Your subcontract workers may be considered employees under workers’ compensation law.
Our clients often ask questions regarding how subcontractors affect their insurance. One frequent concern is whether the subs increase premiums on their workers’ compensation policy. Under workers’ compensation law, an employee can include part-time workers, seasonal, temporary, minors, trainees, immigrants, and working family members.
IRS verses Workers’ Compensation
Workers’ compensation law is governed by each state individually and these states do not utilize the same definition of “subcontractor” as the IRS. If a worker is paid by 1099, that may meet the IRS’ definition, but that person could still be considered an employee under state workers’ compensation law.
Definitions vary by state, but generally a worker is considered an employee if ALL of the following are met:
- They are paid,
- The employer can hire and dismiss them, and
- The employer exercises control over how the work is performed.
For the first point, the employee can be paid by any means, whether by 1099, W-2, or cash. If they are compensated, #1 is satisfied. The second point addresses the employer’s authority. If the employer decides whether that person does or does not fill the position, they qualify. The third and last point amounts to how much control is exercised over the employee. This is, admittedly, where gray areas arise. But generally, if an employer tells someone how to do the job and provides tools for the work, they will qualify.
No Shorts Electric
Suppose I need a new light fixture in our office building. I hire a local electrician to do the job. I pay them, so #1 is YES. I decide who gets the job, so #2 is YES. However, the electrician brings his own tools. And since I don’t know anything about electricity, they perform the job without my interference, according to industry standards. Thus, #3 is a NO. This electrician is not an employee.
Assume I need help moving a copier from one office to another. I know someone perfect for the job, young Elmer with a strong back that I often use for similar tasks. I pay, so #1 is YES. I selected Elmer, so #2 is a YES. If I have to supervise the move, telling him what to move and how to move it, #3 is a YES as well. Therefore, most states would say he is my employee and, if injured, could claim my workers’ compensation benefits. Elmer’s pay will be added in with the rest of my payroll by my workers’ compensation carrier.
Now assume the same situation, but instead of Elmer, I hire ACME Movers, a professional moving company. #1 is still a YES. I didn’t tell ACME who to bring to do the job, so #2 is NO. I tell ACME where to put the copier, but provide no further supervision, so #3 is a NO. Thus, if someone sprains a back during the move, my workers’ compensation is not affected.
If you have questions regarding whether a subcontractor could be considered an employee, ask your insurance agent. For especially difficult cases, we may refer you to your state workers’ compensation commission. Every claim is different. Anyone injured on a job can try to claim workers compensation benefits, but disputes are settled by each state’s workers’ compensation board. Contact Us for more information. Each of our clients is assigned a personal agent in our office.
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