Workers Compensation: Employee or Independent Contractor?

In the world of workers compensation, the subject of employee vs. self-employed independent contractor is complex. Employers are not required to provide workers compensation coverage for independent contractors. Likewise, employers are not responsible for payroll taxes and other legal obligations that are necessary for employees. However, there are consequences for misclassifying an employee as an independent contractor, so it’s important to understand the difference.

Independent Contractor Test

For workers compensation purposes, the primary test that an employer/employee relationship exists is if the employer has the right to control the details of the employee’s work. The following questions are also considered:

  • Does the alleged employer exercise the right to control the alleged employee’s activities?
  • How is the alleged employee paid?
  • Does the alleged employer furnish any equipment or tools?
  • Does the alleged employer have the right to fire the alleged employee or terminate the relationship?

Classifying Independent Contractors in Wisconsin

Check with your state’s Department of Labor to determine how they define independent contractors. In our home state, Wisconsin statute 102.07(8) states that an independent contractor is not an employee of an employer if the independent contractor meets ALL of the following nine conditions:

  1. Maintains a separate business with his or her own office, equipment, materials and other facilities
  2. Holds or has applied for a federal employer identification number with the Internal Revenue Service (IRS) or has filed business or self-employment income tax returns with the IRS based on that work or service in the previous year
  3. Operates under contracts to perform specific services or work for specific amounts of money and under which the independent contractor controls the means of performing the work or services
  4. Incurs the main expenses related to the service or work that he or she performs under contract
  5. Is responsible for the satisfactory completion of work or services that he or she contracts to perform and is liable for a failure to complete the work or service
  6. Receives compensation for work or service performed under a contract on a commission or per job or competitive bid basis and not on any other basis
  7. May realize a profit or suffer a loss under contracts to perform work or service
  8. Has continuing or recurring business liabilities or obligations
  9. The success or failure of the independent contractor’s business depends on the relationship of business receipts to expenditures

Do you think you are involved in a workers compensation situation where all nine of these conditions have been met? Don’t be so sure. The world of workers comp often has gray areas. In general, the Wisconsin Supreme Court has said: “In cases where the evidence is evenly balanced and an inference may be drawn one way as easily as another, the scale should be turned in favor of the claimant, principally because it was the intent and purpose of the Workers Compensation Act (WCA) to bring border-line cases under it and to close up avenues of escape which would naturally be suggested to those seeking to avoid liability under the WCA.”

Tips for Working with Independent Contractors

So, here are some helpful hints to protect the best interests of your business when dealing with independent contractors:

  • Reach out to your insurance company to ask questions BEFORE you begin working with an independent contractor.
  • Don’t tell the independent contractor what to do or how to do it. Less is more.
  • It’s YOUR responsibility to know how your state defines an independent contractor – ahead of time. In Wisconsin, use the nine conditions above, or click here to learn more about worker classification.
  • Don’t trust their word. Get it in writing.
  • Repeated use of the same independent contractor on a consistent basis, like an entertainer at a bar, could be problematic.
  • Avoid things of value outside of your agreement.

To find out how Society can help your business, visit societyinsurance.com to find an agent and request a free quote.

-Jim Putzer

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