Worker’s Compensation- Is It Absolutely Necessary?
Worker’s compensation insurance is a required, state-specific law that provides employees monetary relief in the event of any injuries or accidents that occur as a result of employment. In California, employers are required to have worker’s compensation for their employees under Labor Code Section 3700 even if they only have one; employers are not required to obtain worker’s compensation for independent contractors whose services are enlisted by the employer. However, it is important to note that Division of Labor Standards Enforcement assumes that a worker is an employee under the Labor Code Section 3357, and the burden of proving otherwise falls on the employer, who must show that a number of factors exist that would constitute the worker being an independent contractor rather than an employee (see our article “Do You Know the Difference Between an Employee and an Independent Contractor?”).
If the worker is deemed to have been an employee by a government agency when they were classified as an independent contractor by the employer, the California Labor Code cites that the employer’s failure to have worker’s compensation for an employee is a misdemeanor punishable by either a fine of no less than $10,000 or imprisonment in a country jail, or both.
The insurance in California is mandated for employers who have more than one employee, but for sole proprietors and independent contractors, the insurance for their own coverage is optional (except for those engaged in California’s construction industry). It is not all too uncommon or illegal for companies that are enlisting the services of a sole proprietor, independent contractor, or freelancer to require proof of worker’s compensation insurance to prevent the independent contractor from suing the company later on for damages the “contractor” suffered on the job by claiming that they should have been classified as an employee all along.
Sole proprietors, independent contractors, and freelancers should perform a thorough analysis and weigh the advantages and disadvantages of purchasing worker’s compensation. While the cost of the worker’s compensation insurance premiums as a sole contractor or owner may be avoided by NOT purchasing it, you may consider the advantages that having worker’s compensation offers. One major benefit is that the insurance may cover up to two thirds of the worker’s average wage once they are rendered injured or permanently disabled and unable to carry on their work. The compensation from the insurance begins shortly after the injury of the employee or contractor has been sustained.
An insurance company providing worker’s compensation will often perform a risk analysis based on the industry that the employer or contractor is in. This analysis helps the insurance company determine the premium payments that are to be made by the employer or contractor: the higher the risk, the higher the premium payments for the insurance will be. Jobs such as providing bookkeeping services or clerical work contain little to no risk, so the premiums paid for the insurance would be minimal. On the other hand, sole proprietors who are engaged in the construction industry as general contractors are required by California law to obtain worker’s compensation before they are issued a valid contractor license. The worker’s compensation insurance premiums as a construction contractor are likely to be higher to compensate for the inherent risk of performing services in that industry.
If you are still confused about the requirements for worker’s compensation and who is required to obtain it, please consult a legal or financial professional to assist you in understanding if worker’s compensation is right for you.