From About.com, Marianne Bonner discusses the issue of misclassifying workers as independent contractors instead of employees from the perspective of a business insurance expert with a particular eye workers compensation issues. Marianne writes:
Many employers misclassify workers inadvertently. However, some employers intentionally misclassify employees as independent contractors as a ploy to save money on insurance premiums. This tactic is a bad idea!
For one thing, failure to purchase mandated workers compensation coverage may be grounds for a lawsuit against the employer by an injured employee. Secondly, many state workers compensation laws prohibit employers from deliberately misclassifying employees as independent contractors. Employers that violate these laws may be subject to fines, civil penalties, criminal charges and even prison.
Some states randomly audit employers to ensure that workers are properly classified. However, most states rely on insurers to conduct audits.
A majority of workers compensation policies are subject to an annual audit. The audit ensures that a premium has been charged for all workers entitled to workers compensation benefits. When purchasing a workers compensation policy, an employer pays a deposit premium based on estimated payrolls. The actual premium is determined after the policy has expired.
The final premium is based on actual payroll and classification codes. If the insurer determines that workers designated as independent contractors are really employees, it will assign a class code and payroll to those individuals. The employer may ultimately be charged a large additional premium.
Does your company hire subcontractors? If the answer is yes, you must ensure that all subcontractors have purchased workers compensation insurance. This is important for two reasons. First, an employee of an uninsured subcontractor who is injured on the job may seek recovery for his or her injury from you (the general contractor). You can protect yourself against such suits by insisting that all subcontractors provide a certificate of insurance verifying that they have purchased workers compensation insurance.
There is a second reason why it is important to obtain certificates of insurance from subcontractors. When your insurer audits your policy it will make sure that all subcontractors you’ve hired have provided a certificate. The auditor will charge you a premium for each uninsured subcontractor. The premium will be based on the subcontractor’s payroll and the appropriate classification codes. If you cannot provide payrolls for those subcontractors, your insurer may base the premium on the cost of the subcontractor’s work….
Read the full story at Employee or Independent Contractor?.