Workers' comp insurance: When is someone a contractor?
Usually when we write about workers' compensation audits and lawsuits, it's because employers either purposefully or inadvertently misclassified an employee as an independent contractor. But now the tables have turned in a New Jersey case involving a horse trainer.
According to a report by the National Workers Compensation Defense Network, licensed horse trainer Randolph Perry trained horses for Robert Horowitz Stable at the Meadowlands Race Track. All was well until one day, Perry slipped on an ice patch and sustained a serious injury. He filed a workers' compensation claim against Horowitz, and that's where things got weird.
In a New Jersey workers' compensation case, it's not uncommon for an alleged employer to make the case that the plaintiff is an independent contractor, and that's the defense Horowitz used. Though Perry pointed to instances where Horowitz controlled how his work was done – such as specifying how many miles the horses must run – the court could not overlook the fact that that Perry worked with many different horse owners over his 40-year career.
Here are several other factors that helped the court decide Perry is self-employed:
- Perry did not receive a W-2 or 1099 from any of the horse owners he worked with
- He was not paid a specific wage – if Perry needed more money, he would charge accordingly
- Perry rented stalls directly from the racetrack, which supported an interpretation that Perry was in business for himself and not an employee
This case is the perfect example of a close call: there was evidence to both support and negate Perry's status as an independent contractor. And where does that leave a small-business owner who wants to abide by the law and hire contractors? Can you ever be sure that the employment lines aren't getting blurred?
Let's take a look.
Off to the races: The control test and the relative nature of work test
Say you want to hire an independent contractor to help your marketing business churn out some engaging web content for your clients. But you also don't want to run afoul of your state's workers' compensation laws, which require that you insure all your employees. You need to be certain that your contractor is indeed a contractor in the law's eyes, lest you face severe fines and penalties for not having adequate workers' comp coverage.
You're absolutely right to cover your bases. After all, the burden of proving that your contractor is not an employee falls on you. Luckily, there are some "tests" that can help you determine if a person is an independent contractor.
Control test for independent contractors
If someone who works with your business is an independent contractor, they must:
Control the manner of their work. You can establish deadlines, but you can't tell them how to get that work done.
Use their own tools and equipment to complete their work. In the case of your hypothetical copywriter, that means the writer should have their own laptop or computer, word-processing software, and Internet service.
Have the ability to earn a living by working for other businesses. When it comes to compensation, you should not withhold taxes or offer benefits – those are trademarks of an employee relationship.
Work whatever hours they please, so long as they meet their deadlines.
The relative nature of the work test
If your business depends on your contractor's work and skills to keep the business afloat, you might be in hot water. What the contractor does, the level of skill involved in their work, and whether their work can be done independently affects their worker status. Typically, if the contractor does long-term, continuous work for your business alone, that evidence may be enough to convince a court that you misclassified the worker as an independent contractor when the nature of their work aligns with that of an employee.
To learn more, read the IRS article, "Independent contractor (self-employed) or employee?"
Quick tips for small-business owners hiring independent contractors
Here are some helpful tips if you want to hire some contractors and avoid worker misclassification issues:
Give your contractor room to be a contractor
Sure, you can establish project parameters and deadlines, but you can't define the manner in which the contractor does their work. In the case of the horse trainer, for example, you can require that the horses be trained, but you can't specify how the trainer should accomplish that end (e.g., come in every weekday from this time to that time). On that note, your contractor should have enough time and flexibility to work for other businesses to earn their living.
Be careful with the financial side of the relationship
Require that the contractor submit an invoice for their completed work. If you put contractors on your payroll, it supports the case that they are employees rather than independent business entities. As a payer and not an employer, you shouldn't reimburse contractors for tools or supplies.
Don't offer employee benefits
Think of independent contractors as their own boss. You shouldn't offer them pension plans, insurance, and vacation pay – they are small-business owners and can handle that themselves.
Think about why you want to hire the contractor
If you're hoping this worker can fill a key role in your business, you should hire an employee instead. A contractor's work should be more supplementary than primary. And if the work you need done doesn't have a definitive end date, it may be a sign that an employee might be a better fit for your needs.
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