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Like everything else in life today, businesses and their needs are changing as is the traditional employer/employee relationship. In the traditional employer/employee relationship, the employer hired, supervised and paid an employee. Today, employers need to be more flexible as respects their labor needs and therefore, have the choice of using temporary agency workers, independent contractors and/or leased employees. When making these choices an employer must always think in terms of their Workers’ Compensation liability and the effect their actions might have on their premiums.

Workers’ compensation is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment.

Employers are often tempted to declare certain or all of their workers as independent contractors or 1099 workers thereby exempting them from the Workers’ Compensation requirements. However, hiring a worker as an independent contractor can cost you a great deal in the end. You risk considerable tax fines, other penalties, and a serious gap in insurance coverage if your “independent contractors” are later determined to actually fit the definition of an employee.

Previously, an employee had withholding taxes taken out of their check, while an independent contractor did not. Subsequently, the IRS realized the loss of billions of dollars a year strictly due to this misclassification.

When an Independent Contractor has no Workers’ Compensation remedy in place to cover an injury, often their payroll is added to YOUR Workers’ Compensation on audit. The law is very clear that Workers’ Compensation must be provided for all “employees” as defined above.

To avoid being penalized, make sure that any independent contractor you hire has their own Workers’ Compensation insurance in force. In addition, have them provide you with evidence of coverage via a certificate of insurance, which is standard in the insurance industry. It is best to have some sort of Certificate Program in place so that you are alerted to request a renewal certificate prior to the expiration of their current policy.

At audit, you can present these certificates to your Workers’ Compensation auditor so that you are not penalized. That way, whether an independent contractor is considered an employee or not, you are not audited for additional workers’ compensation premiums.

Workers’ Compensation Exemption Form

New York State businesses can protect themselves in the event of a workers’ compensation audit by asking independent contractors to fill out a Worker’s Compensation Exemption form. This form is for an independent contractor, with no employees, who is not required by New York State law to carry their own Workers’ Compensation insurance.

The form may only be completed by entities with no employees and/or out-of-state entities obtaining a contract or license in which all the work is being performed outside of New York State. This form protects you/your business from being charged on your own Workers’ Compensation policy for any 1099 distributions identified at the time of an audit. Unfortunately, if an independent (1099) contractor doesn’t have this exemption form, or their own insurance policy for Workers’ Compensation, than your Workers’ Compensation policy will be charged accordingly.

Examples:

Medical/Dental Profession

A Doctor’s office hired doctors as 1099 employees, but the doctors were given a work schedule and a prescribed procedure they had to follow with patients and paperwork. The Workers’ Compensation Board will consider them EMPLOYEES and you are responsible for their workers’ compensation.

Contractors (Construction)

A plumber who owns a company hires subcontractors to do the electrical work and drywall to repair holes in walls made by plumbers. If the plumber’s company does not obtain a certificate of insurance from the electrical and drywall subcontractors that proves they have their own Workers’ Compensation policy, any insurance company when performing their workers’ compensation audit MUST include payments made to these subcontractors as payroll.

Hair Salon

You obtain a hair stylist that will work in your hair salon. This worker is assigned a specific chair and is assigned a work schedule. Workers’ Compensation Board will consider them EMPLOYEES and you are responsible for their workers’ compensation.

Office Worker

You hire someone who is going to be paid on commission. However, you tell them they need to work from 9:00 am – 5:00 pm, Monday through Friday and take their lunch from 12:30 – 1:30 and they get two weeks’ vacation each year. Also, they use computers and supplies provided by the company. – Workers’ Compensation Board will consider them EMPLOYEES and you are responsible for their workers’ compensation.

Keep in mind that ALL your workers, whether employees or independent contractors, should be covered by workers’ compensation insurance. If your independent contractors don’t have the coverage, you can be held responsible for their injuries. Courts have ruled that the hiring party is responsible for the injuries to an independent contractor or his/her employees when an independent contractor is found to have no Workers’ Compensation of their own.

Need help understanding how your business is can be affected with employees vs. independent contractors? Contact Schaefer Enterprises, Inc. 877.237.2481.