Should Freelancers Get Workers' Comp Insurance?

Question: Should a small business include its independent contractors in workers’ comp? I’m using some freelancers and I’m not sure if they fall under my workers’ compensation insurance or not.

Answer: The rise of the so-called freelance economy is remaking the U.S. employment landscape and raising questions such as yours for many small business owners.

Workers’ compensation laws are governed by the states, so start by asking your insurance agent or broker what legal obligations you’re subject to in your state. You may be able to get some preliminary answers online: Most state insurance commissioners have websites that spell out their rules in straightforward language, says Bill Feldhaus, a retired professor of risk management at Georgia State University’s Robinson College of Business.

Many states determine workers’ comp liability by applying an IRS test that determines whether someone working for a company should be classified as an independent contractor or as an employee. Very generally, it measures how much control the employer has over the freelancer’s work schedule. If that test shows that your independent contractors should be classified as employees, you will have to provide workers’ comp insurance for them, as well as put them on your regular payroll.

But even if you determine that you don’t have a legal obligation to cover freelancers, you may want to ask them for evidence of their own insurance coverage or include them in your policy, Feldhaus says. “It’s very critical that you clarify who is assuming the workers’ comp obligation if they get hurt on the job,” he says. “If your company really does not want to take on that obligation, you might spell out in their contract that you’re not assuming state workers’ comp responsibility.”

That’s because “in the absence of other coverage, the party that has hired an uninsured contractor could become responsible for the workers’ compensation losses” if the worker gets hurt on the job, says Stephen Carlson, a vice president who oversees workers comp for small businesses at Travelers Insurance.

If there’s an accident and the contractor sues you for damages, in the absence of any prior legal agreement, the courts often side with the injured individual. “The sympathy is usually for the single person doing the work, so the courts will say, ‘You look like an employer to me, so we’re going to make you responsible for the state requirements,’” Feldhaus says.

Erik Stenson, founding principal of ABD Insurance & Financial Services in San Mateo, Calif., works with many technology startups that use independent contractors in their offices and around the globe. Most of them ask him how they can exclude those freelancers from their workers’ comp to keep their expenses down, he says.

He says employers who don’t provide coverage should have freelancers sign a contract holding the company harmless in case of an accident, and they should require freelancers to provide proof that they carry their own workers’ comp.

The other way to go is to hire contractors through an employment agency that provides insurance coverage. “The employer typically is paying the agency and it has built in additional fees to cover the individual through the agency’s workers’ comp policy,” Stenson says.

Workers’ comp used to be sold primarily to companies, but it is now sold to self-employed individuals as well, Feldhaus says. The cost depends on the nature of the work involved: “A race car driver is going to find the price is very expensive. Someone doing call center work from their home is in a different situation.”

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