Employers are often looking for ways to cut the cost of doing business. One approach used by employers to cut labor cost is to have outside independent contractors to complete some of the work. In most states, the employer does not have to provide independent contractors with workers’ compensation coverage. The problem for employers arises when the independent contractor is injured and seeks workers’ compensation coverage from the employer.Risk managers who foresee the possibility of an independent contractor getting hurt on the job will often have the independent contractor sign a document confirming the individual is an independent contractor and not an employee. This works, sometimes.
Industrial Commissions, Workers’ Compensation Boards, Departments of Labor, and other state administrative/judicial agencies will consider the Weight of Evidence in deciding who is and who isn’t an independent contractor, regardless of the independent contractor agreement. Also, some states use what is known as a Bright Line Test which has a specific set of criteria that must be met before an individual is consider an independent contractor.
Whether a jurisdiction used the Weight of Evidence or the Bright Line Test, or other criteria for determining the classification of an individual – either as an employee or as an independent contractor, the following criteria is often included in the determination of the individual’s status.
Employee criteria frequently includes:
• The individual does not work for any other company
• The individual does not have any employees working for him/her
• The individual has not control/have a say over who else will be assisting with the work
• The company controls the order or sequence in which work will be completed
• The specific time/hours worked are controlled by your company
• The means and methods by which the work is completed is controlled by your company
• The individual is provided the tools, supplies, equipment or materials needed to perform the required work
• The individual cannot earn extra profit by completing the work in less time than expected
• The individual cannot suffer a financial loss on the assigned work
• The company deducts income taxes and other taxes from the individual’s pay
• The company provides benefits other than wages (vacation time, health insurance, etc.)
• If a license is required to do the work, the license is held by the company
• The length of employment is open ended
• The company provides the workers’ compensation insurance policy, the general liability insurance policy and other types of insurance
Independent contractor criteria frequently includes:
• The individual has other company(ies) where he/she earns income
• The individual has employees that are working for him/her
• The individual has complete control over who assists him/her in the completion of the work
• The individual controls the order or sequence in which work will be completed
• The individual determines when the work will be done
• The individual determines the means and methods by which the work is completed
• The individual provides the tools, supplies, equipment or materials needed to perform the required work
• The individual earns extra profit by completing the work in less time than expected
• The individual can suffer a financial loss on the job assignment
• The individual is responsible for paying income taxes, self-employment taxes, etc.
• The individual is not provided any type of benefit except the agreed upon compensation amount
• If a license is required to do the work, the license is in the name of the individual and not in the name of the company
• The employment period ends when the project or assignment is completed
• The individual provides the workers’ compensation insurance policy, the general liability insurance policy and other types of insurance in his/her own name and not the company’s name
Improperly Classifying Employee Could Be Costly
Your company’s workers’ compensation insurance premium is based on the number of employees. If you inadvertently misclassify an employee as an independent contractor and an injury occurs, you could end up in a legal quagmire. The worker’s compensation insurance company will deny coverage as no premium was paid to cover the injured person. Your company will have to pay all medical costs and indemnity benefits owed, or could face tort litigation by the individual trying to recover the costs associated with the injury. Your company will have the legal burden of proving the injured person was an independent contractor and not an employee.
To protect your company properly with workers’ compensation insurance, careful consider the above criteria AND the laws within your jurisdiction as to what constitutes an employee and what constitutes an independent contractor. If in doubt, you are normally better off to pay the workers’ compensation premium to cover the individual as an employee.
Author Rebecca Shafer, JD, President of Amaxx Risk Solutions, Inc. is a national expert in the field of workers compensation. She is a writer, speaker, and publisher. Her expertise is working with employers to reduce workers compensation costs, and her clients include airlines, healthcare, printing/publishing, pharmaceuticals, retail, hospitality, and manufacturing. She is the author of the #1 selling book on cost containment, Workers Compensation Management Program: Reduce Costs 20% to 50%. Contact:RShafer@ReduceYourWorkersComp.com.
Editor Michael B. Stack, CPA, Principal, Amaxx Risk Solutions, Inc. is an expert in employer communication systems and part of the Amaxx team helping companies reduce their workers compensation costs by 20% to 50%. He is a writer, speaker, and website publisher. www.reduceyourworkerscomp.com. Contact: email@example.com.
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