Does my Start-Up Really Need Workers Comp Insurance?

All My Workers are 1099 Independent Contractors

Workers Compensation New York

In the startup world, a lot of New York companies classify their workers as “independent contractors” and pay them on a 1099.  I get it, this is easy, and it avoids the hassle of taxes and insurance and a lot of other regulatory factors.  But the simple fact is that this practice is probably violating the workers compensation law – at least in New York.  Workers Comp Insurance rules and laws are governed by each state and vary widely from state to state, but I can tell you that in New York the rules are pretty straight forward and the penalties for non-compliance are pretty significant.

Here’s the deal.  In a for-profit business, the New York Workers Compensation Board says that an “employee” is generally any laborer, worker, leased employee, borrowed employee, part-time employee, and most sub-contractors.  And, under the law workers comp is required to cover them.

Now, specifically with regard to differentiating between an independent contractor and an employee the board has these factors or criteria for determining if the worker you “employ” is in fact an employee and subject to the law:

Right of control – the degree of direction or control you or your company exercises over a worker is a key issue in determining an employer-employee relationship.  If you control when, where or how work is to be performed that worker is probably an employee.  If the worker carries out the task on their own time in their own space and works independently they are likely an independent contractor.

Type of work performed – if the worker is doing work central and similar to the business for which they are working for then they are likely an employee.  As an example, a worker hired to mow lawns for a landscaper is likely an employee, a worker hired to mow your lawn is likely an independent contractor.

Method of payment – Employees are going to generally be paid at regular intervals, like weekly, monthly, or on an hourly basis.  Independent contractors tend to be paid via a contract for work performed, or by project.  Whether you pay a worker using a W2 or a 1099 is NOT a determinant of whether that person is an employee or independent contractor for workers comp purposes.  This one point is generally the most surprising for tech firms who assume that if a worker is paid on a 1099 then they are naturally an independent contractor, but it’s not that simple under the comp law in NY.

Furnishing equipment and materials – if you provide office space, computers and other work materials to a worker, that tends to indicate an employer-employee relationship.  This rule is often applied to construction firms where the company provides workers the tools materials and equipment necessary to complete a project, which will indicate more employee status than independent contractor status.

Right to hire or fire – if you retain the right to hire or fire a worker, it typically indicates an employee status.  An independent contractor usually retains control over the completion of a project or work project.  Naturally, a business can fire an independent contractor if they are not performing the work as specified, but that is different than terminating an employee.

It’s important to understand that all the above criteria are used to determine whether a worker is an employee or independent contractor for workers comp purposes and no one factor alone determines it.  If disputed, a workers compensation law judge has the final say….but do you really want to go that far with it?

The penalties for non-compliance are pretty heavy in NY.  The Workers Compensation law permits a penalty of $2,000 per 10-day period of noncompliance.  PLUS any other penalties the Board may assess.  If the Board “finds out” that you didn’t have workers compensation because a worker is injured and reports you to the Board you’ll need to pay out of pocket for the injured workers’ medical costs and lost wages he or she would be entitled to under the law.  And, in those circumstances, the Board may drop the hammer on you for other penalties.

Okay, if that’s not scary enough, imagine a worker is severely injured in a workplace accident…. You may be thinking “What can happen?  I’m a technology company who’s going to get injured working at a computer?!?”  Here’s an example – your worker, who you’re paying on a 1099 and classifying as an independent contractor runs an errand for you and while crossing the street is hit by a car which doesn’t stop and leaves the scene.  The worker’s injuries are severe, and he is hospitalized for 5 days and out of work for 2 months.  He doesn’t have health insurance and is forced to file a workers comp claim because his medical bills are over $100,000.  Your company is going to be fined for the number of days you didn’t have coverage and now will pay the medical bills and his lost wages out of pocket – total cost – let’s just say it’s going to be large – over $150,000!  How do you avoid that potential financial catastrophe?  You buy workers compensation insurance – for a startup tech firm that might cost you $1,500 a year.  Make sense?….. Probably.  Your investors will thank you for making that wise decision.

One final note.  A business cannot require “employees” to obtain their own workers comp insurance or contribute to the cost of the employer’s workers compensation insurance.  “Independent contractors” may be required to procure their own insurance, but it’s important to remember the difference between who is an employee and independent contractor by the Board rules.

by: Gordon B. Coyle

One thought on “Does my Start-Up Really Need Workers Comp Insurance?

  1. Pingback: January 1 Workers Comp Strategies - New York Business Insurance for Technology, Manufacturing, Commercial & Industrial

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