Employees in Work Comp: Two Key Work Comp Questions

Workers’ compensation, as a coverage, is simple. A worker gets hurt, the work comp policy pays – theoretically; that’s the simple part. The more complicated areas of workers’ compensation involve the state laws and legal doctrines applicable to workers’ comp. Two key areas of confusion are:

1. For whom is the insured actually responsible under workers’ comp laws?
2. Who counts as an employee?

Although these appear to be simple questions, the reality is far more detailed. Understanding both is required to protect the insured’s employee exposure.

For Which Workers is the Insured Responsible?

Insureds are responsible for protecting and providing workers’ compensation benefits to four types of individuals: Direct employees; employees of uninsured subcontractors; “de facto employees” and borrowed servants.

1. Direct employees. An “employee” is a person hired to perform certain services or tasks for particular wages or salary under the direct control of another. Employees are generally hired to perform a specific job usual and customary to the employer’s (hiring person’s) business operation.

2. Employees of uninsured subcontractors. Forty-four states and the District of Columbia statutorily require that the general contractor provide workers’ compensation benefits to the employees of an uninsured subcontractor. General contractor/subcontractor relationships are not limited to the construction industry. A general contractor/subcontractor relationship is created when there are three parties involved: 1) a principal/owner hires an 2) independent contractor to complete the work; and the independent contractor hires a 3) subcontractor to perform some part of the work. When work is contracted to a third party, the “independent contractor” becomes a “general contractor.” Employees of lower tier contractors are called “De Jure” employees.

3. De Facto employees. Just because someone is called an “independent contractor” does not necessarily make it so. Even if the individual is an “independent contractor” according to the IRS, they may still be considered an “employee-in-fact” under workers’ compensation guidelines. These are called “de facto employees.” Four major “tests” can be applied to decide whether a particular worker is an “independent contractor” or an “employee-in-fact” (de facto employee) under workers’ compensation:

1. 1. Does the employer/contracting party) control the worker’s ways and means? Does the employer tell the worker what time to show up for work; when to go to lunch; when to go home? Further, is the worker instructed exactly how to do the job? If yes, this indicates control, and control is a key feature of an employer/employee relationship. True independent contractors show up when they want; leave when they desire and work according to acceptable standards of quality. In essence, the contracting party has little control and provides limited direction.

1. 2. Are the tools and materials supplied by the hiring party? True independent contractors supply their own tools and generally supply the materials necessary to perform their duties (nails, glue, etc.) and at their own expense (as part of the contract price). If the “contacting” party provides all this, the hiring party is asserting control and looks like the employer.

1. 3. Does the “independent contractor” work for anyone else? True independent contractors work for many principals and general contractors. If this is not the case, then this individual is a “de facto employee” (employee-in-fact) regardless of what they are called or how they are paid.

1. 4. Does the “independent contractor” carry his own insurance? If not, then it is very likely he/she is an “employee-in-fact” under workers’ compensation laws?

1. 4. Borrowed Servants. A Special Employer/Special Employee relationship exists when employees are loaned to another “unrelated” offices. The loaned worker is often referred to as a “borrowed servant” and the employer to which they are loaned is considered the “doctrinal” or special employer, IF one key condition is met – control.

Control and the right of control is the overriding and deciding factor when establishing the existence of a borrowed servant/special employer relationship. Basically, does the special employer have the absolute right to control the actions of the worker? This includes the right to control the manner in which the work is performed.

An employer of any one of these “employees” is responsible for providing workers’ compensation protection for any “occupational” injury.

Who Counts as an Employee/Worker?

I realize the following is a “duh” statement, but the employer is not required in most states to be protected by workers’ compensation, but the employees are required to be covered. And employee status is affected by entity type.

To understand who is considered the employee requires understanding who qualifies as the employer. Here is a key point in this part of the discussion, the employer is always a “person.” The employer is either a:

• Natural person; or
• Legal person.

A natural person is somebody who has flesh and blood, you and me. You cut them they bleed. Examples of natural person employers include sole proprietorships, partnerships and in a majority of states (33 or 34) LLCs.

Legal person employers are “persons” created by law. They’re born by the filing of articles of incorporations or articles of organization. Examples include corporations, professional associations and, again, LLCs in 16 or 17 states.

Natural persons and legal persons are essentially equal under the law. They have the same rights, the same duties and same responsibilities. They can hire, they can fire, they can own property, they can sell property, they can sue, and they can be sued.

With that as background, pinpointing who qualifies as an employee is easier. An employee is any natural person not considered employer (i.e. sole proprietor, partner or member of an LLC (in a majority of states). Who are employees in the following scenarios:

• Sole proprietorship: Everyone but the sole proprietor;
• Partnerships: Everyone but the partners;
• LLCs: Depends on the state; in most states, everyone but the members/managers; in a few states, everyone is an employee; and
• Corporations: Everyone is an employee (even the “owning” corporate officers).

Note, the above are the most common rules. A few states apply their own unusual rules.

Combining These Answers

The first question defined the workers for which the insured is responsible; the second described who was considered an employee. Put these two together and there appears a much better definition of “De Jure” employee.

Basically, in a de jure employee situation – such as an upper tier contractor being responsible for the employees of a lower tier contractor – the upper tier is only responsible for the lower tier’s employees. And who counts as an employee as defined above applies to who qualifies as an employee of the lower tier contractor. Thus:

The upper tier is not responsible for protecting the sole proprietor, partner or, in most states, members/managers of an LLC. The upper tier is responsible for everyone else. However, if the lower tier is a corporation, the upper tier is responsible for everyone (including the corporate officers/“owners”).

Last Updated: January 5, 2018