Can Your Business Afford A Workers’ Compensation Policy?

02 Aug 2016

Reuben Dourte

Reuben Dourte is an account executive at Ruhl Insurance, specializing in farm and agribusiness insurance. Reuben joined Ruhl Insurance in 2012 and received certification for Accredited Advisor in Insurance (CAAI) in 2015.

For both small and large businesses alike, workers’ compensation insurance can often account for the majority of insurance premiums each year. Every state has mandated requirements for employers and many states, like Pennsylvania, for example, afford employers common law defenses in exchange for carrying a compulsory workers’ compensation policy. Still, many employers (incorrectly) approach workers’ compensation insurance from a position of, “Can I afford it?” The correct question is, “Can you afford not to?”

Penalties for non-compliance

Many states assess punitive damages in addition to legal obligations to pay for an employee’s injuries. Often, employers who do not carry workers’ compensation insurance automatically forfeit common law defenses in court, allowing injured employees to collect payments exceeding what they would have been eligible for within the legal constraints of workers’ compensation benefits. Add to that the possibility of jail time, and skirting workers’ compensation compliance begins to look less and less attractive. In Pennsylvania, for example, an employer failing to carry workers’ compensation may be fined up to $2,500 and receive up to one year imprisonment for each day of non-compliance for a misdemeanor conviction. Bump that to $15,000 and seven years, respectively, for a felony conviction.

As an employer, can your business afford lifetime medical payments for an injured worker? Can you afford nearly 10 years of wage loss payments? Even if you can absorb those costs, can you operate your business from prison?


Also on StartupNation.com: 7 Myths About Workers’ Compensation Insurance


Using independent contractors

Employers who realize that they need workers’ compensation may attempt to classify employees as independent contractors (ICs) in order to manage the amount of employee payroll they report during their annual audit process. Because states have provisions that do not require ICs to be covered by workers’ compensation, employers in many states have attempted to use this as a loophole. There is absolutely nothing wrong with using ICs in your business. Many times it is a legitimate cost-saving measure that business owners successfully use. However, depending on your state, the criteria that must be met in order to classify workers as bona-fide ICs is stringent. Some of the requirements an IC must be able to meet include, but are not limited to, are:

  1. The worker supplies his or her own tools and equipment: If your IC is using your tools and equipment in order to perform his or her job duties, you may have a hard time establishing that an employer/employee relationship does not, in fact, exist. True ICs will have their own equipment, which they use to perform the work they are doing for you, as well as other companies.
  2. The worker is free to set his or her own hours and work schedule: If you are telling your IC when they need to be at work, you may be establishing an employer/employee relationship. Certainly, you are able to demand that a job is completed by a certain date (which should be established by contract), but telling an IC that they need to be on site from 8 a.m. to 4 p.m. speaks to an employment relationship. True ICs are operating as an independent company, and as such, are free to set their own hours. Their requirement is to get the job done on time, and they are free to come and go as they wish.
  3. The worker carriers his or her own General Liability and/or workers’ compensation insurance: A good indication that the worker in question is truly an IC is whether or not they carry their own insurance. It’s necessary for you to secure a certificate of liability insurance from your IC so that you can present it to the auditor at the end of your policy term. This helps to establish that the worker is indeed an IC and in business for themselves. It also helps if they operate their business under a FEIN number. If they have employees themselves, you need to make sure that they provide you with evidence that they carry workers’ compensation or you can be held liable for injuries to their employees. If they have employees and do not carry a workers’ compensation policy, do not be surprised when their employee’s wages are included in your workers’ compensation audit at the end of the year. Because the workers’ compensation laws are designed to find compensation for an injured party, the courts will look to secure benefits wherever they can. If you have a policy in place, and the IC you hire does not, your policy will be responsible for paying their injured worker’s benefits. For this reason, insurance companies will look to include these wages in an audit. Verification of insurance coverage is an absolute necessity when working with ICs.
  4. The worker performs service for other individuals: Most companies perform work for many clients. If your IC is coming to work every day for you and does not offer or conduct services for anyone else, they are probably an employee and not an IC (legally speaking). ICs should be engaged in business activities with other companies, or at the very least, advertising their services publicly.
  5. The worker is paid by the job: True independent contractors are paid by the job, not by the hour. If you are paying an IC an hourly wage, this tends to establish an employment relationship. When ICs are paid by the job, they take on the risk of profit or loss; while an hourly employee will receive their income regardless of how profitable the job is for your company. The way you pay your worker is instrumental in determining whether they are truly an IC.

Workers’ compensation policy conclusion

The cost of workers’ compensation insurance is a pain point for many businesses. The temptation to curb these costs by any means necessary is great. At the same time, because of the significant societal burden of injured workers and the rippling impact workplace injuries can have on the families of those workers, workers’ compensation has become compulsory in every state. Managing workers’ compensation costs simply cannot be legitimately achieved through non-compliance.

Discounts for safety committees and favorable claims history or the use of bona-fide independent contractors are legal ways to manage costs. However, it is highly unlikely that you or your company can afford the possibility of litigation, fines or imprisonment in the event you do not comply with your state’s laws. Beyond what they may be risking financially, the moral responsibility employers have toward their injured workers should, in and of itself, be enough to make them stop and reconsider even the hidden costs of non-compliance.

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