Independent Contractor or Employee?

February 28th, 2005 by

One of the most problematic areas of workers compensation coverage involves independent contractors. It is indeed ironic that tradesmen in high risk occupations (construction, landscaping, mechanical trades, trucking) often find themselves without workers compensation coverage because of their independence. In many (but not all) states, independent contractors are precluded from securing workers comp insurance. When these people are seriously injured, often their only recourse to indemnity and health benefits is to claim an employment relationship with the general contractor operating the site where they got hurt. The GC will state that, no, this is not my employee; I don’t control the work. The independent contractor, content with his or her status until the injury, now tries to claim that the GC controls the work and hence, there is an employer-employee relationship — and the workers comp coverage that comes with it.

Many states offer guidance on this perplexing issue. To cite just a few: the state fund in Oregon provides guidance on the criteria for independence, pretty much following the IRS standards. In Rhode Island, independent contractors have to self-certify that they are indeed independent, thus building a firewall between themselves and their GCs — to the GC’s advantage. (In Rhode Island, independent contractors cannot secure workers comp coverage for themselves.) Across the border in Massachusetts, the attorney general has put GCs on notice that they are responsible for workers comp coverage for “independent contractors” and “sole proprietors.”

In July of 2004 the MA AG issued new requirements for independent contractors (M.G.L.c.149 sec.148). The new regulations contain strong, unambiguous language creating a default assumption that “independent contractors” are in fact employees, unless three explicit criteria are met. In other words, the burden of proof is now clearly on employers/GCs to prove the independence of subcontractors. In the absence of such proof, the subcontractor is assumed to be an employee. As a result, insurance carriers will routinely add the 1099 numbers from undocumented “independent contractors” to the GC’s payroll for calculating workers’ compensation premiums.

The new standards are more stringent than the standards promulgated by the IRS, the Fair Labor Standards Act (FLSA) and even MA common law.

Three Criteria
The new law creates a presumption that any working arrangement involving “independent contractors” and sole proprietors is in fact an employer-employee relationship unless you establish that all three of the following factors are present:

1. The worker is free from the presumed employer’s control and direction in performing the service. This standard is similar to those of the IRS and FLSA. Activities must be carried out with autonomy and independence. Contractors provide their own tools and materials and use their own approach without instruction or supervision. They determine their own hours.

2. The service provided by the worker must be outside the employer’s usual course of business. In other words, if the “independent” contractor is in the same trade as the employer’s own workers, there can be no determination of independence! Hence, overflow crews are not independent unless you can document that they carry their own insurance.

3. The worker must be customarily engaged in an independent trade, occupation, profession or business of the same type. The contractor must be in an independent business enterprise, working for others, truly working on his own.

There is an additional and, to my mind, rather scary dimension to the new regs in MA. In addition to the unambiguous wording creating a presumed employer-employee relationship, the regulations open the door for lawsuits. Once it has been determined that the “independent contractor” is in fact an “employee,” the employee you did not know you had can sue you for violation of any number of worker rights you mistakenly thought did not apply.

Here is brief list of some of the laws under which your new-found “employees” can sue you:

  • Wage and hour laws
  • Minimum wage law
  • State overtime law
  • Law on keeping payroll records
  • Withholding taxes and payment of social security benefits
  • Wilful understatement of payrolls for workers compensation insurance
  • Violation of laws on discrimination.

As I read it, it would almost be impossible not to be in violation of one or more of these statutes. Why would you track presumably “independent” contractors to this level of detail?
The independent contractor law provides for substantial civil and criminal penalties with fines up to $50,000 and even prison terms! In addition, firms can be debarred from public works projects for 6 months (for the first unintended offense) up to 5 years (for a willful first offence). (This is in addition to any penalties under the long list of employee benefit rights listed above.)
Protecting your Interests

The managing of independent contractors and sole proprietors has become a very high stakes game — not just in Massachusetts. So how can you protect yourself?

Ideally, all of your subcontractors should be incorporated and should carry a full line of insurance coverage, including workers comp (where available). GCs should require that subs and independent contractors provide certificates of insurance with specified levels of coverage. For contractors operating in MA, all subs, including independent contractors, should be required to carry their own workers comp insurance.

Certificates of insurance should be carefully tracked. Secure original certificates (not copies) and make sure the coverage is up-to-date and maintained from year-to-year. If your subs and independent contractors cannot provide this documentation of insurance, or if the certificates have expired, do not allow the subcontractors on the job site. If they begin working without insurance documentation, you are at immediate risk for assuming liability as their employer! At first, you may find resistance to these new and tougher standards, but once established, they will simply become a routine of the business day.

On the other side of the equation, people working as independent contractors and sole proprietors should secure their own disability coverage, either through workers comp (if available) or through conventional disability insurance. You need to protect your livelihood!

This is a complex issue well beyond the scope of a single blog. When I “Googled” “workers compensation + independent contractors” I had nearly 2 million responses! We will certainly revisit this issue in the months ahead.