Question: Should a small business include its independent contractors in workers' comp? I'm using some freelancers and I'm not sure if they fall under my workers' compensation insurance or not.
Answer: The rise of the so-called freelance economy is remaking the U.S. employment landscape and raising questions such as yours for many small business owners.
Workers' compensation laws are governed by the states, so start by asking your insurance agent or broker what legal obligations you're subject to in your state. You may be able to get some preliminary answers online: Most state insurance commissioners have websites that spell out their rules in straightforward language, says Bill Feldhaus, a retired professor of risk management at Georgia State University's Robinson College of Business.
Many states determine workers' comp liability by applying an IRS test that determines whether someone working for a company should be classified as an independent contractor or as an employee. Very generally, it measures how much control the employer has over the freelancer's work schedule. If that test shows that your independent contractors should be classified as employees, you will have to provide workers' comp insurance for them, as well as put them on your regular payroll.
But even if you determine that you don't have a legal obligation to cover freelancers, you may want to ask them for evidence of their own insurance coverage or include them in your policy, Feldhaus says. "It's very critical that you clarify who is assuming the workers' comp obligation if they get hurt on the job," he says. "If your company really does not want to take on that obligation, you might spell out in their contract that you're not assuming state workers' comp responsibility."
That's because "in the absence of other coverage, the party that has hired an uninsured contractor could become responsible for the workers' compensation losses" if the worker gets hurt on the job, says Stephen Carlson, a vice president who oversees workers comp for small businesses at Travelers Insurance (TRV).
If there's an accident and the contractor sues you for damages, in the absence of any prior legal agreement, the courts often side with the injured individual. "The sympathy is usually for the single person doing the work, so the courts will say, ‘You look like an employer to me, so we're going to make you responsible for the state requirements,'" Feldhaus says.
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