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Independent Contractor or Employee?

By George Henry, JD, CPCU, CIC CLU, ChFC

Reprinted from Michigan AGENT Magazine with the permission of the Michigan Association of Insurance Agents.

It doesn’t take an agent very long in our business to encounter the Workers Comp client who thinks all they have to do to avoid premium is pay everyone on a 1099, making them independent contractors and not employees. The problem is that calling a horse a cow doesn’t make it a cow; and calling an employee an independent contractor doesn’t change employee status.

As many agents have found, clients become dissatisfied when their audits are adjusted because the auditor does not agree to the Independent Contractor status of certain individuals.

There are a couple of forces involved in the processes of EE (employee)/IC (independent contractor) status. One is the IRS test, the second is the Court system (common law) of the various states.

The IRS has an 11 factor test (revised from 20, http://bit.ly/ pivExJ), that stresses the behavior control—where, when, what to do; financial control—how and when paid, is there a potential for profit or loss; and relationship—what do contracts show was intended: permanency, benefits provided, and is work performed a key aspect of the regular business of ER (employer).

As you are probably aware, each state in our union can promulgate its own brand of law. Here in Michigan, “the Economic Reality Test is the most common tool for discerning whether an employee-employer exists.” Buckley v. Professional Plaza Clinic 281 Mich. App. 224 (2008).

The court looks very closely at what the parties intended and contracted, as well as the totality of the circumstances regarding the work performed. Similarly to the IRS test, the courts look to: 1. control of duties, 2. payment of wages, 3. right to hire & fire, and 4. integrality of work performed to ER’s business (a roofer’s labor is not integral to a legal office, but a lawyer’s would be).
So what can we as agents do to advise clients regarding the Workers Comp Employee/Independent Contractor dilemma?

1. Let the Employer know that if they declare Independent Contractor status for work done, they have given up the Workers Comp statutory protection against being sued by an employee for common negligence. Although Employees may still sue for gross negligence (such as an employer removing a protective device on a machine to increase production), they can’t sue for common negligence, as the concession to the Employer for providing wage and medical benefits under Workers Comp.

2. Advise Employers to have any Independent Contractor provide them with a Certificate of Insurance, showing they have Workers Comp protection elsewhere.

3. Make sure that Independent Contractor status is addressed in any contract between Employer and IC.

4. Advise Employers to follow Rule IX. F. Subcontractors, in the basic manual for Workers Comp and Employers Liability (1997).

Whether someone is an Independent Contractor or an Employee is a complex legal question that ultimately comes down to the court system hearing the case. As agents, we can only explain the various tests involved, and advise the client to keep that Workers Comp in force.