Independent Contractor or Employee Part 2 – Insurance Implications

Written by: ​Jimmy Norton, CPCU

The Independent Contractor vs Employee discussion never ends!  In a prior post, I wrote about State and Federal efforts to crack down on Employee misclassification.  As of July 1, 2020, a new Virginia law declared that all workers are considered Employees and employers must prove their workers are Independent Contractors.  If they cannot offer such proof, then employers must pay for prior wages, benefits and payroll taxes.

If that wasn’t scary enough, changes in the Contractor vs Employee question can also dramatically increase your company’s liability risk and insurance premiums.  Here’s a look at a few biggies:

 

Workers’ Compensation Insurance

Work Comp laws state that employers must pay medical bills and lost time arising from a work-related injury.  Employees are automatically covered under Work Comp laws, but Independent Contractors are not (some state laws may vary).  If an Independent Contractor is injured while working for your company, he or she could still try to file for benefits under your company’s Work Comp policy.  Insurance Adjusters and State Work Comp Commissions often scrutinize the nature of the employer-worker relationship – similar to the IRS and DOL.  If the Independent Contractor relationship more like an Employee, then that individual’s claim is often covered.  If the Contractor is truly independent, then their claim is usually denied. 

In light of the tightening restrictions, what could happen if an Independent Contractor wins their misclassification suit, and they are retroactively classified as an Employee?  It is possible that they would be entitled to Work Comp benefits that had been denied previously.  Claim amounts can increase, causing insurance rates to increase in future years.

Work Comp premiums are based on gross annual payroll for company Employees.  Independent Contractor compensation is not included in this basis if that Contractor carries his/her own Workers’ Compensation insurance.  If that Contractor is reclassified as an Employee, then he/she can drop his/her policy and rely on the employer’s coverage.  His/her annual compensation is added to the premium basis, thereby increasing the employer’s insurance bill. 

 

General and Professional Liability

If an Independent Contractor causes property damage or bodily injury while working for you, most Liability policies will cover YOU for work they perform on your behalf.  Subcontracted costs are usually included in your Liability premium basis but at a reduced rate.  If those Contractors are now Employees, then their cost becomes payroll and is charged at higher rates depending on the work they perform. 

 

Employment Practices Liability

Employment Practices Liability (EPL) insurance covers companies against discrimination, harassment, wrongful termination and retaliation claims brought by Employees or third parties.  A common Employee action is a “wage and hour” claim, where the Employee alleges that he/she is entitled to overtime or additional compensation due to employer misclassification.  EPL policies typically exclude coverage for wage and hour claims, but many provide a sublimit ($100,000 or $250,000) for defense.  The new DOL rule and state laws may spur a wave of new Employee misclassification claims.  Check your coverage to see if it includes Wage & Hour protection.

 

What Does This Mean For My Business?

Now is a good time to take a look at the relationship between your company and any Independent Contractors whom you use.  Read up on the topic and apply the IRS test (mentioned in my previous post) to see if your Independent Contractor will stand up to scrutiny.

Remember, Virginia and several other states will operate on the assumption that your Contractor is an Employee.  You must prove them wrong.  Do you have enough evidence to support your assertion that they are Contractors?

Read your insurance policies and educate yourself on how they will or will not respond to claims arising from your use of subcontractors.  Give us a call if you have any questions on this topic. 

Be prepared!