By Bill Pilchak – 9/4/14
Most businesses are aware of the dangers of designating workers under the direction and control of an employer as independent contractors. The federal government, in need of revenue since the economic decline of 2008, has staffed up to ferret out abuses, levy fines and collect taxes. And, the individuals who sign independent contractor agreements at the commencement of the relationship can disavow their independent contractor status and claim that they were employees all along, because the agreement is “not determinative.” So, both individuals and the government have reason to dispute independent contractor status.
Accordingly a mischaracterization can come back to haunt an employer in a variety of ways, such:
- The supposed independent contractor’s claim to employee benefits, and possible plan qualification and disqualification issues;
- Fines for not having I-9 forms for individuals who are employees, fines or criminal prosecution for having illegals on the workforce, or God-forbid fines assessed against one’s customer for its use of your illegal workers on its premises;
- IRS or other agency assessments against the employer for all items not withheld, such as federal and state income tax, social security contributions, Medicare deductions, unemployment contributions, etc. (You didn’t think the government would actually chase the individuals, when they can get all the revenue from you, did you?)
- Pursuit of employment litigation under statutes designed for employees only.
However, another interesting wrinkle became apparent recently. In fact, this wrinkle applies to legitimate corporations and LLCs that serve a variety of businesses and are legitimately independent contractors, if they are so small that the owner is the primary or only service provider for the business. Let’s call that business “One-Man-Show, LLC.”
As most employers know, workers’ compensation is both a blessing and a curse. It’s a curse because those injured on a worksite get compensated for their injuries even if the injury is caused by their own negligence. It’s a blessing because at least the individual cannot sue for pain and suffering and mental distress damages, which make up most huge courtroom verdicts.
Workers’ compensation coverage for extremely small businesses is unique in two respects. First, the business owner can opt out of having coverage for him/herself. Second, because there is usually no one in the business with a motive to discern fraudulent claims by the owner, workers’ comp coverage for owners is priced quite high. The combination of these two unique features means that even legitimate businesses such as One-Man-Show forgo workers compensation coverage for the owner.
Under Michigan law, improperly designated independent contractors are still “employees” for workers’ compensation purposes. The relevant statutory provision says:
“As used in this act, “employee” means:
(n) Every person performing service in the course of the trade, business, profession, or occupation of an employer at the time of the injury, if the person in relation to this service does not maintain a separate business, does not hold himself or herself out to and render service to the public, and is not an employer subject to this act.”
So, any person “performing services” is within the coverage of the act, even if they are designated as independent contractors. But, is the key to assure that only those who maintain a separate business, hold themselves out to and render service to the public should be retained as independent contractors? That’s a good practice, generally, because that helps assure independent contractor status in other respects. However, as it turns out, it does not get the customer of the independent contractor out of the workers compensation dilemma if One-Man-Show is injured and does not have coverage. That is because another part of the workers’ compensation act, MCL 418.171, states:
(1) If any employer subject to the provisions of this act, in this section referred to as the principal[ e.g., the customer], contracts with any other person, in this section referred to as the contractor [One-Man-Show LLC], who is not subject to this act or who has not complied with the provisions of section 611 [requiring employers to secure coverage]…prior to the date of the injury or death for which claim is made…the principal shall be liable to pay to any person employed in the execution of the work any compensation under this act which he or she would have been liable to pay if that person had been immediately employed by the principal.
So, unless One-Man-Show has purchased the expensive coverage for himself, if he gets injured on the customer’s premises, he has a workers compensation claim against the customer.
What’s the final lesson? First, don’t mischaracterize individuals as independent contractors when they are really employees for this and a dozen other reasons, some of which appear above. Second, when retaining very small businesses as independent contractors where the owner performs the services, ask to see proof of their workers comp coverage for the owner. If they do not have the coverage, you carry the risk of comp claims.