Business Articles - Legal and Insurance

The Lowdown on Worker's Comp

Worker's compensation rules make a lot of people in small construction businesses nervous because they're not sure how those rules apply to them. What exactly is worker's compensation anyway?

Worker's compensation is a kind of no-fault program for job injuries. No-fault means that if an employee is injured on the job, it doesn't matter whose fault it is, even if the injury happened because the employee was doing something stupid or against your company's safety policy. No matter how many times you've told your employees to leave those saw guards in place, if one of them cuts off his fingers because he had the saw guard tied up, he's entitled to coverage of his medical expenses and a portion of any lost wages. (You can, however, require that he go to the doctor or clinic you prefer.)

So that's a big benefit for your employees, but what's in it for you? This: When you take the fault out of injuries, you also take away those multimillion-dollar lawsuits. Bear in mind that I'm not speaking here about injuries caused by an employer's gross negligence. That's a different issue.

But maybe you aren't subject to worker's compensation laws at all, because you have no employees. Many construction businesses don't. Most construction companies need plumbers, electricians, concrete people, and so forth, but not for 52 weeks a year. You aren't required to provide worker's comp benefits to independent contractors.

Working With Independent Contractors
Those independent contractors can't be employees disguised as independent contractors, however. The IRS knows how tempting it is to call, for example, the painter who works for you only during the summer an independent contractor instead of an employee.

There are rules for determining who is and who isn't an employee, but they mostly boil down to control. Do you tell your worker how to do a job, what kind of tools to use, where to start, when to come to work, when he can take his lunch, how loud he can run his radio, and so forth? Or do you just tell him what job you want done, and then he figures out how to do it? Does he work only for you, or does he also work for other contractors. Does he have his own license and insurance? The answers to these questions will help distinguish between employees and independent contractors.

Sometimes you may wish that an independent contractor was your employee. If an independent contractor is injured because of his own care-lessness, it's not your problem. But if his injury is caused by you or any of your employees, the money you would pay out in a liability claim is a lot more — sometimes by a factor of millions — than the money you would pay in worker's comp. Liability insurance is what protects you in that situation.

Sole Proprietor or Partnership
What if you are your only employee? If you are the sole proprietor of your business, you don't have any worker's compensation responsibility. The idea is that you will take care of yourself, just as you would if there were no compensation laws. That's also true if your business is a partnership.

However, if you incorporate the business, or if you and your partner incorporate your partnership, then, legally, you become the business's employee. What does that do to your worker's comp requirements? What if your partner — or, as we now refer to him, the other employee of your corporation — is injured on the job? Does your corporation have to kick in with worker's comp benefits, or is he on his own, as he would have been before you incorporated?

Most states provide a waiver for when a company's employees are also the company owners and officers. In Michigan, you must file a certificate asking for a waiver from workers' comp laws and insurance requirements.

Worker's Comp Insurance
In most states, the fact that you would have to pay worker's comp benefits if your employee was injured does not automatically mean that you must also carry worker's comp insurance. Often there are thresholds of how many employees you must have and how many hours they must work before you are required to buy worker's comp insurance.

Although you could be subject to worker's comp laws without being required to carry any worker's comp insurance, you ought to look into carrying it anyway. If you are found liable for an employee's injury and you don't have the insurance, you will have to pay out of your own pocket.

Quenda Behler Story has practiced and taught law for over 25 years and is the author of The Contractor's Plain-English Legal Guide, available from Craftsman Books.

This article has been provided by JLC-Online is produced by the editors and publishers of The Journal of Light Construction, a monthly magazine serving residential and light-commercial builders, remodelers, designers, and other trade professionals.

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