Who is Covered By Your Workers’ Compensation Policy?
December 27, 2018 | Juli Jenkins, SCLA
The Workers’ Compensation Act (WCA) requires coverage for all employees. Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
The relationship between employer and worker is not always this straightforward, so it’s important to categorize and understand the relationship that exists between your company and the person performing the services.
As defined by the Internal Revenue Service (IRS), employees may be categorized into one of the following four categories:
- Direct Employees: This is the most common relationship. Simply stated, these are the workers that are on the company payroll.
- De Facto Employees: Based on the degree of control the hiring party has, an independent contractor may actually be an employee. The more control over the worker, the more likely the worker will be considered an employee. If the hiring party sets the hours and methods of doing the work; supplies the tools and materials necessary to complete the work; and is the sole source of income for the contracted party, the higher the likelihood the worker is a de facto employee.
- De Jure Employees: In this situation, the employer is not the direct employer; instead, they become the employer of record by the action of the legislature and sometimes the findings of a court. In other words, de jure employers are created by force of law. For example, general contractors hiring uninsured subcontractors become a de jure employer of the uninsured subcontractor’s employees.
- Special Employees: This is a situation where there is both a direct employer and a special employer, and both employers are involved in some way. This is sometimes referred to as “borrowed servant doctrine,” where control and right of control is the deciding factor. Several markers are used to determine whether a worker falls into this category.
- Who controls the manner in which the work is performed?
- Who specifies the place of performance?
- Who sets the hours worked, including breaks for lunch and rest?
- Who details the work and provides the necessary tools, supplies, and work areas?
- Who is supervising the worker?
- Is the work being done exclusively for the hiring party?
Worker classification is not always an easy task. The entire working relationship needs to be considered, as well as the extent of the right to direct and control the services of the worker. Be sure to document the factors used to classify your workers. Remember, misclassifying a worker can have a substantial financial impact.