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Workers Compensation Insurance Issues

Right to require worker to carry complete insurance

Sole owners exempt from workers' comp

Employers may ask for proof of policy

Sacramento Business Journal by Abigail Sterling Vazquez, San Jose Business Journal

Date: Sunday, February 1, 2004, 9:00pm PST - Last Modified: Thursday, January 29, 2004, 7:17am PST

Workers' compensation insurance is not something free-lancers usually think about, yet in this day and age they might have to.

One San Jose resident found out the hard way when she recently applied for a free-lance job with a New York-based transcription company.

"They told me I had to have workers' comp," says the woman, who asks not to be named. She is a sole proprietor and works from home.

Legally, a sole proprietor with no employees is exempt from workers' compensation insurance, not just in California but in all of the United States.

Paradoxically though, it's not illegal for companies that hire independent contractors to require them to have workers' comp, even if they work completely on their own.

"It's not a question of the law, it's the question of a company trying to protect itself from any possibility of a claim," says Mike Nolan, president of the California Workers Compensation Institute, a nonprofit organization that conducts research and analysis to improve California's workers' compensation system.

He says there is plenty of case law in which a person who claims to be an independent contractor gets injured, then turns around and claims to be an employee in order to collect workers' comp benefits.

Nolan says California has a reputation for siding with employees, so a zero-tolerance corporate policy wouldn't surprise him.

"The company might say, 'Well, if that's California's attitude in the courts, then that's the only way we can protect ourselves.' "

Scott Hauge, a small-business advocate and owner of Cal Insurance, a San Francisco brokerage firm, says in all fairness companies that hire independent contractors have to do their homework and make sure the person they are hiring is really independent.

"It's definitely a gray area," Hauge says. "The burden of proof is on whoever hires the person, because that person can legally be held liable."

Policies expensive, hard to find: Hauge recommends that employers refer to the Internal Revenue Service's list of factors that differentiate an independent contractor from an employee.

The rules consider things like who is determining the worker's hours, whether there's a continuing relationship between the person doing the hiring and the person doing the work, whether the work is being done on the employer's premises, and whether the worker uses his or her own tools.

For the free-lancer, however, the whole issue can seem like a hassle. Not only are workers' compensation policies extremely expensive, they're also hard to find.

"The problem right now for small independents is that you can't shop around. The market is just awful," says Hauge.

He says the only company that will even write policies for independents is the California State Compensation Insurance Fund, the state's insurer of last resort.

Fortunately, State Fund does offer an inexpensive alternative for the sole proprietor.

It's a bare-bones policy just to show proof of insurance, costing anywhere from a few hundred dollars to $1,000 a year, depending on the level of risk in your trade or profession.

"They're paying $500, $600 for a piece of paper," says Bill Blaha, a customer service manager at State Fund.

But he says he still gets a fair amount of requests for this kind of coverage.

Dennis McClenahan, vice president of insurance brokerage firm Professional Insurance Associates, in San Carlos, says the policy really doesn't do much unless that proprietor hires someone, then that person will get workers' comp coverage. But the premium will immediately go up as a result.

He doesn't recommend the bare-bones policy unless it's absolutely necessary in order to get a job. It's then up to the independent contractor to determine if the extra expense is worth it.

Another option for the free-lancer is to write a letter stating he does not need workers' comp.

The letter may be accompanied with a note saying that as a sole proprietor or independent contractor, she will not employ anybody or claim any work-related injuries.

Nolan from the Workers Compensation Institute also recommends free-lancers show an employer proof of health insurance, liability and even life insurance.

"If you look at the benefits provided by workers' compensation they include death benefits, disability benefits, wage-loss replacement and medical. So if you have coverage for all of that you can say, 'Look, here's proof.' "

Know rules, regulations: Whether a prospective employer asks for workers' comp coverage or not, insurance experts recommend that all small-business owners be proactive and find out exactly where they stand. That's what Cathy O'Donnell did.

O'Donnell, who co-owns O'Donnell Redmond Consulting in San Francisco, read that premiums are as high as $585 per $100 paid to employees, with stiff punishments for noncompliance.

She had recently incorporated with her partner and was concerned she might be breaking the law by not having workers' comp coverage.

"There are so many rules and regulations, you really have to be diligent about checking what the requirements are. Things can so easily slip through the cracks," she says.

Other independent contractors like Jim Crane, owner of Crane Construction in Los Gatos, have learned to avoid workers' compensation issues altogether.

Crane, who has been framing houses for more than 15 years, used to run a union shop with as many as 10 employees, but retrenched when insurance premiums got too expensive.

"It got to the point where for every $100 I paid an employee, I had to set aside $50 for workers' comp. To me, it made it unaffordable to do business."

Crane laid off all his employees and became a sole proprietor, passing up the big contracts for smaller framing jobs.

Any job that requires workers' compensation coverage he turns down. But he still hires other sole proprietors to work on projects with him.

"Now I can band a group of contractors like myself together and not pay workers' compensation. All I need from them is liability."


Credit to: Sacramento Business Journal by Abigail Sterling Vazquez, San Jose Business Journal