Workers' compensation insurance is widely known at least in name, but often ignored with painful consequences. Employees only care about coverage in case of serious personal injury. Conversely, business owners are required by law to have coverage and many have a bad habit of not respecting this important business responsibility. Don't get burned by failing to understand the 3 Secret Weapons for Managing Workers' Comp. The employer's reward for strict compliance shields them from liability of employee injuries. When an injured employee accepts workers' comp benefits they magically give up the right to sue their employer.

Mandatory 

Worker's compensation coverage is mandatory in all 50 U.S. states and generally applies when you hire the first employee. The law supports and protects the public welfare which is evident by various penalties and criminal liability. The riskier the job activity the more expensive the coverage. For example, a general carpentry classification costs $20 per $100 of wages and a crane operator classification costs $80 per $100 of wages paid. Meanwhile a clerical job could be $3 per per $100 of wages paid. Each state has a unique set of classifications and related rates which are more like a hefty tax than insurance from an employer's perspective. Pennsylvania has over 300 different classifications. 

The Employer Fundamentals:

1) Required by law

2) It can be hard to get 

3) It can be very expensive

4) It can require lots of admin

5) Employees can't sue employers after accepting it (sole remedy doctrine)

6) Company officers can be criminally liable for not having it

7) Your business can be crushed by non-compliance penalties

Substance Over Form 

Calling someone a subcontractor does not make them a subcontractor. Facts and circumstances determine employee vs. subcontractor status. Employers who provide net paychecks with proper tax withholdings have employees 100% of the time. Said another way, the people your business hires are de facto employees and you have to create evidence proving they are subcontractors. Employees are always employees while you may have subcontractors who are really employees in the eyes of the law. 

Subcontractor Shenanigans

Business owners love to classify workers as subcontractors because thinking they can avoid the following responsibilities:

Employer Costs:

1) FICA and Medicare tax

2) Federal unemployment tax

3) State unemployment tax 

4) Workers' Comp insurance

5) Health Care

6) Payroll management 

Employee withholdings:

7) FICA and Medicare withholding

8) Employee federal income tax withholding

9) State(s) income tax withholding 

10) State(s) unemployment tax (employee portion)

11) Local income tax withholding

Artificial Competitive Advantage

The total cost of having an employee adds up quickly. If you pay someone $15 per hour, they may cost your business a total of $30 per hour. Non-savvy business owners are incentivized to use subcontractor shenanigans as an artificial competitive advantage. For example, Construction Shenanigans, Inc. pays all its workers in cash reducing its total labor cost by 50%. Now they are able to take away jobs from their competitor, Responsible Construction, Inc. whose construction cost is twice as much because they have real employees, pay employer tax and provide workers' comp.

Can't Be Avoided

These subcontractor "form over substance" shenanigans may help avoid all the responsibilities on the list except for one. When it comes to workers' comp you are responsible for your uninsured subcontractors. Your business is legally required and criminally liable to maintain workers' comp. If one of your subcontractors provides a certificate of insurance, then you don't have to provide coverage otherwise you're on the hook. A business entity is responsible for coverage and you should assume it's your business. 

Per Day Penalties

Sole proprietors, partners, members and shareholders the owners of a Schedule C business, a partnership, an LLC and a corporation respectively, including officers of a corporation are responsible for maintaining coverage. Willful violations carry felony criminal liability. Examples of state penalties for failing to provide coverage includes:

a) Minnesota: $1,000 per employee for each week the employee worked without coverage. 

b) New York: $2,000 per 10-day period of non-compliance

c) Pennsylvania: Up to $2,500 and up to one year in jail for each day the employer fails to provide coverage for employees. 

Insult to Injury 

Typically, each day or period is a separate offense. For example, in 2008 Zullinger Meats, Inc. willfully failed to provide coverage for 299 days resulting in 299 felony counts. This happened in Pennsylvania so the fines would be $747,500 (299 X $2500). Consider the legal fees to defend the charges, the stress on the officers and the opportunity cost. This scenario could wipe out a business in the blink of an eye. The artificial competitive advantage is really a lurking liability. See other workers' comp nightmares here.

Certificates Like Discount Coupons

Many subcontractors are legitimate businesses who play by rules and get hired by general contractors especially in the construction industry. General contractors who get certificates of insurance for workers' comp have a "coupon" for a 100% discount on the labor provided by the subcontractor. Workers' comp coverage is coupled with an annual audit which gives the auditor carte balance access to your company's books and records. You have agreed to let auditors examine everything and anything by signing the insurance contract. 

The 3 Secret Weapons  

Weapon #1) Awareness

Paying for your uninsured subcontractors is not necessarily a bad thing as long as you're aware of your business' responsibility. Some general contractors will bill their subcontractors for reimbursement who don't have coverage and can't provide certificates. A general contractor should build in the cost of covering uninsured subcontractors into the contract price charged to customers. Otherwise, business newbies with end up with a monster workers comp bill at the end of an audit. We've have seen this happen many times so don't let it shock you. 

Weapon #2) Executive Officers' Exception

The owners and officers of a corporation can file an Executive Officers' Exception in some states to opt out of workers' comp requirement. This is more valuable for owner operators in high risk businesses so they don't have to pay "the tax" on themselves. Business owners could offer an ownership stake to valued workers who could also get an exception from coverage. A $100,000 per year employee who becomes an owner or officer could save a business classified as general carpentry $20,000 in workers' comp per year. 

Weapon #3) Pay-As-You-Go

Fortunately, when you operate your business with integrity everything goes your way. There are some great payroll solutions for managing employer compliance mentioned in Subcontractor Shenanigans above. The tax withholding and employer tax are expected benefits of great payroll tax solutions, but the value of the pay-as-you-go workers' comp option can't be overstated. The typical workers' comp coverage presents the following challenges:

1) Having to get first time coverage with a state insurance fund

2) Paying for more expensive coverage with a state insurance fund

3) Having to get multiple state fund policies when doing business in multiple states

4)  Having cash flow to cover a 25% or more down payment 

With the pay-as-you-go option, the classification rate for a specific employee is applied to their pay rate and the workers' comp insurance is paid by the employer along with the employer tax and employee tax withholding. This conserves cash, prevents monster audit bills and eliminates anxiety. Since workers' comp is like a de facto tax it makes sense to manage it within the payroll process. 

Two of the best pay-as-you-go workers' comp payroll options are:

a) Wagepoint

b) Gusto

In some pay-as-you-go options the sole remedy doctrine doesn't work if the policy is not titled in the company name. The benefits are compelling enough that it could make sense to forgo the sole remedy. Consult your attorney, insurance broker or other advisor on this complex topic. 

Take Action

As you can see this is serious stuff. Get coverage as fast as possible if your business is not in compliance. The Ultimate Back Office™ by invizibiz.biz is your virtual bookkeeping solution for eliminating invisible expenses™ like gignatic workers' comp bills and failure to comply penalties.