The High Price of Skipping Workers' Comp Insurance

“Mr. Beaver, my wife and I are very active 85-year-old semiretired architects. We are still running our own business, but on a greatly reduced basis. We have no full-time employees. Once in a while, if we have to be out of town or if one of us is ill, I will have a former employee come in to answer the phone. Other than that, it is just the two of us.

“I believe that we should still have workers’ compensation insurance in the event that the part-time employee somehow gets hurt or is in an auto accident driving to our office, but my wife says that it is a waste of money. The insurance would cost about $700 a year. I’ve read your column for years, and you always say, ‘Happy wife, happy life,’ so who’s right? Thanks, ‘Walter’ and ‘Rosemary.’”

Who needs workers' comp insurance? Three basic questions

I ran the following questions by labor and employment attorneys Jay Rosenlieb and Jerry W. Pearson with Southern California-based KDG Law.

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• Who needs workers’ compensation insurance?
• Who doesn’t?
• Should you consider having it even if you do not have any employees right now?

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Here’s what they said.

Pearson: In all states, workers’ compensation (WC) insurance is generally mandatory, with the exception of Texas, where an employer can opt out.

However, and this varies by state, if your only employees are immediate family members — defined as spouse and children — WC might not be required. Therefore, if in doubt, absolutely speak with an employment lawyer to obtain an accurate answer.

In the situation your readers describe — someone working in the office on occasion — WC is required in most states. If the employer does not have coverage, the penalties are significant.

Rosenlieb: The reality is that the older we are, sometimes things happen, and one of the couple could be hospitalized for a few days. So, by covering for them — even for a few hours — there is now an employer/employee relationship, and WC should be considered as obligatory.

If you need WC and do not have it, in many states, this is a crime and can lead to a jail sentence, in addition to heavy fines.

What if my employees are independent contractors?

I had a client who was engaging in work requiring a general contractor’s license — that he did not have — and over my warning that he was flirting with jail time, he boasted, “I save a lot on taxes and WC by classifying everyone as independent contractors.”

He said they signed an agreement stating that they were an independent contractor (IC) and agreeing that they were responsible for their own taxes and deductions. (You can read more about his situation in my article How to Spot a Contractor Who's Not Playing by the Rules.)

Pearson: It doesn’t matter what you agree on. Merely classifying someone as an IC regardless of how the law views what he does and his relationship with the employer is not determinative.

While the federal test for IC status is fairly broad and looks at the right to control how the work is performed, several states — including California — have adopted the strict "ABC test."

Rosenlieb: Under these ABC tests, the worker must have the right to control how the work is done. The work accomplished is outside the usual course of the company’s business, and the worker is customarily engaged in an independently established trade of the same nature as that involved in the work performed.

So, in a nutshell, if the person does the same kind of work as the company, merely calling them an IC is meaningless.

As it is an elements test, failure to satisfy any one of the elements means that the worker does not qualify as an IC.

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It is important to stress that the business and the worker cannot simply decide between themselves that the worker is going to be an IC.

Penalties for failing to have WC

I asked Pearson and Rosenlieb to describe the penalties if an employer does not carry workers’ compensation insurance.

Pearson: The penalties for employers who fail to provide WC coverage are substantial and can include:

• A stop order issued by, for example, a state’s labor commissioner, halting all business operations until WC is obtained.
• Fines and imprisonment, as operating a business without WC is considered a criminal offense in most states — this means large fines and potential jail time. Additionally, each day without WC can incur fines that accumulate over time.

Rosenlieb: Other consequences can include:

• Personal liability. Employers without WC are personally liable for any costs related to workplace injuries or illnesses that occur during the period of noncompliance. This includes medical treatment, loss of income and other damages that would otherwise be covered by a WC insurance policy. Also, the employer is open to being sued civilly.
• Damage to business reputation. When word gets out that a certain business owner failed to carry WC, damage to their reputation for being trustworthy spreads, creating long-lasting negative consequences among possible employees and the general public.

There's a moral aspect, too

Both attorneys stressed that having workers’ compensation insurance is a moral duty to your employees.

“After all,” Rosenlieb said, “these are the people who generate income for your business. If they are hurt on the job, then basic morality requires you to help care for them.”

“Also,” Pearson notes, “you owe this duty to yourself, your family and all those who depend on you, to do the right thing, and that means having this important insurance.”

Dennis Beaver practices law in Bakersfield, Calif., and welcomes comments and questions from readers, which may be faxed to (661) 323-7993, or e-mailed to Lagombeaver1@gmail.com. And be sure to visit dennisbeaver.com.

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