Independent Contractors and Workers Compensation

Written by on 10/26/2015 10:00 AM . It has 2 Comments.

When your business is growing, it's often necessary to bring on extra help to make sure that you don’t fall behind. The use of independent contractors can definitely help fill this need but it can come with some risk. How exactly will hiring independent contractors affect your workers compensation insurance policy?

What is an Independent Contractor?

Independent contractors are people that you hire to perform a job that are not employees of the company. There are very clear differences between an independent contractor and an employee. In order to legally call someone an independent contractor, strict guidelines must be met.

Independent contractors:

  • Do the same work for you as well as for other businesses
  • Use their own tools or equipment
  • Can hire and pay for help doing the job
  • Make profits or suffer losses
  • Set their own hours and work schedule
Now look at what an employee must or can do in comparison:
  • They have a continuing relationship with their employer.
  • They're furnished tools by the employer as needed.
  • They must comply with an employer's instructions on when, where, and how to work.
  • They are trained by their employer to do the job.

While it may be tempting to simply call your employees “independent contractors,” the cost of being caught with improperly classified employees is much greater than any savings you'll see from lower workers compensation premiums.

The Savings and Costs of Working with Independent Contractors

The potential savings of working with more independent contractors is pretty appealing for many businesses.

  1. Lower workers compensation costs
  2. Lower state and federal taxes
  3. Lower costs for equipment, office space, and supplies
  4. Lower insurance and other benefits costs

The financial benefits are immediate and a big reason some companies use independent contractors. However, the risk of incorrectly classifying the people you hire, or even working with independent contractors who don't carry their own workers compensation coverage, is bigger than you may realize.

Workers compensation isn't simply a protection for your employees when they get hurt or sick on the job. While medical costs and lost wages are covered, you, as the business owner, are also protected from lawsuits. An independent contractor, however, can still sue you if they become hurt – with no limitations on the amount.

If you improperly classify employees as independent contractors in order lower your workers compensation insurance premiums, a few things can happen.

  • The IRS may audit you. If you've incorrectly labeled employees as “independent contractors” you will face tax fines and legal penalties.
  • You'll have a gap in your insurance coverage. If someone is injured and sues, you'll pay all of the costs associated with the lawsuit, you'll pay fines and penalties for not carrying workers compensation coverage, and you'll still have to purchase coverage and pay the premiums for a new policy.

Turning your employees into independent contractors may sound like a great idea, but don't do it unless you're truly prepared to treat those workers as independent contractors. If you have questions about your current workers compensation policy or if you'd like to discuss how you can lower your costs, contact us at Charlotte Insurance.


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