Misclassification of Employees and Independent Contractors – A Workers Compensation Perspective

Posted on May 18, 2012 by Randy Sieberg, CIC, ARM, CRM

We are seeing a renewed interest from authorities on the topic of misclassification of workers compensation employees. This can be a very broad topic but we’re going to talk today specifically about the employee – independent contractor issue and it’s effect on workers compensation.

It’s an age old question…is my worker an employee or independent contractor? How can I tell, why is it important and what happens if a mistake is made?

How can I tell? You have to be a little careful in answering this question because the answer may not apply to all jurisdictions. To make a proper determination you have to look to the state in which the employer is conducting operations for it’s in the state statutes where most of the answers to this question lay. Most states have adopted some specific rules regarding the application of independent contractor status as far as workers compensation goes. You’ll find a specific state may have some very detailed rules and applications in order to qualify as an independent contractor and in lieu of those rules being met the workers would be considered employees. Of course there is always the old fall back of the IRS employee test. This is helpful as a guide but used in determining employee status for tax purposes. 

Why is it important to determine whether a worker is an employee or independent contractor? Again, strictly from a workers compensation perspective, it’s about premium charges, coverage and whether or not the compensation to the independent contractor is to be included within the premium for the employer. If considered an insured independent contractor, the employer may not have to include the compensation within his own premium calculation. Certainly if they are determined to be an employee, they will have to be included under the employers policy and premium calculation. A simple rule to remember about workers compensation; if an insurance company would have to pay a claim then they are allowed to collect a premium for that exposure.

Here’s a tip…I mentioned it above…if a worker is properly considered an independent contractor, but has no workers compensation coverage, the compensation you as the employer may make to them will more than likely be included within and added to your premium calculation. An example: Say you have an office operation and contract out to have your office cleaned. The person performing the cleaning tasks only works by themselves, has no employees and cleans offices for many other local businesses. They are not required in their state to carry workers compensation insurance on themselves and the state has no specific rules excluding independent contractors from workers compensation. So even though properly classified as an independent contractor, this cleaning person will be picked up at audit and included within your workers compensation policy.   

What happens if a mistake is made and a worker previously considered an independent contractor is really an employee? Here’s a couple of things to consider. Was it an honest mistake or oversight or was it an intentional act?

Accidental misclassification of employees occur quite often. An employer not familiar with the rules and who has not sought out advice from an outside source may honestly make this mistake. From a workers comp perspective this is remedied during the audit. When the auditor is reviewing an employers records, which will include a review of the employers general ledger and cash disbursements, it will be discovered that payment was made to an uninsured independent contractor and a premium will be charged.

Intentional misclassification of an employee as an independent contractor can bring the authorities into the mix. Fraudulent misclassification also happens all the time. From the workers comp perspective, an employer intentionally misclassifying an employee as an independent contractor will be attempting to avoid paying the proper premium for workers compensation coverage. His goal will be to avoid including the compensation within the premium calculation. Insurance companies take this action serious. If intentional misclassification is suspected the insurance company will, and should, pursue legal remedies usually through the state. Most of the time the state department of insurance will turn the case over to its fraud investigation unit and prosecuting attorneys office. This is a serious issue. Those employers who try to circumvent the workers compensation system place the burden back onto those who play by the rules and you’ll find that all the governing authorities take the issue of fraud in workers compensation very serious!

Hope this has helped you out. Thanks!

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Are corporate officers included in Arkansas workers compensation coverage?

Posted on May 17, 2012 by Randy Sieberg, CIC, ARM, CRM

A workers compensation question asked today.

Workers compensation statutes and rules are state specific. In other words each state goes by it’s own rules and there should be no assumption that what goes on in one state applies to another! You can find direct links for each individual state on our State Directory of Work Comp Rules and Laws, found on our website. 

Arkansas includes corporate officers within coverage by statute however corporate officers may elect to be excluded from coverage. What’s that mean? If a corporate officer is included then payroll or remuneration for that corporate officer will be included in the rating process to determine a deposit premium for the policy. Most of the time corporate officer payroll will either be a flat fixed amount or some kind of banded range between a minimum and maximum. But remember, if coverage applies, a premium will be charged. Makes sense right?

Do not to confuse the inclusion or exclusion of corporate officers in Arkansas workers compensation with other entities like sole proprietors or partnerships. Different rules apply for different employer entity types so be sure to check and verify the treatment of corporate officers or other entities within your specific state.

Hope you find this information helpful!

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Workers Compensation Coverage – Insurance company underwriter surprised by a claim from unknown entity

Posted on May 16, 2012 by Randy Sieberg, CIC, ARM, CRM

It happens. We’ve witnessed it. An insurance company underwriter or company branch manager is surprised that a claim by an employee under another entity, is paid for by their workers compensation policy. How can this happen?

You’d be surprised at the confusion over the proper use of entities on a workers compensation policy. Let’s shed some light…

If a workers compensation policy is written with the named insured being ABC, Inc. and the application only indicates ABC, Inc. as the named insured, typically an insurance company underwriter will take a look at the information provided, maybe ask a few questions and issue the policy. 

Lets say ABC, Inc. is some kind of office operation, where all employees are properly classified as clerical workers.  A little time goes by and the insurance company is presented with a claim from a worker of XYZ, Inc., a company whose workers install commercial sewer mains. The employee suffers a serious injury and the insurance company claims department researches the claim finding common ownership of ABC, Inc. and XYZ, Inc. and are obligated to pay the claim. The branch manager, underwriting manager and underwriter are all confused. They don’t understand how this may have happened!

What just happened here? Well, it falls under the general category of common ownership and combinable entities. Under most workers comp rules you are allowed to combine common ownership entities onto one workers compensation policy. That means a policy issued to ABC, Inc. may also provide coverage for the employees of XYZ, Inc. if the common ownership meets the guides established by the advisory authority of their state.

So what’s this mean? What if the insurance company that issued the workers comp policy to ABC, Inc. was fine with the clerical operation and wanted to provide coverage for that type of business but would not normally provide coverage for the type of work XYZ, Inc. performed? That means they had no idea they were on the XYZ, Inc. risk and would have normally not written workers comp coverage on ABC, Inc. if they had known of the other exposure. That would have been a failure of underwriting.

You might be surprised of the combination of combinable entities and relationships between various, seemingly unrelated, entities. Sure, it’s a question that’s asked on a workers compensation application. But normally one that agents, employers, insurance company underwriters and managers don’t pay much attention to, is not understood and one that could result in a surprise!

Lesson Learned: Insurance company underwriters…pay attention to entities! Learn how they work and apply them correctly when underwriting a workers compensation policy!

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Are workers compensation waivers of subrogation allowed?

Posted on May 15, 2012 by Randy Sieberg, CIC, ARM, CRM

A workers comp question asked today…

Waivers of subrogation and their effects are seldom understood. When it comes to insurance transactions an insurance company is allowed to subrogate against or pursue it’s rights to re-coup damages it has paid against a third party for damages which the third party they may have caused. You see in an insurance policy the insured or client of the insurance company gives over to the insurance company it’s right to recover from another party damages it may have had to pay in response to coverage provided in a policy.  Under a waiver of subrogation the insured or client agrees to waive the rights of the insurance company to recover. In really simple terms this is called a waiver of subrogation.

Each state has their own application and interpretation of waivers of subrogation. Check each individual state workers compensation rules to find out how they may apply in your state.

 Most individual state workers compensation statutes allow, in some form or another, an employer and insurer to waive its right to subrogate against another who may have caused an employees injury. However some states, like Missouri and Kentucky, do not allow waivers of subrogation for workers compensation. Usually the states not allowing waivers of subrogation have deemed them to be against public policy. You’ll also find that many of the states allowing waivers require an endorsement to the workers compensation policy or some other means of consent from the insurance company in order for the waiver to apply.

Be sure to check with your state to make sure workers compensation waivers of subrogation are allowed. And if you are a contractor, be sure to read and understand the contract you are signing.

Hope this helps out!

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Workers Compensation Audits – Where and When To Find Help

Posted on May 14, 2012 by Randy Sieberg, CIC, ARM, CRM

Workers compensation audits are performed by the insurance company to determine the final premium for a policy. They are conducted after the expiration of the policy and it’s only after an audit is performed that the insurance company and employer/insured will know what the correct premium for the expiring policy period will be.

There are many individual items that go into the make up a workers compensation audit. Each must be considered for its accuracy as each item may lead to additional cost or inaccurate return.  Some of these items include:

  • Payroll or remuneration
  • Inclusion or exclusion of Owners, Partners, LLC Members and Corporate Officers
  • Classification Codes
  • Business Operations
  • Premium Modification Factors
  • Job and Material Processes
  • Overtime, Vacation Time, Sick Leave, Prevailing Wages, Temporary Help and more
  • Treatment of Subcontractors or Independent Contractors

Just to mention a few!

When do you need help with a workers compensation audit? In my opinion, every employer should have every audit reviewed! Doesn’t it make sense? After all, audits are subject to many rules that an auditor and insurance carrier must follow. Rules that most employers are not familiar with. The insurance company does have the upper hand because they know the rules and how to best take advantage of them, not the employer.  And you do not have to be a big company to ask for an independent workers comp audit review. As a matter of fact smaller employers are particularly at risk.

Where can you find help with a work comp audit? There are several good firms out there who conduct independent audit reviews. Did I mention our company? Of course audit reviews are one of the services we provide at WorkCompConsultant.com. I might stay away from ones you find that make unfounded promises and that hype up the idea that you’ll get thousands of dollars back if you let them work over your audit. But use your common sense and find a consulting firm that you can work with and that will help you find the right answers for your problem. 

Hope this helps you out!

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Workers Compensation Audit – What can an employer do when things go wrong

Posted on May 13, 2012 by Randy Sieberg, CIC, ARM, CRM

It seems that our company is frequently contacted by employers seeking help when a workers comp audit goes wrong usually brought on by the receipt of an unexpected audit bill from the insurance carrier. 

What can an employer do if they have a problem with their audit? Here’s a few things to think about.

  • Were you prepared for your audit? We see this quite often as an area that creates problems with audits. Be sure to prepare for your audit. When the employer’s not prepared and does not have the documents required by the auditor to be reviewed, it just causes delays and improper completion of the audit. Most of the time, lack of proper documentation will cause the auditor to put the audit on hold, having to wait for the employer to send additional documentation at a later date. If that information is never received then the auditor will close his case and return it to the insurance carrier marked incomplete.
  • As an employer, do you understand the process and purpose of an audit? Ask your insurance agent to help you understand the process. If your agent can’t help you then contact a workers comp consultant. Regardless how you become informed about the process and purpose it’s important that you know how the audit works, what it’s for and what to expect upon completion. 
  • Does your audit contain errors or mistakes? Most the time it’s nearly impossible for an employer to maintain the knowledge base needed in order to thoroughly analyze their work comp audit. Here’s where you may need to ask for help so be sure to seek the assistance of an independent work comp consultant to analyze your completed audit.
  • Is there a list common errors that an employer can use? Sure there are common mistakes that happen on audits and you can use this list to check off common mistakes that occur. But be aware there are many items that can go wrong, many items that can contribute to additional premium being paid by an employer.
  • What can an employer do when things go wrong with their audit? Many times we are called to help an employer who is having an audit problem after they’ve tried to work through the problem themselves. And I’m sure other work comp consultants out there would say the same thing. So if there was only one suggestion I could give, that would be do not wait to ask for help! Time is not on your side when it comes to resolving problems with a workers compensation audit.

I hope you’ve found this information helpful!

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I bought a workers compensation policy for my part time business and did not have any payroll, will I get my premium back?

Posted on May 11, 2012 by Randy Sieberg, CIC, ARM, CRM

A question I was recently asked.

Workers compensation policies are subject to what’s known as the minimum premium. You can refer to the individual state authority in question for their definition of this term, however it is typically the lowest amount of which a policy can be written. 

Minimum premiums are established for each classification code and are generally found in a rate and rating value table published by the advisory organization, again for any specific state in question. When there are more than one classification code on a policy the minimum will be developed from the classification with the highest estimated premium.

To properly answer this question requires more information about how the policy was originally set up. For example…was the policy only written with the owner included? Or was the owner not included? What payroll was used to establish the policy premium and where did that payroll come from? What was the minimum for the policy? By the way…minimum premiums are generally shown on the issued policy declaration sheet.

So you may get some premium back…but the answer really depends on the details or circumstances surrounding the policy you have and how it was originally set up.

Funny how what seems to be a simple question can suddenly grow into a confusing issue when it comes to workers compensation!

Be sure to ask us a question or visit our site for more information about workers compensation premium issues.

Hope this somehow helps you out!

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How do you apply workers compensation payroll for a contract trucking (owner/operator) when they get paid by the load?

Posted on May 10, 2012 by Randy Sieberg, CIC, ARM, CRM

A question asked about Texas workers compensation rules.

How much of that cost for the load should be included in the workers comp code for payroll?

Answers to these types of questions about workers compensation can sometimes be very hard to uncover. And usually the first place to start is with the workers comp manual for the individual state in which the question pertains. 

According to the Texas Workers Compensation and Employers Liability Manual, under the paragraph entitled “Vehicles Under Contract,” to paraphrase, you’ll find that the labor part of payroll for drivers who provide vehicles under contract are to be included as payroll of the insured employer. It goes on to explain that if the “labor part” of the pay cannot be determined then 1/3 of the contract price paid by the employer should be considered payroll.

While the answer seems to be obvious, it is always wise to verify with the insurance carrier and the state authority their interpretation of the rules and how they will apply them to the insureds policy and audit.

Hope this helps you out!

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Are written job descriptions important in properly classifying employees for workers compensation?

Posted on May 8, 2012 by Randy Sieberg, CIC, ARM, CRM

A great question about workers compensation classification that I was asked earlier today!

To classify an employee properly, into a correct workers compensation classification code, written job descriptions are a great beginning point.  We all know that most job duties are actually in constant flux. And it can be the fluctuations that create audit and classification problems for the employer.

Classification codes can be very specific. Think of a classification code as a narrow range or band of acceptable work processes hovering between two book end boundaries. As long as the  employee’s work duties fall between those two book ends, a specific, descriptive classification code would apply. But what happens when that employee’s job duties are expanded and now all of a sudden one of their new duties takes them outside of their book end boundary?

Let’s add something. Let’s say at the beginning the employee worked full time in an office. They would come to work every day, walk into the office shut the door or stay in their cube and never venture outside until the end of the work day. Pretty easy to classify that employee as an office worker.  Now let’s say the employer comes to that office employee one day and tells them that their new job duty includes what they were doing before, but now, once in a while, they would go outside, climb a scaffold and help other workers install roofing materials. How will that new job duty effect the proper classification of that employee? What if that extra duty only happens 20% of the time, or 10%…or 1%! Where is the line drawn? Or is it? These are the kind of questions we help our clients sort out.

It’s these shifts in job duties that create unknown exposure for an insurance carrier. It’s these shifts in job duites that move a previously low rate classification employee into a higher rate class code driving the workers compensation premium up for the employer. Most of the time these shifts are unknown to the employer and only discovered at audit time by the workers compensation auditor by either asking detailed questions about the job processes or by observing the activities of an employers employees.

Lesson Learned: Written job descriptions are important when it comes to classifying an employee for workers compensation purposes…But are not the only consideration.

Hope this helps you out and thanks for reading!

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Independent Contractors; Workers Compensation and State Rules – Misclassified Employees?

Posted on May 7, 2012 by Randy Sieberg, CIC, ARM, CRM

Spurred on to address the ever-growing problem of mis-classifying employees on a workers compensation policy as independent contractors many states have reacted, or are reacting, by developing and enforcing stiff statutory penalties for employers who incorrectly classify a worker as an independent contractor.

This is not a new problem but confusion continues to reign supreme on this topic. You might think it’s pretty easy to tell if someone working for you is an independent contractor or an employee but hold your horses right there…it can be complicated.

Various states have been scrambling around now for a while putting together their definitions, specific rules and establishing their guides for implementation of the differences between an employee and independent contractor. Of course with those rules come penalties.

So let’s break it down for just a second. What’s the big deal anyway?

  • An employer using an independent contractor typically does not have to collect or contribute to various payroll and unemployment taxes, causing the states to loose revenue in an economic time when every state is scrambling to find every dollar they can;
  • If an employer incorrectly classifies an employee as an independent contractor the injured employee may lose their protection under the states workers compensation statutes thus circumventing the laws, in place, designed to protect the employee.
  • If an employer incorrectly classifies an employee as an independent contractor the workers compensation insurance carrier may lose premium they were due because of the exposure they had to loss.
  • Reclassification at audit can create an unexpected additional cost for the employer.
  • Of course there are more issues than these on this topic…

While some states have clarified their stand on this topic, others are still working on it.

Lesson Learned: Be sure to check with your specific state regarding their take on the independent contractor – employee issue. Rules and penalties can be very different from one state to another!

Thanks!

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