Workers’ Comp Requirements – Untangling the Confusion

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Workers' Comp Requirements In Wisconsin in basic form with a focus on contractors and sub-contractors.

Untangling the confusion between having a workers' comp insurance requirement and adding payroll to your commercial business general liability insurance policies.

This isn't a substitute for speaking with an employment attorney and other experts, but hopefully this will help you better understand what may be required of your firm if you're deciding on workers compensation insurance. You can feel free to give us a call and from an insurance point of view, we'll be happy to provide any advice that we can.

Here's the (abridged) rule for workers' comp in relation to contractors. Keep in mind, that to truly be an independent contractor as I understand the rules, the contract between the parties is between two businesses. Not between a business and a worker. Just calling someone a "1099", doesn't make it so. The walk like a duck, talk like a duck, and looks like a duck analogy fits this situation well. 

An independent contractor is not an employee of an employer for whom the independent contractor performs work or services if the independent contractor meets all of the following conditions:

1. Maintains a separate business with their own office, equipment, materials and other facilities. – If the person doesn't need an office etc… to operate their business, maybe they're not a business.

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2. Holds or has applied for a federal EIN, or has filed a business or self-employment income tax return based on the type of services performed. – The self-employment tax filing is the most common one I hear, but again, it's only a small piece of the puzzle, and to continue using animal sayings….the dog wags the tail, not the other way around.

3. Operates under contracts to perform specific services or work for specific amounts of money and under which the independent contractor controls the means of performing the services or work. – Paying by the hour isn't a deal killer, after-all, attorneys plumbers, and others performing "one-off" work for you are paid by the hour typically, but consider it a red flag if it's continuous and especially exclusive.

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4. Incurs the main expenses related to the service or work that he or she performs under contract.- Can the sub-contractor lose money, or can they make more than expected because they're able to create efficiencies?

5. Is responsible for the satisfactory completion of work or services that he or she contracts to perform and is liable for a failure to complete the work or service. – Can you sue the sub-contractor if the work doesn't meet your satisfaction. You can't sue employees for a bad job, or force them to work for free to correct errors, but you may be able to sue sub-contractors.

What is a Workers' Compensation Insurance Ghost Policy?

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.- This is often the basis for real estate and insurance agents and many other types of sales people on "their own". On the other hand, you don't find car lots using sub-contractors to sell cars, even when the sales people (and often the credit and finance person) is stickily working for commission. It's not because car dealers want the extra expense of workers' compensation insurance, employer FICA payments, unemployment insurance payments and other costs, it's because in total, the salespeople are considered employees and not sub-contractors. Also, as employees, the ability to sue the employer is relatively limited and workers' compensation is likely the only remedy regardless of what happens in a typical injury on the job.

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7. May realize a profit or suffer a loss under contracts to perform work or service. – As mentioned already, businesses can suffer losses or make oversized gains. Employees are relatively safe in their expected earnings.

8. Has continuing or recurring business liabilities or obligations.- For the same reasons already mentioned

9. The success or failure of the independent contractor's business depends on the relationship of business receipts to expenditures. – If this statement appears full of ambiguity, hey, you're not alone. I think an argument could be made either way, but it's meant to provide greater clarity in relation to the totality of the situation.

They're an employee unless proven otherwise

Something to keep in mind while you're trying to make a logical determination is that I hear often is "See, number (pick any two numbers from above) are met and soooooo they're a sub-contractor, not an employee, is that they're an employee, unless the situation demonstrates that the person is clearly not an employee and is a sub-contractor. As a contractor, you're faced with at least three tests. The IRS, the state Department of Revenue, and the insurance Audits. It really only takes one of them to trip-up your plan and force your checkbook out when you weren't expecting it. All THREE consider anyone performing services for your business to be employees unless CLEARLY not. So if it could go reasonably go either way, they're employees. Well, potentially not, buy you should have clarity before hand to save your business employment expenses you didn't budget for.

Lastly, it's important to know if an insurance agent has a bias. After all, if the people you're trusting to provide solid advice have a horse in the race, maybe they're not as helpful as you would like. From an agent's point of view, I don't care if I sell commercial business general liability insurance or a workers' comp policy in most cases. Another aspect to commercial (and personal lines) insurance is I have an obligation to "get it right" and do the best job I can based on the information provided by the client. In other words, most agents in general, and agents at 1 Reason Insurance want to do the right thing for you, and are paid about the same regardless if the commercial business general liability policy is increased because of sub-contractors, or Wisconsin workers' compensation insurance is increased because of payroll.

If you ever received a high-pressure sale's pitch from *any* sale's person, you may feel that they're more interested in making a sale than truly serving you. That's why you will never ever receive a high-pressure sales pitch and that's my promise to you. We advise you on what your coverage needs appear to be and what your options are, and do so in a consulting type of atmosphere. It's a better way to do business, ultimately leading to greater sales anyway because business people can depend on our fidelity.

Moving back full-circle, I hope this helps you clarify where as a business owner you stand in regards to your workers' comp insurance requirements, as well as your business general liability insurance needs.

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