More businesses are getting hit up for additional premiums by their insurers during audits for using independent contractors, according to a new report in the insurance trade press.

According to the Workers’ Comp Executive trade publication, insurers are ratcheting up their scrutiny of independent contractor usage and sometimes demanding that the employer pay for workers’ comp coverage for the contractor.

The issue is typically coming up when companies use independent contractors that are one-man operations. According to the report, even companies that contract out work to computer programmers and graphic designers are getting hit with bills for additional workers’ comp premium during audits.

Sole proprietors of businesses are not required to carry workers’ comp coverage for themselves and do not have to obtain workers’ comp if they have no employees, under the California Labor Code.

The only exception to this is roofing companies with C-39 contractor classification. All roofing contractors are required to secure workers’ comp policies, even if they are sole proprietorships with no employees.

The press article cites the case of a small sign and graphics company that as part of its services offers sign installation. The company for years has been using independent contractors to do this work, according to the report.

The owner of the company told the Workers’ Comp Executive: “They’re installers and they sub out for tons of [other] businesses. Independently they’re just one guy. They’re incorporated and they have liability insurance, but as a business owner they’re not required to have workers’ comp insurance.”

The sign company’s owner said the issue of comp coverage for these installers had been raised for the first time in his latest audit. “I’ve shown [the auditor] that they’re incorporated businesses, I have their liability insurance certificate – I pushed back a couple times but they said this is the way it is,” he told the trade publication.

One of the biggest challenges for employers is the difficulty of defending against a carrier’s demand for additional premium. If the dispute can’t be resolved through discussion, the only solution is to go to court, but the cost of hiring an attorney will often outweigh the benefits – if the employer can find an attorney to represent them.

Insurers told the trade publication that they look at a number of factors to determine whether an “independent contractor” is that, or really just an employee.

In particular, they will typically check if the contractor is in the same line of business as the policyholder, or if the contractor has their own business or federal employer identification number.

Auditors may look at a number of factors to determine if someone is an independent contractor or employee, such as:

  • If the employer retains direction and control over how the independent contractor and its employees perform their work;
  • If either party terminates the contract at will;
  • If a person brings other workers to perform contracted services, and if they provide a certificate of insurance for workers’ comp in such cases;
  • Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
  • Whether or not the work is a part of the regular business of the principal or alleged employer;
  • Whether the principal or the worker supplies the instrumentalities, tools and place for the person doing the work;
  • The alleged employee’s investment in the equipment or materials required by their task or their employment of helpers;
  • Whether the service rendered requires a special skill;
  • The length of time for which the services are to be performed; and
  • The method of payment, whether by time or by the job.


The takeaway

The biggest takeaway for you as an employer is to review all of your independent contractor relationships to make sure that they comport with the bullet points above. The biggest factor is typically the degree of control you exert over the work.

Besides workers’ comp carriers cracking down on the way employers classify independent contractors, the federal government and the IRS have also been scrutinizing their use.

If you have concerns or questions, feel free to call our office to discuss independent contractor usage.