I represent injured workers- people who have been hurt on the job. Over the years, I have seen small businesses collapse when there is an accident which injuries an worker. Why? The company was trying to run “lean” and failed to buy the legally required insurance to protect themselves and their employees.

How does this happen? Small business owners know the importance of remaining lean- adding permanent employees only when there is enough work. Since they are concerned about having enough work at first, they start many workers out as subcontractors or “independent contractors.” The difficulty becomes when the subcontractor is working enough (or in a manner) that they should be categorized as an employee- and the company fails to realize it.

North Carolina uses a carrot and stick approach to convince businesses to buy workers compensation insurance. Businesses who have three employees (or more) MUST buy workers’ compensation coverage. The owner counts as an employee. Part-time employees count as an employee. Failure to have coverage in place will subject the business to financial penalties of up to $100.00 per day. Any person with the “ability and authority” to bring the employer into compliance faces misdemeanor or felony convictions. The North Carolina Attorney General’s office has an attorney assigned to prosecute such companies. That’s the stick.

Treating a worker as an employee protects the business against a lawsuit from the worker for negligent injury. North Carolina law prohibits an employee from suing their employer for a wrongful act on the part of the employer which causes an injury. A workers’ compensation policy pays for the worker’s damages due to the injury. That’s the carrot.

Can’t the company and the worker just agree that the worker is a subcontractor and avoid all these workers’ compensation issues? No. Just like the IRS, the court system doesn’t care how the company defines the relationship with the worker. They look to the facts of the employment to determine whether a worker should be treated like an independent contractor or an employee. I have won a case where the worker signed a contract stating he was an independent contractor- but the facts showed he was an employee.

The degree of control and independence must be considered in evaluating the workers’ status. This falls into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Can the worker have someone else perform the work? Can the worker hire his own assistants to help him? Is there a required time and place for the work to be performed? Who controls the workspace?

2. Financial: Who controls the business aspects of the worker’s job? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, who provides the materials for the work.

3. Type of Relationship: Are there written contracts for each job? Are there employee type benefits (pension plan, insurance, vacation pay, etc.)? Was the work an individual project or continuing job duties? Will the relationship continue? Is the work performed a key aspect of the business? Does the worker work for other companies? Can the worker turn down a job and still come back for more business later? If they turn down work, are they “fired”?

There is no one factor that stands alone in making this determination. The key is to look at the entire relationship and consider the degree or extent of the right to direct and control.

If the court determines that the injured worker is an employee and there is no insurance, then the company is responsible for paying for the worker’s medical bills, lost time from work and permanent injury. The court will also assess a penalty for the failure to purchase insurance and consider criminal charges against the owners and officers of the company. If the company subcontracts work to a subcontractor who does not have workers’ compensation insurance, the company may be liable for the work-related injuries of those employees, regardless of the number of employees you or the subcontractor employs.

How much will workers’ compensation cost? Premiums are based on the company’s payroll and type of work performed, so the costs for a web design company to obtain coverage will be far less than a roofing company. Low-risk companies and companies with good safety records pay less. If you are just starting out and have a small company- your small payroll translates into smaller premiums.

I’ve seen companies driven out of business due to an injury for a worker they tried to call an independent contractor. I have sent the sheriff to the houses of owners to seize their vehicles, their boats and their computers, so we can pay hospital bills for fractured hips, knees and backs. I have had the sheriff to padlock the doors of the company offices until payment is made for lost wages. I have asked the courts to put company owners in jail for failure to pay the fines. Protect your business, yourself and your workers–comply with the law and buy a workers’ compensation policy. You will get the carrot and none of the stick. #hurtatwork

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