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This article was written by Pam Victor, Director of West Coast Operations, AP Intego Insurance Group. All claims and representations made herein are attributed to them. Nothing in this article constitutes legal advice. Please consult an attorney if you have any questions.
Basic logic tells us we can’t protect something we don’t have. The conventional wisdom, therefore, is that if you don’t have employees, you don’t need to purchase a workers’ compensation policy. In fact, the law in 49 states codifies this by requiring only businesses with employees to carry this coverage. This, of course, is the letter of the law.
But if your business relies on a labor force of independent contractors and freelancers, following only the letter of the law may leave you exposed to risks similar to those a business with employees might endure. These “1099” employees (a reference to the year-end tax form they receive) might under certain circumstances be granted the same rights and protections as the W-2 employees that workers’ comp laws are written to protect.
Does it make sense to purchase a workers’ comp policy when your business doesn’t have employees? It might. Here are a couple of scenarios, among many, in which the benefits of having a policy in place make good sense even if it’s not legally required:
When a 1099 employee, well, shouldn’t be
You use 1099 workers because they have the expertise you need and provide the flexibility that helps you manage your costs and workload effectively. They can also create tax and employee benefits savings versus what a W-2 employee would cost. And like all smart business people, when you find that one-in-a-million freelancer who’s super diligent with killer skills, you want to claim the bulk of her billable hours.
But beware, in this scenario, the IRS could take the view that she is effectively your employee, and that you should have been paying W-2 employee taxes all along. Employee benefits, including workers’ comp protection, might then accrue to your 1099 worker, leaving you exposed and in a potentially precarious financial situation.
In other words, just because you don’t consider a contractor to be an employee doesn’t mean the government, the Fair Labor Standards Act, or a judge will agree, especially if an uninsured (or underinsured) contractor makes a claim against you after getting hurt or sick on the job. If it’s deemed they were in your “care, custody, and control,” they may be considered coverable.
When you don’t know what you don’t know
In another scenario — again, because you’re a smart business person — you request a certificate of insurance (COI) from a contractor before you hire him, boosting your confidence that he carries his own liability insurance.
Unbeknownst to you, however, that COI has a cancellation notice on it for something that happened on a prior job with another client. If this contractor gets hurt working for you and makes a claim against you, a State Workers’ Comp Board may not find in your favor. You may be liable for his medical costs and lost wages.
Insulating yourself from these and other hard-to-predict, complex, and costly risks is critical to the viability and sustainability of your business. Although it may not be required by law, purchasing a workers’ comp policy that protects your business is a shrewd business move.
Two more shrewd moves
Familiarizing yourself with your state’s workers’ comp regulations is actually more than a good idea, it’s required reading in our book. You can find information about your state’s requirements on this interactive map.
Get a fast workers’ comp quote from our insurance partner AP Intego by visiting Benefits in the Payroll section of your online Square Dashboard. Worried about the cost of a policy? AP Intego offers Pay As You Go Workers’ Comp, which enables premium payments tied to your regular payroll runs. With a Pay As You Go Workers’ Comp policy, you protect your business, your employees, and your cash flow.
About AP Intego
AP Intego combines all the traditional sales and service capabilities of a national insurance broker with a passion for using technology to uncomplicate small business insurance. AP Intego currently has more than 46,000 customers.