Home > Property & Casualty > Misclassifying independent contractors could cost you

Misclassifying independent contractors could cost you

hailingacabAs the economy changes, we have seen an increased use of “independent contractors” in all areas of business as a way to try and reduce employer expenses.

Let’s take ride-sharing startups Uber Technologies Inc. and Lyft Inc. as an example. A job as an Uber driver has many benefits. Drivers are their own bosses with the luxury of making their own schedules. But as independent contractors, they are responsible for myriad expenses. After car maintenance, gas, insurance, and taxes, plus a 20 percent commission to Uber, the driver’s pay is cut nearly in half, according to The Washington Post. In recent lawsuits filed in San Francisco, drivers claim the ride-sharing companies have been mislabeling them as independent contractors according to California’s labor law. The National Council on Compensation Insurance (NCCI) notes that if drivers were declared employees and therefore entitled to workers comp benefits, there would be no disputing which policy – commercial or personal – would cover auto accidents. Additionally, as the employer, Uber would be responsible for covering fuel costs and other work-related benefits like paid sick leave and vacation days.

Every state defines the roll of an independent contractor differently, if at all. In California, courts consider how much control a company has over a worker’s day-to-day decisions, whether the worker is paid by the hour or job, who supplies the necessary tools, and if the work itself is part of the company’s regular business. Uber and Lyft have urged the courts to dismiss the employment questions, but the judges disagreed. “At first glance, Lyft drivers don’t seem much like employees,” Judge Chhabria wrote in his order.” But Lyft drivers don’t seem much like independent contractors either.” Despite the hope of a ruling in California this week, judges have declared the roll of drivers for car-sharing tech companies as ambiguous, and a decision left for the juries.

On a local level, Massachusetts has one of the strictest independent contractor laws. Attorney General Maura Healey, who began her term in January, has made this issue a priority, going as far to release an Advisory on the 2008 Massachusetts Independent Contractor/Misclassification Law articulating the purposes of the law and determination guidelines. The Advisory states, “The need for proper classification of individuals in the workplace is of paramount importance to the Commonwealth. Entities that misclassify individuals are in many cases committing insurance fraud and deprive individuals of the many protections and benefits, both public and private, that employees enjoy.”

To be classified as an independent contractor in Massachusetts, all three of the following elements must be met:

  1. The individual must be “free from control and direction in connection with the performance of the service, both under his contract for the service and in fact.”
  2. The service being performed must be “outside the usual course of the business of the employer.”
  3. The individual must be “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.”

Massachusetts attorneys have won many battles against companies abusing workers’ rights in all areas of business. By taking some preliminary steps you can ensure that your workers are properly classified.

Once you have properly identified your employees and independent contractors, it is necessary to obtain and retain the proper documents from any independent contractor. You will need them when you are audited by your workers’ compensation insurance carrier:

  • A Certificate of Insurance for General Liability Coverage. (Keep originals not photocopies on file.) Make sure to verify the limits are at least equal to that which you have on your company’s insurance program and be sure that the period of coverage on the certificate matches the period when the work was performed as closely as possible.
  • A Certificate of Insurance for Workers’ Compensation, if the independent contractor has workers’ comp Insurance.
  • A copy of the independent contractor’s business license.

By not taking some preliminary steps to ensure that each of your workers is properly classified, you could face additional premiums upon audit from your workers’ compensation insurance carrier and the risk of adverse claims experience, which could result in higher future premiums. Finally if you fail to properly classify your workers properly, depending on the state, you can be subject to fines and legal remedies.

By taking some preliminary steps to ensure that each of your workers is properly classified, your business can function without fear of government sanctions and you can save your money.


About the Author

David Bardelli is a Senior Vice President in the Property and Casualty Group and the Casualty Practice Leader for WGA. David has extensive knowledge with casualty risks, including technology healthcare, business services and miscellaneous manufacturing groups of all sizes.

617.646.0257 | DBardelli@wgains.com | Connect with David on LinkedIn
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