contractors versus employees

Understanding workers’ compensation for contractors versus employees

As much as we try our best to prevent them, workplace accidents do happen and businesses need to be prepared in case they’re faced with a claim. Workers’ compensation insurance is purpose-built for such occasions. 

Workers’ compensation is a form of business insurance, offering benefits to employees who have suffered an injury or illness resulting from their work. This insurance will help pay for medical care, lost wages, and other needs depending on the level of insurance in place. Workers’ compensation also protects the business — ensuring you stay compliant with state regulations while reducing the potential for lawsuits.

Most states require some form of workers’ comp, but not everyone working for your company will be provided the same benefits. There are also different requirements for workers’ compensation for contractors compared to employees. 

It’s a very tricky issue to tackle and it’s vital that businesses get workers’ compensation right. Business owners must be aware of the regulations surrounding workers’ compensation, but you don’t have to go about figuring out the right coverage for your employees alone.

Do employers have to pay workers’ compensation?

Nearly every state requires employers to carry workers’ compensation insurance with the exception of Texas. Some states also exclude seasonal workers when the work they do is not part of the employer’s regular business or profession. Other workers’ comp exemptions exclude certain agricultural businesses, construction businesses, charities, and more.

Typically, the number of employees determines when a business needs workers’ compensation insurance. In most cases, it is required as soon as you hire your first employee.

The cost of this coverage varies greatly depending on many factors, including:

  • State and local laws
  • Size of the business
  • Work type
  • Risks associated with the job role.

Workers’ compensation for contractors versus employees

Not everyone that works for your company needs to be employed by your company. 

Let’s say you have a project that requires a specific skill set — one that your current employees don’t have — so you bring in an external resource to help fill the gap. To save time and money with costly recruitment and hiring processes, the external staff will be contracted to work for the company, but they are not employed by the company. 

Hiring an external contractor can prove highly beneficial. On top of the hiring and training savings, contractors can offer an outside perspective on the project. They can discover ways to improve workflow that may not have been considered previously due to the existing employees being stuck in their habits. 

A contractor can also provide more flexibility than a permanent hire. Rather than hiring someone with a specific skill set for one task, then having issues fitting them into the business needs once the project is over, you simply hire who you need when you need them. 

Lastly, businesses aren’t required to cover the workers’ compensation for contractors. Meaning your business is only spending money on things that provide value to your product.

What’s the difference between a contractor and an employee?

It’s crucial that your business knows the difference between contract workers and employees — you can’t, or shouldn’t mislabel a staff member as a contractor simply to avoid additional fees. 

The IRS has very specific guidelines a person must follow to be considered an independent contractor, these are:

“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done. Small businesses should consider all evidence of the degree of control and independence in the employer/worker relationship.”IRS 

If that still sounds a bit confusing, don’t worry — it’s not the easiest differentiation to work out! As a result, many states have also adopted a more stringent set of requirements for independent contractors, referred to as the “ABC Test”. 

The ABC test outlines three separate criteria a person must meet in order to qualify as an independent contractor.

  • The worker is free from the employer’s control or direction in performing the work.
  • The work takes place outside of the company’s usual course of business, and off-site of the business.
  • Customarily, the worker is engaged in an independent trade, occupation, profession, or business.

It’s vital to adhere to both the IRS classification and state laws as improper classification can lead to heavy fines.

Of course, not every situation requires a contractor. Contractors can help during times of difficulty or high growth, but you should also consider the impact on engagement, culture, and morale.

If you’re looking to build a solid team for a long-term project, it’s better to hire employees rather than having a revolving door of contractors. Employees are value-boosting assets to keep hold of, whereas contractors can be utilized, and then replaced, depending on the requirements. 

What do you need to offer a contractor, if not workers’ compensation?

Businesses aren’t legally obliged to offer traditional benefits such as workers’ compensation to contractors, but they can offer certain perks, such as:

  • Discounted prices on the company’s products for the duration of the contract.
  • Bonuses for contributions towards the company goals and hitting targets.
  • Including contractors in social activities such as work lunches, happy hour, or work conferences. Building a social connection promotes a close relationship between the business and the contractor which can prove useful if they are required in the future.
  • Smooth and on-time payments.
  • Less paperwork — allowing them more time to focus on what you really need them for.

As we mentioned earlier, there isn’t much wiggle room when it comes to classifying your workers. So when offering benefits, you have to be cautious as to not cross over that line between contractor and employee. If you have any concerns about misclassifying your workers, make sure to double-check state and IRS guidelines. 

If you’re still unsure, consider partnering with a PEO expert like MartinoWest who can handle all of this and more, giving you peace of mind.

Is an employee or a contractor better for my business?

There are advantages to both types of workers, but deciding which to hire can be a little confusing. Realistically, it all depends on the needs of your business at the time of hiring. 

You should consider hiring an employee if:

  • There is a long-term need for this worker. For example, if you’re building a product or service and they are required for the whole project, rather than a specific section of development. 
  • The work they are doing is essential to the business.
  • You need the worker to work within your set parameters, such as hours of work, tools, and other equipment you need them to use.
  • Supervision is required for the job they will be doing.

You should consider hiring an independent contractor if:

  • The worker is only required short-term for a specific task.
  • The work that needs doing can be done with little supervision.
  • The worker has specific skills you require.
  • The work is not essential to the business, such as cleaning crew or IT support. 

The decision to hire an employee or contractor should be made on a case-by-case basis, rather than “it’s what we did last time”. Employers are audited regularly to ensure employees and contractors are categorized correctly — if your company starts defaulting to one classification or the other, they could be leaving themselves open to heavy fines.

One of the safest ways to manage this is to look to an HR, compliance, and workers’ comp partner like MartinoWest. Together, we can create peace of mind — keeping your SMB out of dangerous waters and keeping all your employees happy and engaged.

Contact us today.

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