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Navigating Workers’ Compensation for Independent Contractors

by FCIS Team | This article was posted on 10 11, 2021 |

What you don’t know can cost you. Did you know you can be liable for injuries to independent contractors? Or that you can pay extra premiums as a result of improperly classified independent contractors?

California Labor Code 3700 requires every employer to maintain workers’ compensation insurance. The definition of “employee” is specified in CA Labor Code 3351, and beginning July 1, 2020, the code was amended to include any individual who is also an employee pursuant to Labor Code Section 2750.3. This means, except for specific exemptions, a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor (AB5).

Business owners can be exposed to a number of problems as a result of this. The three most common issues are claims/losses, government fines and unforeseen audit exposure.

Claims can be submitted against general liability or employer liability/workers’ compensation policies by improperly insured independent contractors. Even worse, some policies contain outright exclusions for claims brought by uninsured independent contractors. As a result, you could have liens put on your business, property or projects by unpaid medical providers who provided care to the independent contractor.

Failure to maintain workers’ compensation is a misdemeanor and can result in a fine of at least $10,000 or imprisonment for up to one year. If an employee gets hurt or sick, you are responsible for paying all bills related to the injury and illness. The Department of Industrial Relations, through the Division of Workers’ Compensation, will pursue reimbursement of expenses from the responsible employer through all available avenues, including liens.

Workers’ compensation policies in California are subject to audit annually and are adjusted based on final payroll for the policy period. Independent contractor payments can be reclassified as “wages” and become subject to premium charges. Based on the type of work the independent contractor was doing, an additional classification can be added to a policy during an audit. Also, keep in mind, regardless of exemptions under AB5, if independent contractors do not have their own coverage, they can also be included for rating purposes.

Take these steps to mitigate your risks:

  1. Have a competent employment attorney review your independent contractor agreements.
  2. Make sure all independent contractors have insurance — check annually.
  3. If independent contractors do not have insurance, know your risks. Plan ahead to determine if you have audit exposure.
  4. Obtain workers’ compensation coverage.

Have additional questions or want help securing the right coverage? We’re here to make your life easy — contact us today.