Do Contract Employees Need To Be Covered By Workers' Compensation?

As a small business owner, you know that all your employees must be covered by workers' compensation insurance, a state-administered system covering anyone injured in the workplace. This insurance is a type of guarantee between employer and employee: the employee automatically receives benefits in case of job-related injury, regardless of how much he or she is at fault, and gives up the right to sue regarding those injuries.

But what about people who perform work for you as contractors or freelancers?

Who Qualifies as an Independent Contractor?

It's true that independent contractors do not usually need to be covered by an employer's workers' compensation insurance policy. True contractors are responsible for their own payroll taxes and insurance, so it can make financial sense for a business to work with them to save on paying these things. The problem comes when employers incorrectly classify a worker as a contractor.

Here are some ways that an independent contractor can be identified:

  • Works by the project or job, not by the hour.
  • Does not earn a regular, set salary.
  • Completely controls the service and how it is provided without direct supervision by the employer.
  • Sets his or her own work schedule.
  • Provides all of his or her own equipment for performing the job.
  • Works for more than one company.

What if an Employee is Incorrectly Identified as a Contractor?

If you've been treating someone who performs work for your business as a contractor, and it comes to light that he or she should actually have been considered an employee, you may be subject to fines and back payments for taxes and workers' compensation. This usually arises if a person is injured while doing work for you and tries to sue or claim that you should take responsibility.

How Do You Make Sure You're Protected from Lawsuits?

One way to make sure that you are not liable to pay workers' compensation (in addition to making sure that the worker in question does not meet any criteria for being an employee) is to require that your contractors prove that they have insurance. Some states require this as a condition of hiring contractors and not paying workers' compensation. You should keep a copy (or an original, depending on your state) of each contractor's Certificate of Insurance as additional proof of that person's contractor status.

If you have any doubts about whether or not your small business is correctly handling independent contractors, talk to an attorney who specializes in workers' compensation and employment law.

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