Quick Takeaway: Your independent contractors must (among other requirements) meet and maintain nine of the workers' compensation requirement tests as listed below, or lose the ability to not be classified as employees for workers' compensation insurance purposes.
For Wisconsin employers and small businesses that appear to have a choice in hiring employees or sub-contractors / independent contractors (I'll use the term independent contractors for the sake of simplicity, albeit there can be potential nuances between the two in any given situation), the attraction for selecting the contractor route first is easy to understand. As an independent contractor, costs including withholding, payroll processing, retirement matching, workers' compensation, unemployment insurance, and others are shifted from the "employer" to the independent contractor compared to an employer – employee relationship.
It's not always as beneficial as many may initially believe though. I've had several clients voluntarily switch from the contractor-independent contractor to the employer-employee model and found the advantages outweighed the disadvantages. Remarkably (to me at the time anyway), one reported greater overall income because his turnover rate decreased (he believes this was from greater loyalty from the staff, albeit does it really matter why?), lowering his training costs, he was able to dictate greater control over staff, including customer service responses and procedures, which improved the client's overall experience and the online reviews reflected the change, reducing marketing cost (or depending on your point of view) increasing the ROI on his marketing expense.
Another client in a different industry not only reported the same findings, but it was a little eerie in the way the two described the benefits. Although they have never met to the best of my knowledge (they haven't), not even located in the same state, and have different personalities, It was as if they colluded in what they described to me because the reports were so similar. It was a paradigm shift for me because before learning about the benefits received, I stood with the theory it was always better to have someone as an independent contractor whenever possible due to the cost savings. As someone who has never collected unemployment insurance and knows social security is one of (if not the) worst retirement investments available, you can understand why I held the position that it was better for all involved to use the independent contractor model when available as a choice. As I've grown with greater insight and experience, I've learned that despite a few (relatively) painfull shortcomings, it's not always crystal clear what route to take.
Interpersonal dynamics plays a significant role, and not fully appreciating all the variables can lead a manager to make what appears to hold the optimal strategy and in fact isn't, and potentially causing stuggles and diversion away from marketing and grown and towards retention and customer service.
Ok, that said, I know that most will select the independent model and again, I get it. Objectively, the difference in cost is so blatenly clear, and once analyzed, it's hard to move from the additional costs and give much thought to the subjective potential cost of not having employees. And that brings me (finally you're maybe thinking) to the point of the article, that all else being equal, the State of Wisconsin has a say in the matter, and arguably the largest say in if you will need to purchase workers' compensation insurance for your staff (or you for that matter).
As of this writing, according to Chapter 102 of Wisconsin Statutes, the one that covers "Worker's Compensation," and specifically, 102.07(8), a person is required to meet a nine-part test before s/he is considered an independent contractor rather than an employee.
In my article "Titled Employee or Subcontractor / Independent Contractor, What is the Proper Classification I Should Use for Workers?" I discuss many of the factors that any given state and/or the Federal Government uses to classify a person's status also.
1. Maintains a seperate business with his or her own office, equipment, materials and other facilities.
2. Holds or has applied for a federal employer identification number (EIN) with the federal Internal Revenue Service (IRS), or has filed business or self-employment income tax returns with the federal Internal Revenue Service based on that work or service in the previous year.
3. Operates under contracts to perform specific services or work for specific amounts of money and nder which the independent contractor controls the means of performing the services or work.
4. Incurs the main expenses related to the service or work that he or she performs under contract.
5. Is Responsible for the satisfactory completion of work or services that he or she ctontracts to perform and is liable for a failure to complete the work or service.
6. Receives compensation for work or service performed under a contract on a commission or per job or competitive bid basis and not on any other basis.
7. May realize a profit or suffer a loss under contracts to perform work or service.
8. Has continuing or recurring business liabilities or obligations.
9. The success or failure of the independent contracto's business depends on the relationship of business receipts to expenditures.
(bm) A real estate broker or salesperson who is excluded under s. 452.38 is not an employee of a firm, as defined in s. 452.01 (4w), for whom the real estate broker or salesperson performs services unless the firm elects under s. 102.078 to name the real estate broker or salesperson as its employee.
(c) The division may not admit in evidence any state or federal law, regulation, or document granting operating authority, or license when determining whether an independent contractor meets the conditions specified in par. (b) 1. or 3.
(8m) An employer who is subject to this chapter is not an employee of another employer for whom the first employer performs work or service in the course of the other employer's trade, business, profession or occupation.
As a side note, something else to consider when it comes to hiring independent contractors is the joint liability of employer and contractor. It's why I sell so many workers' compensation "ghost policies" in Wisconsin, Minnesota, and other states. Here's the language for Wisconsin as of this writing:
102.06 Joint liability of employer and contractor. An employer shall be liable for compensation to an employee of a contractor or subcontractor under the employer who is not subject to this chapter, or who has not complied with the conditions of s. 102.28 (2) in any case where such employer would have been liable for compensation if such employee had been working directly for the employer, including also work in the erection, alteration, repair or demolition of improvements or of fixtures upon premises of such employer which are used or to be used in the operations of such employer. The contractor or subcontractor, if subject to this chapter, shall also be liable for such compensation, but the employee shall not recover compensation for the same injury from more than one party. The employer who becomes liable for and pays such compensation may recover the same from such contractor, subcontractor or other employer for whom the employee was working at the time of the injury if such contractor, subcontractor or other employer was an employer as defined in s. 102.04. This section does not apply to injuries occurring on or after the first day of the first July beginning after the day that the secretary files the certificate under s. 102.80 (3) (a), except that if the secretary files the certificate under s. 102.80 (3) (ag) this section does apply to claims for compensation filed on or after the date specified in that certificate.
A “contractor under the employer" is one who regularly furnishes to a principal employer materials or services that are integrally related to the finished product or service provided by that principal employer. Green Bay Packaging, Inc. v. DILHR, 72 Wis. 2d 26, 240 N.W.2d 422 (1976).
Liability of principal employer for injuries to employees of his contractors or subcontractors. 1977 WLR 185.
As an employer, you at least have choices in workers' compensation insurance in Wisconsin. Some states are monopolistic and give only one choice, much akin to the DMV. Wisconsin does regulate the premium, so it's not a full free market neither, albeit the differences between the carriers and the final net-net cost for workers' compensation can vary widely. For example, mutual workers' compensation insurance carriers can offer "dividends," which while aren't guaranteed in any given year, can over time lower your realized workers' compensation expense compared to paying the same premium level for a non-dividend paying policy. The amount of support, including training for work related injury reductions can vary as well.
Another key difference is the fact that some carriers (increasingly so due to competition and business demand) offer pay-as-you-go or also known as payroll-based-payments that avoids the relatively larger deposit and potential time-consuming adjustments that are required during the year, and instead moves the employer into a program that requires potentially more frequent, albeit smaller payments based on the weekly, bi-weekly, or relative payroll dispursements. I think we'll reach a point were all or almost all workers' compensation policies will be pay-as-you-go plans. It just makes so much sense when executed properly.
The take-away as you can see is Wisconsin as a state wants people to be employees and not independent contractors as much as possible, and specifically, wants as many workers as possible under a state workers' compensation insurance policy. Arguements in regards to the judgement and soundness can be made for both sides, but for now, it's the policy and position of the state, and it's beyond the scope of this article to discuss the pros and cons (maybe a viable article in itself).
Robert Weinstein is a husband, dad, stock market junkie, real estate broker, and of course…Insurance agent. Interests include my family, economics, marketing, technology, real estate, finance/investing, history, and Asia.
Robert’s insurance expertise includes having the designation of Certified in Long-Term Care (CLTC) and assist in asset protection for families with members entering retirement.
Robert is also an accomplished syndicated writer whose work can be found in TheStreet, MainStreet, CNBC, Forbes, Yahoo Finance, Seeking Alpha, MSN Money, The Money Show, Stock Saints, Motley Fool, Fidelity, Minyanville, RealMoney Pro, and many national and international newspapers.