Can You Cover Independent Contractors With Workers’ Compensation Insurance?

Independent Contractor Misclassification & Compliance Blog
June 3, 2024

We are frequently asked by businesses about workers’ compensation coverage for independent contractors. Clients ask us: Can our company cover independent contractors with workers’ compensation insurance? Is it safer for us if we do so? Or better not to? Like many issues involving independent contractor compliance, there is no one answer to these questions because workers’ comp is governed by state laws, which vary from state to state, and even under a single state’s law, the answer may depend on the nature of the services being provided by the independent contractor. One part of a comprehensive compliance process such as IC Diagnostics (TM) provides businesses with approaches to enhance compliance with independent contractor laws and minimize misclassification liability relating to workers’ comp matters.

What are the risks to businesses? 

Workers comp benefits are traditionally limited to employees. Businesses are not generally required to provide workers’ comp coverage to independent contractors.

However, there is a considerable risk that, under a particular state’s workers’ comp law, a state agency or court may find that the workers involved are not independent contractors, but rather employees, and therefore, should have been covered. In that event, a company can be exposed to severe penalties for failure to provide such individuals with worker’s comp coverage. And penalties can be quite considerable. For example, in New York, civil penalties for non-coverage can be as high as ‎$2,000 per violation for each 10-day period of non-compliance, up to two times the cost of compensation ‎for a company’s payroll for the period of such failure. In Virginia, employers who fail to provide workers’ comp insurance for their employees are assessed a civil penalty for each violation of up to $250 per day for each day of noncompliance, up to a maximum penalty of $50,000, plus collection costs.

Are there any workers who must or may be covered by workers’ comp, even if they are independent contractors?

It is important to bear in mind that some state laws require individuals who perform certain types of work (even when undertaken by those properly classified as independent contractors) to be covered by worker’s comp insurance. For example, Louisiana requires a company to cover independent contractors if they engage in substantial manual work. That term presumably covers contractors engaged in construction activities and perhaps a host of other occupations. Florida and other states require companies to provide workers’ comp insurance coverage to independent contractors in the construction industry.

Other state laws permit certain independent contractors to be voluntarily covered by workers’ comp insurance. For example, in Texas, companies can elect to cover independent contractors under their workers’ comp policy by filing the appropriate form depending on the industry and circumstances of the relationship. One type of form relates to building and construction workers who build, demolish, or repair physical structures. Another form creates an agreement between a general contractor and a subcontractor where the former will provide workers’ comp insurance.

In South Carolina, a narrow exception exists to the ‎general rule that workers’ comp is limited to employees. That state allows an independent contractor to elect ‎coverage under the contractor’s own workers’ compensation ‎policy.‎ A similar law exists in Georgia, where sole proprietors can elect to be covered in that state by their own workers’ comp policy by filing an election form. Businesses in these states that use independent contractors may choose to pay the premiums for such coverage, even though that may be a factor undermining an independent contractor relationship.

These nuances in state laws can trip up many companies. Prudent businesses, therefore, should first consider whether a particular type of worker operating as an independent contractor must be covered by workers’ comp or whether the law permits their coverage on a voluntary basis. If workers are engaged in services that must be covered, even when performed by independent contractors, such workers must be provided with coverage.

What steps can businesses take to protect themselves?

How can companies protect themselves from the risk that individuals whom they classify as independent contractors might be reclassified as employees by an agency or court for workers’ comp purposes? There are two ways we suggest.

One way is a step that some businesses regard as being extra cautious: procuring workers’ comp insurance for all their independent contractors – even if paying for such coverage may have no value. There is also a risk if this step is not done properly. Covering independent contractors with insurance that is available only to employees can be misconstrued as an acknowledgement that the workers are employees. Therefore, extreme care must be taken to use effective disclaimers in all communications regarding such coverage so that taking this cautious step cannot be used against the business. The cost of covering such workers may, however, be regarded as an expensive form of legal “insurance.”

A more practical and effective approach, which can also be the least costly, is to maximize compliance not only with the test for independent contractor status under the applicable state workers’ comp law but also with the other state and federal tests for independent contractor status. Many savvy companies have resorted to a process such as IC Diagnostics (TM) to structure, document, and implement their independent contractor relationships in a manner that maximizes compliance with independent contractor laws in a customized and sustainable manner, consistent with their preferred business model.

Some companies have taken both steps, especially where an applicable state law expressly permits a business to carry workers’ comp insurance for certain types of independent contractors. The only approach a company should not take is to disregard the issue of workers comp or ignore the need for elevating its level of independent contractor compliance. Such businesses needlessly expose themselves to liability risks that can otherwise be effectively managed.

‎Written by Richard Reibstein.

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