indemnity benefits, might ask the Department of Insurance or the state Attorney General's office to investigate your company for insurance fraud.
OR you could be very unlucky. The Workers’ Compensation Board denies the work comp claim; the state court finds in favor of your general liability carrier that there is no coverage for the worker — resulting in your company owing the injured worker millions of dollars. To make matters worse, the Attorney General’s office successfully prosecutes the principal(s) of your company for insurance fraud with maximum jail time. (workersxzcompxzkit)
Employers and their legal counsel need to carefully evaluate the status of their workers and be very careful who they classify as an independent contractor, especially if the worker is working out of the employers workplace. Chances are there may be liability when any person is injured in the course of their working for you – employee or independent contractor.
Author Robert Elliott, executive vice president, Amaxx Risks Solutions, Inc. has worked successfully for 20 years with many industries to reduce Workers' Compensation costs, including airlines, health care, manufacturing, printing/publishing, pharmaceuticals, retail, hospitality and manufacturing. He can be contacted at: Robert_Elliott@ReduceYourWorkersComp.com or 860-553-6604.
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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker or agent about workers' comp issues.
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