The “Independent Contractor” Workers’ Comp Trap for North Carolina Businesses
Employees are expensive. Employers must pay payroll taxes on their employee’s wages and withhold additional payroll taxes from their employee’s paychecks. Employers must also contribute to North Carolina’s unemployment insurance program on behalf of their employees and comply with various federal and state labor laws. And then there’s workers’ comp. With all these expenses it is not surprising that some NC small businesses will look for ways to cut corners.
North Carolina business owners frequently try to reduce payroll expenses by classifying employees as “independent contractors.” Employers will often file a federal “1099” tax form on these workers and may even require the worker to sign an independent contractor agreement. I can tell you from my experience as a workers’ compensation attorney that this can lead to disastrous consequences. The employer who appears before the Industrial Commission arguing that a severely injured worker was actually an independent contractor takes a great risk.
NC employers who misclassify employees as independent contractors have a competitive economic advantage over employers who follow the law. These arrangements also shift the responsibility for workplace injuries from the employer, where it belongs, to the public at large. For these reasons North Carolina law provides for a careful examination of independent contractor relationships to determine if they are really just disguised employer/employee arrangements.
An employer is not relieved of its obligation to provide workers’ compensation coverage by simply designating its employees as independent contractors. When an independent contractor is injured on the job the North Carolina Industrial Commission will look past how the employer has designated the relationship and examine the actual facts of the case to determine whether the worker is actually an employee.
The Industrial Commission will consider a number of factors in determining whether a worker is an independent contractor or an employee. These include whether the worker:
(a) is engaged in an independent business, calling or occupation;
(b) is to have the independent use of his special skill, knowledge, or training in the execution of the work;
(c) is doing a specified piece of work at a fixed price or for a lump sum or upon a quantitative basis;
(d) is not subject to discharge because he adopts one method of doing the work rather than another;
(e) is not in the regular employ of the other contracting party;
(f) is free to use such assistants as he may think proper;
(g) has full control over such assistants; and
(h) selects his own time.
No one factor controls the determination however these cases usually come down to the degree of control exercised over the worker by the employer.
Employers who rely on an independent contractor designation take a great risk. There is no reliable way to know how the Industrial Commission will rule ahead of time. Furthermore, it is common for employment relationships to evolve over time. An “independent contractor” hired to assist with a single project can easily become a regular helper, and suddenly, without any real thought, an employee for workers’ compensation purposes.
If an injured worker is determined by the Industrial Commission to actually be an employee then the employer will be liable for paying the medical and wage replacement benefits due under the North Carolina Workers’ Compensation Act. If the employer has failed to obtain workers’ comp insurance then the employer and even its managers can be held personally liable for paying the benefits. An uninsured company and its managers can also be subject to civil penalties and even criminal charges
On the other hand, if the worker is determined to actually be an independent contractor then the employer will have no liability for the workers’ compensation. However, the employer will also not receive the “exclusive remedy” protection afforded by the Workers’ Compensation Act and could be liable in civil court for any negligence on the part of the employer or its employees that result in an injury to the independent contractor.
A North Carolina business can protect itself from the risk associated with the independent contractor designation by 1) carefully evaluating whether a worker is actually an employee or independent contractor; 2) ensuring that each independent contractor has its own active workers’ compensation insurance policy insuring all of its workers; 3) including all independent contractors and their employees on the businesses own workers’ compensation policy.
Smart small business owners will consult an experienced North Carolina business attorney to help them work through the independent contractor issue.
For more information, contact Kevin Bunn