Many states require companies employing one or more employees to maintain workers’ compensation insurance. You might be tempted to try to avoid that expense, perhaps by paying your workers as 1099 employees, or you might forego the expense and just hope none of your employees gets injured on the job.
Failing to maintain workers’ compensation insurance is unwise. The consequences of being uninsured when a workplace accident happens can be devastating for a small business, and perhaps for you personally. Read this article to find out why.
Table of Contents
A 1099 Independent Contractor is Often an “Employee” under Workers’ Compensation Law
Employers have tried to avoid paying the taxes and benefits W-2 employees are entitled to by misclassifying their workers as 1099 independent contractors. This has been a hotly-litigated issue, especially in the trades, such as construction.
Typically a contractor will subcontract different tasks, and the subcontractors’ workers will be themselves, independent contractors. This used to be a creative way to circumvent workers’ compensation law and avoid liability for workplace accidents, which are common in construction. No more.
While the exact test and factors vary from state-to-state, in general, a workers’ compensation court will likely re-classify a 1099 independent contractor as an “employee” for the purposes of workers’ compensation if:
- Their duties are an essential part of their employer’s business;
- They work full time;
- They depend solely upon their employer for income;
- their employer controls how and when they do their job.
Other factors, such as whether the employer provides training or the tools to do the job, are also considered.
The Consequences of Employee Misclassification under Workers’ Compensation Law
If a workers’ compensation judge finds that a 1099 worker is instead an employee, then that worker will be entitled to full workers’ compensation benefits. Benefits may include payment for medical treatment, lost time at work, and disability benefits.
You, as an employer, will be assessed for this amount and must pay either out-of-pocket or must reimburse your state’s uninsured employer program in full, depending upon state law.
Other Penalties for Employee Misclassification
If your misclassification of employees as independent contractors is referred to the IRS, you may face the following fines and penalties:
- Fines for each W-2 you failed to file;
- Penalties imposed on you for failure to withhold income taxes;
- Penalties imposed on you for failure to withhold the Social Security taxes and Medicare taxes;
- Penalties in the form of 100% of the employer taxes that you failed to pay;
- Penalties in the form of interest accrued on all overdue and unpaid taxes and penalties.
Depending upon the number of employees you misclassified as independent contractors, this cost can be steep, and too much for many small businesses to absorb. Carrying workers’ compensation insurance eliminates all of these risks.
Employee Misclassification May Be a Crime
If any state agency, including a workers’ compensation judge, finds that your misclassification of employees as 1099 independent contractors was intentional, fraudulent or criminal, they can assess additional fines, penalties, and interest on those fines and penalties to those already listed.
Depending upon the law in your state, that state agency might also refer your case to the appropriate state criminal agency to charge you with a crime. A prosecutor might then seek to impose a jail or prison sentence and additional fines upon you personally, as the owner of the company, a member of the LLC, or an officer of the corporation.
In other words, if your business willfully misclassified employees as independent contractors, not only could you go broke, you could go to prison.
If State Law Provides, You May Be Criminally Prosecuted for Failing to Maintain Workers’ Compensation Insurance
Failing to carry workers’ compensation for employees is a crime in most states. The severity of the crime and the accompanying fines, penalties, and jail sentences will vary state-to-state.
For example, in Pennsylvania, the crime of failing to maintain workers’ compensation insurance when required is a third-degree misdemeanor carrying a $2,500.00 fine and up to 1 year in jail. If the failure to maintain insurance is intentional, it is a third-degree felony carrying a $15,000.00 fine and a jail sentence of up to seven years.
Bear in mind that in most states, each and every day that you as the business owner fail to carry insurance can be charged as a separate crime, which will enhance the penalties and jail time you face.
You can avoid any and all of these possible consequences by maintaining workers’ compensation coverage for your employees. It is a business expense you can deduct, and it insures you and your business against civil and criminal liability.
About the Author: Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with Larry Pitt, Esq., a busy workers’ compensation lawyer in Philadelphia.
About Carson Derrow
