In all states except Alabama, California, Delaware, Iowa, Maine, Rhode Island and West Virginia, you might have to provide workers’ compensation benefits for the employees of ICs—depending on the circumstances. Under state laws that define statutory employees, an IC’s uninsured employees are considered to be your employees for workers’ compensation purposes if:
- the IC fails to obtain workers’ compensation insurance for them, and
- the IC’s employees perform work that is part of your regular business—that is, work customarily carried out in your business and other similar businesses.
The purpose of these laws is to prevent employers from avoiding paying for workers’ compensation insurance by subcontracting work out to uninsured ICs.
EXAMPLE: The Diamond Development Company, a residential real estate developer, is building a housing subdivision. It hires Tom, a painting subcontractor, to paint the houses. Tom is an IC who has sole control over the painting work. Tom hires 40 painters to do the work for him. They are all Tom’s employees. Tom fails to provide his employee-painters with workers’ compensation coverage.
Andy, one of Tom’s employees, is injured on the job. Since Tom has no workers’ compensation insurance, Andy can file a workers’ compensation claim against Diamond Development, even though he was not Diamond’s employee. This is because Andy is Diamond’s statutory employee under the state law and house painting is clearly a part of Diamond’s regular business of constructing new housing.
Because of these statutory employee rules, it’s very important for you to require any IC who uses employees to perform services for you to provide them with workers’ compensation insurance. Ask to see an insurance certificate establishing that an IC’s employees are covered by workers’ compensation insurance. In many states you can also call the state workers’ compensation agency to determine if an IC has coverage for his or her employees. (See State Workers’ Compensation Offices for contact details.)
If your own workers’ compensation insurer audits your company and discovers that you have hired an IC whose employees do not have workers’ compensation coverage, it will likely classify that worker as your own employee for workers’ compensation purposes and require you to pay an additional workers’ compensation premium.
If you are required to provide workers’ compensation benefits to an IC’s employees, you are entitled to seek reimbursement for the cost from the IC. But if the IC has no money or can’t be located, this legal right will be useless.
Caution California Rule for Unlicensed Construction Workers
Under California law, a construction contractor who hires unlicensed subcontractors or construction workers is automatically considered to be their employer for workers’ compensation purposes. (Calif. Labor Code § 2750.5.) This is so even if the workers are ICs under the usual common law rules. This means the contractor has to provide the workers with workers’ compensation coverage. The California State License Board determines who must be licensed to perform services in the construction industry in California. If you’re not sure whether the work involved requires a license, contact the Board. If a contractor’s license is required, ask to see one before hiring a construction subcontractor or worker. Otherwise, you’ll have to provide workers’ compensation coverage.