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Independent Contractors and Workers Comp – watch out for audits

workcompauditEarlier in the year, one of my WGA colleagues wrote a blog about the growing challenge employers face trying to place Workers Compensation. While many companies have been able to navigate these difficult renewals, there may be more to be concerned about. Employers must avoid becoming complacent, especially when it comes to renewal prices and policy reviews. It’s important to remember that the estimated exposures used in the development of the annual renewal premium are subject to an end of policy year audit. While most facts discovered during an audit are the result of normal business actions and are not surprises, regulations surrounding independent contractors may catch some employers off guard. Specific employment practices will determine whether a worker is considered an employee or independent contractor and whether or not the employer is responsible to insure them. Therefore, employers should review the differentiating factors to ensure they have complied with current regulations.

During an audit, determining the status of an independent contractor is fact intensive based on whether or not the employer is controlling or has the right to control the work performance of the contractor. For example:

  • Deciding what actions are to taken to complete the work
  • Directing the manner of how the work is done
  • Providing the means
  • Controlling the methods, etc.

If there is evidence of this type of control, the auditor is likely to consider the independent contractor an employee. The contractor will be considered truly independent only if the employer’s sole involvement in the project is acceptance and approval of the final work product.

How can protect yourself from this big surprise?

  1. Identify all independent contractor relationships that you have over the course of your Workers’ Compensation coverage term. You may be surprised to learn just how many there are over the course of a 12 month period.
  2. Centralize the use, approval, and documentation of all independent contractors.
  3. Require all contractors to provide a certificate of insurance as evidence of Workers’ Compensation insurance. Some contractors may opt out of Workers’ Compensation coverage – e.g. Sole proprietors. If that is the case – document, document, document.
  4. Have a signed written contract with each and every contractor that details the work to be performed; that confirms this is an independent contractor and not an employer/employee relationship; the employer only has the right to inspect the work product as opposed to directing the contractor; and that coverage for Workers’ Compensation is the contractor’s responsibility.
  5. Have all 1099 tax forms on file for all independent contractors.
  6. Check your Workers’ Compensation policy regarding audit and the basis on which premiums are calculated.
  7. Be proactive in having all of this documentation available for the insurance company auditor.

For more information on Workers Compensation programs, contact your WGA Client Executive.


About the Author

Rick Black is a Senior Vice President at WGA, with a focus on Property and Casualty Insurance. He joined the firm in 2007, bringing with him 30 years of insurance experience in all areas of complex risk and risk financing. 

617.646.0279 | Rick.Black@wgains.com | Connect with Rick on LinkedIn
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