One of the most frequent issues in workers compensation coverage is misidentifying employees. Properly classifying employees helps ensure they’re getting the benefits they deserve and can help your business avoid costly penalties. Even if a worker is an independent contractor, they could still be found to be a statutory employee and entitled to work comp coverage if certain conditions are met. Learn more about classifying employees and how to protect your business.
Employee v. Independent Contractor
A common belief is hiring independent contractors is much less expensive than hiring employees, but that assumption can lead you and your business down a slippery slope. A worker signing a contract stating they are not to be treated as a company employee is simply not enough to avoid work comp liability.
Work comp law is typically very inclusive when determining who is covered, especially when an injured worker may be left without coverage. IRS classifications for independent contractors may differ from the workers compensation classifications, so it recommended that you visit your state work comp board website for further information about identifying employees and protecting your business.
What is a statutory employee?
While a worker may be properly classified as an independent contractor, they may still be found to be a statutory employee if the work they’re performing is under a verbal or written contract, and the work is within the scope of work you or your business typically perform. This distinction is intended to prevent employers from avoiding work comp liability by simply hiring independent contractors to perform work their employees would otherwise complete. Learn more by visiting the FAQ section of the Missouri Department of Insurance.
Who controls the actions of the worker?
In determining whether a worker is likely to be considered an independent contractor for work comp purposes, the primary consideration is who controls the actions of the worker. For example, will you, the employer, be controlling the day-to-day operations of the worker, setting work hours or approving time off? If so, the worker may be found to be an employee for the purposes of work comp coverage.
In a proper independent contractor relationship, the worker should complete work according to their own methods without being subject to the employer’s control. The employer can inspect the work and provide feedback, but the employer cannot control how the independent contractor achieves the stated goals. The employer can only ensure that the job gets done. To reduce the likeliness of unexpected work comp liability, verify the company is not exercising control over the worker.
1099 v. W-2 for Insurance Benefits
When hiring workers, it’s also important to understand the difference between the 1099 and W-2 tax forms. The 1099 and W-2 are two different tax forms for two different kinds of workers. The 1099 is used for independent contractors, who are responsible for reporting the amount of income they receive. If taxes are required to be withheld, tax on this income is normally calculated manually outside of the normal payroll system used for employees. The W-2 is the typical form used for payroll employees in which a portion of a worker’s paycheck is deducted in the form of taxes and collected by the government. Check out these 1099 employee and independent contractor FAQs.
How to Protect Your Business
Misidentifying an employee can be costly, but there are ways to protect your business from unnecessary losses. One of the most important ways to protect yourself is to always collect certificates of insurance from any independent contractor you hire. This allows you to identify whether the independent contractor has proof of work comp insurance. If the independent contractor is uninsured, then they may be covered by your business’s work comp coverage if they are injured on the job. Certificates should come from the producing agent, agency or insurance company. A certificate alone may not indicate whether the policy is in place, so it is important to verify the policy coverage dates.
Another way to protect your business is to provide all the necessary records for premium audits. Audits ensure you are paying the right premium for your work comp coverage. Records needed for an audit include payroll records, certificates of insurance, general ledgers, checkbooks and cash disbursements. Updating and keeping track of these records can help verify information during an audit and ultimately reduce your insurance costs.
Please note: This article is not an official employment or non-employment determination but a helpful tool when reviewing possible worker misclassification. Please contact a legal advisor before making business decisions on this or other matters related to taxes, benefits, contracts, etc.