A team at the National Association of Insurance Commissioners/International Association of Industrial Accident Boards and Commissions Working Group on Workers’ Compensation has boldly entered the lion’s den of “independent contractor” legal mumbo jumbo.
Headed by IAIABC Executive Director Gregory Krohm, the group recently authored a white paper titled, “The Determination of Independent Contractor Status for Workers’ Compensation.” In it, the authors discuss the various approaches states have taken in defining the nebulous “independent contractor” title, offer up some pros and cons on statutory decisions, and delve into the origins behind the differing regulations.
In the workers’ compensation system, if the injured person is an independent contractor, not an employee, the business that hired him is not liable for benefits if he is injured.
Straightforward enough, except that there isn’t a generally accepted test for determining whether a worker is an employee or an independent contractor. “Independent contractor” can be broadly defined as an individual who has no legally defined employment relationship (for purposes of workers' compensation) with the entity for which he performs paid services.
The devil is in the details. The authors noted that an independent contractor who publicly represents himself as a business, works from his home, uses his own office equipment, and sets his own hours or chooses not to work at all may indeed be an “independent contractor” in one state, but not in another.
The study notes that one core legal principle is at the heart of most tests for determining employment status: Does the hiring entity have the right to control or direct only the result of the work done by the worker, or does the hiring entity also control the means and methods of accomplishing the result? Independent contractors may be told when and how work products must be delivered, but are free to devise their own plans for achieving their obligations.
If the control test is ambiguous or inconclusive, a second common test looks to the dependence of the worker on the hiring entity for his income. An independent contractor would be expected to have multiple sources of income, at least over the span of a year or two.
Given these broad generalities, state workers' compensation systems are all over the board in the number and specificity of criteria used to determine independent-contractor status. In some jurisdictions, a worker’s status does not depend at all on whom they work for, but only on how they do the work. Some states rely exclusively on the nature of the work. Others weigh multiple factors, including but not limited to the right of control and method of payment.
Several states have established licensing as a necessary and sufficient condition for defending one’s status as an independent contractor. Others use a certification process to establish a safe harbor for the alleged independent contractor and the organization that hires him. These certifications run the gamut from simple self-declarations (Rhode Island and Texas) to detailed tests to prove the status of the applicant (Montana).
Since 2005, Montana has used a pre-certification process to screen parties for the right to be treated as an independent contractor. The application includes a point system to determine if a sufficient basis had been reached for awarding the certification. A total of 15 points are needed from 25 criteria having point values ranging from 1.5 to 6 points each.
Massachusetts recently reformed its law to establish a presumption of employment unless three criteria can be proven. Other states have special provisions for particular industries or professions. For instance, Oregon has a special test for landscape contractors; Maine has one for loggers. In Minnesota, custom-made standards were mandated by the legislature for 34 specific trades.
Since the mid-1980s, Wisconsin has used a nine-point test for determining the status of an independent contractor. All nine points must be met and documented or the party is deemed a statutory employee for workers' compensation purposes. Disputes are heard first by the Wisconsin Compensation Rating Bureau.
The approach seems to be working. There were fewer than 10 disputed cases of premium classification brought to the Wisconsin Bureau in the past three years. All were quickly decided, and none were appealed to the Office of the Commissioner of Insurance. This is a remarkably low figure, given the state’s 130,000 insured employers and roughly 20,000–30,000 annual audits.
In Arkansas, there is no fixed formula for determining whether an injured worker is an employee or an independent contractor. The determination must be based on the particular facts of each case.
The white paper may be read in its entirety at www.iaiabc.org.