a. Independent Contractors
Effective July 1, 1993, the law defines a worker as an independent contractor if he/she meets the guidelines of the IRS (See statute quote above in section 2). Senate Enrolled Act 576, (Public Law 168) signed by Governor Daniels on May 10, 2011 and effective July 1, 2011, provides that all independent contractors, not just those in the construction trades, may now obtain a “clearance certificate.” The change in statute matches the practice the Workers Compensation Board of Indiana previously had implemented by rule.
It appears that the State of Indiana would process a clearance certificate from a non-Indiana subcontractor performing work in Indiana. The Indiana Department of Revenue accepts and processes Clearance Certificate Applications. The WC Board understands that the IDOR does check the applicant’s tax status in the state of the contractor's residence.
In its Form SS-8, the Internal Revenue Service has identified 46 factors under the categories of Behavioral Control, Financial Control, Relationship of the Worker and Firm, and a section for Service Providers or Salespersons. The factors are used as guidelines to determine whether sufficient control is present to establish an employer-employee relationship. [Please see the link to the IRS form at the bottom of this document.]
Indiana law requires that a sole proprietor or partner:
Reference IC 22-3-2-14.5
IC 22-3-2-14.5Sec. 14.5. (a) As used in this section, "independent contractor" refers to a person described in IC 22-3-6-1(b)(7).(b) As used in this section, "person" means an individual, a proprietorship, a partnership, a joint venture, a firm, an association, a corporation, or other legal entity.(c) An independent contractor who does not make an election under IC 22-3-6-1(b)(4) or IC 22-3-6-1(b)(5) is not subject to the compensation provisions of IC 22-3-2 through IC 22-3-6 and must file a statement with the department of state revenue in accordance with IC 6-3-7-5 and obtain a certificate of exemption.(d) Together with the statement required in subsection (c), an independent contractor shall file annually with the department documentation in support of independent contractor status before being granted a certificate of exemption. The independent contractor must obtain clearance from the department of state revenue before issuance of the certificate.(e) An independent contractor shall pay a filing fee in the amount of fifteen dollars ($15) with the certificate filed under subsection (g). The fees collected under this subsection shall be deposited in the worker's compensation supplemental administrative fund and shall be used for all expenses the board incurs.(f) The worker's compensation board shall maintain a data base consisting of certificates received under this section and on request may verify that a certificate was filed.(g) A certificate of exemption must be filed with the worker's compensation board. The board shall indicate that the certificate has been filed by stamping the certificate with the date of receipt and returning a stamped copy to the person filing the certificate. A certificate becomes effective as of midnight seven (7) business days after the date file stamped by the worker's compensation board. The board shall maintain a data base containing the information required in subsections (d) and (f).(h) A person who contracts for services of another person not covered by IC 22-3-2 through IC 22-3-6 to perform work must secure a copy of a stamped certificate of exemption filed under this section from the person hired. A person may not require a person who has provided a stamped certificate to have worker's compensation coverage. The worker's compensation insurance carrier of a person who contracts with an independent contractor shall accept a stamped certificate in the same manner as a certificate of insurance.(i) A stamped certificate filed under this section is binding on and holds harmless from all claims:(1) a person who contracts with an independent contractor after receiving a copy of the stamped certificate; and(2) the worker's compensation insurance carrier of the person who contracts with the independent contractor.The independent contractor may not collect compensation under IC 22-3-2 through IC 22-3-6 for an injury from a person or the person's worker's compensation carrier to whom the independent contractor has furnished a stamped certificate.As added by P.L.75-1993, SEC.2. Amended by P.L.202-2001, SEC.3.
Clearance Certificate Processing Time
The clearance certificate checklist indicates two weeks: “Please allow up to seven business days for the Department of Revenue and an additional seven days for the Workers Compensation Board to process this request.”
In addition, the statute calls for a seven day waiting period. IC 22-3-2-14.5(g) provides “A certificate becomes effective as of midnight seven (7) business days after the date file stamped by the worker's compensation board.”
The Indiana General Assembly passed and the Governor signed (on May 10, 2001) House Enrolled Act 1553 effective July 1, 2001 that affects independent contractors in several ways:
- Homeowners are exempt from getting a certificate of insurance from a contractor [IC 22-3-2-14(a)].
- Indiana Department of Revenue must clear status of an independent contractor ($5 fee). The Indiana Department of Revenue website contains Information Bulletin #86and the WORKER’S COMPENSATION CLEARANCE CERTIFICATE APPLICATION(WCE-1, State Form #45899).
- Independent contractor certificate (formerly called affidavit) with WC Board is effective 7 days after stamped (now a $15 fee).
- Contractor who assists employees in filing a false statement for independent contractor status commits a Class D felony. IC 6-3-7-5(m)
"You are an employee if your employer supervises your work, sets your hours and provides you with the necessary equipment to do your work. An independent contractor is not supervised, works at his/her own discretion, and supplies his/her own tools. In addition, an independent contractor files a federal 1099 Tax Form and a worker's compensation affidavit claiming personal responsibility for any injuries that may occur on the job."
(c) Any contractor who shall sublet any contract for the performance of any work, to a subcontractor subject to the compensation provisions of IC 22-3-2 through IC 22-3-6, without obtaining a certificate from the worker's compensation board showing that such subcontractor has complied with section 5 of this chapter, IC 22-3-5-1, and IC 22-3-5-2, shall be liable to the same extent as such subcontractor for the payment of compensation, physician's fees, hospital fees, nurse's charges, and burial expenses on account of the injury or death of any employee of such subcontractor due to an accident arising out of and in the course of the performance of the work covered by such subcontract.
22-3-9-5. Contract exempting employer void - Setoff for benefits paid.
"Any contract, rule, regulation, bylaw, or device whatsoever, the purpose, intent, or effect of which would be to enable any employer to exempt himself or itself from any liability created by this chapter, shall to that extent be void;..."
Excerpt from both Carter v. Property Owners Ins Co and Howard v. U.S. Signcrafters In these cases, the Court of Appeals applied a ten-factor test:
- the extent of control which, by the agreement, the master may exercise over the details of the work;
- whether or not the one employed is engaged in a distinct occupation or business;
- the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
- the skill required in the particular occupation;
- whether the employer or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
- the length of time for which the person is employed;
- the method of payment, whether by the time or by the job;
- whether or not the work is part of the regular business of the employer;
- whether or not the parties believe they are creating the relation of master and servant; and
- whether the principal is or is not in business.
Excerpt from O&I v. Honeycutt, No. 93A02-0302-EX-132, Court of Appeals of Indiana, Nov. 19, 2003 "Our Supreme Court has recognized the most important factors to be:
(1) right to discharge;
(2) mode of payment;
(3) supplying tools or equipment;
(4) belief of the parties in the existence of an employer-employee relationship;
(5) control over the means used in the results reached;
(6) length of employment; and
(7) establishment of the work boundaries
GKN Co., 744 N.E.2d at 402
Further, the right to control the manner and means by which the work is to be accomplished is the single most important factor in determining the existence of an employee-employer relationship. Id. at 403. Nonetheless, that factor is not dispositive. Id. Additionally, the factors should be weighed against each other as part of a balancing test as opposed to a mathematical formula in which the majority wins. Id. at 402."
If legislation were passed to include all workers, the fixed payroll amount rule for sole proprietors, partners, LLC members would most likely need to be revised. Instead, we may attempt to capture actual payroll for these types of workers, however, we know that due to the nature of small businesses that are sole proprietorships or partnerships, identifying actual payroll can be difficult. That's why a fixed payroll amount is currently used.
We do not anticipate any revision in advisory rates would be appropriate if such legislation were enacted. Although we would expect more workers, more payroll, and more losses to enter into the system, they would be spread among the many construction and service classifications, and at the same levels and ratios currently realized. This new experience would eventually work its way into the ratemaking experience period (a five-year history) and so future advisory rates would contemplate this exposure.
Legislators or the WC Board may also want to specifically address how benefits are determined for part-time workers. Are average weekly wages based on one part-time job at time of injury or a combination of jobs that the worker may be performing?
10. Pros and Cons
From a liability perspective, an employer may want to seek advice from legal counsel on the advantages and consequences of the approach to treating workers as either employees or independent contractors. Shown below is a table, which lists the pros and cons to both approaches.
-WC provides exclusive remedy
-claim cost defined by statute
-costs easier to quantify
pay premium for all workers
||avoid premium for these workers
||-subject to law suits|
-other liabilities may apply
-total costs harder to quantify
-subject to penalties if no WC coverage in place
Publication 17, Your Federal Income Tax
Publication 505, Tax Withholding and Estimated Tax
Publication 15-A (PDF) , Employer's Supplemental Tax Guide
Publication 1779 (PDF) , Independent contractor or Employee...
Tax Topic 762, Independent contractor vs. employee
Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
Revenue Ruling 87-41: The Twenty FactorsTo help determine whether a worker is an employee under the common law rules, the IRS identified 20 factors in Revenue Ruling 87-41 that may indicate whether the employer can exercise enough control to establish an employer-employee relationship. Not all the factors must be present to find an employee/employment relationship. The factors are guides to assess whether an individual is an employee or an independent contractor.Although we could not find Ruling 87-41 on the IRS website, many links to the ruling are available on the internet. It appears the criteria used in Form SS-8 is the most current information.
H.R.623 -- National Commission on State Workers' Compensation Laws Act of 2011 (introduced 02/10/11)
H.R.623 Sec. 2. Findings excerpt:
“Serious questions exist concerning the fairness and adequacy of present workers' compensation laws in light of the growth of the economy, changing nature of the labor force, misclassification of workers as independent contractors, and as leased employees...
Past bills on the subject as of March 2011:
· “The Employee Misclassification Prevent Act”— HR 5107 in the House and S. 3254 in the Senate
· “The Taxpayer Responsibility, Accountability and Consistency Act of 2009”— HR 3408 and S. 2882
· “Fair Playing Field Act of 2010” (H.R. 6128 and S. 3786)
A Forbes blog site has more information on employee vs. independent contractor issues:
"Independent Contractor’—Another Word for Employer-Free Ride" referenced new legislation (H.R. 6111) that toughens penalties and cracks down on employers who take away workers’ benefits and rights by misclassifying them as “independent contractors” instead of regular employees.
"There are more than 10 million workers classified as independent contractors and studies show a large percentage for those workers—as many as 3.4 million—are misclassified and should be regular employees. A Massachusetts study found 11.4 percent of the state’s construction workers had been misclassified as independent contractors between 2001 and 2003. And an Illinois study found that misclassification had increased by 55 percent between 2001 and 2005."
b. Maine Law & Report
Legislative Document 1456, An Act To Ensure that Construction Workers are Protected by Workers' Compensation Insurance. Under the new law effective 1/1/2010, a person performing construction work at a job site is presumed to be an employee of the hiring agent for the purpose of workers' comp, unless the individual meets the definition of a construction subcontractor.
f. New Hampshire Law HB 471
A Concord Monitor online article dated 10/21/07 titled Small contractors caught short by change in law explains a new law effective 9/14/07. The law requires "any individual . . . who is actively engaged in on-site work on any construction site within the state of New Hampshire" to be covered by worker's compensation insurance. Previously, up to three executive officers of a limited liability company could waive themselves from coverage.
Apparently some contractors avoid having to pay for WC insurance by making one or two employees principal members of the LLC and hiring subcontractors to do the rest of the work. Many of those subcontractors also establish LLCs and avoid having to cover themselves under worker's compensation insurance, then turn around and hire more subcontractors with the same business model. It's a long chain that is designed to circumvent the law.
The NH Task Force on Employee Misclassification issued its first report on December 1, 2008. The report indicated that the task force is still at the beginning of a lengthy fact-finding process aimed at determining whether employee misclassification creates a serious problem in New Hampshire and, if so, to what degree. The task force is expected to issue further interim reports of its findings and recommendations for proposed legislation with a final report due by December 1, 2010.
g. Pennsylvania Proposed Bill
A Philadelphia Business Journal online article dated 6/10/08 reports a House bill would establish the presumption that workers in construction or trucking are employees and place the burden on employers to prove otherwise to the Department of Labor and Industry.
To classify a worker as an independent contractor, an employer would have to show the worker is free from control or direction to perform the service, the service is outside the usual course of the business and the person is customarily engaged in an independently established trade, occupation, profession or business.
h. Maryland Workplace Fraud Act of 2009
SB 909, the Workplace Fraud Act of 2009 effective October 1, 2009:
i. Nebraska Insurance Fraud Act
LB 208 effective 05/26/09 would add to the list of Fraudulent Insurance Acts found under 28-631 and 44-6604 of the Nebraska Statutes:
“(j) Knowingly and with the intent to defraud or deceive provides false, incomplete, or misleading information to an insurer concerning the number, location, or classification of employees for the purpose of lessening or reducing the premium otherwise chargeable for workers’ compensation
A violation of this section under Sec. 28-631 is a Class IV felony (5yrs/$10,000/Both)
j. Michigan Study
A Detroit News online article dated 9/30/09 mentions a 2008 statewide study which showed that 30% of Michigan employers underreport payroll by misclassifying workers. In the construction industry alone, 26% of employers misclassify.
k. Tennessee Study
A study conducted by researchers from Middle Tennessee State University and Tennessee Tech concluded that more than one in five construction workers (38,680) in Tennessee were misclassified as independent contractors or paid under the table in Tennessee in 2006. This cost the state nearly $15 million in unemployment taxes and in workers' compensation premiums.
l. Oklahoma Bill
Senate Bill 1384 targets organizations that misclassify employees as independent contractors was approved by the Oklahoma House of Representatives in April 2010. It directs three state agencies to share information in order to identify employers who fraudulently classify workers in order to evade taxes and workers' compensation claims.
m. New York State Construction Industry Fair Play Act The Act is effective 10/29/10 and is aimed at correcting employee misclassifications in the construction industry.
The Act includes a three-point test to determine if a worker is an independent contractor or employee. The law assumes all construction workers are employees unless the following three criteria are met:
Construction industry employers are required to provide workers with notification of their classification status.
In a press statement, Governor Paterson said, "Studies have shown that up to 15 percent of New York's construction industry is misclassified at any given time. It deprives the government of tax revenue at a time when it is sorely needed and places an unfair burden on law-abiding employers who play by the rules. It often deprives New York's workers of crucial benefits such as overtime pay, workers' compensation and unemployment insurance. This new law will be a powerful tool that hopefully will clean up this practice once and for all."
The Act provides for a business entity exception, which allows for a sole proprietor, partnership, corporation, or person to be classified as an independent contractor provided the entity satisfy a 12-part test for a separate business entity.
n. Indiana SEA 23
Under Senate Enrolled Act 23, codified in IC 22-2-15-1 to 6, the Indiana Department of Labor issued its report to the Indiana Pension Oversight Commission on Employee Misclassification, dated September 29, 2010.
Click here for excerpts from the Commission minutes, which includes the full report in the exhibit.
Quick summary of the minutes:
· Indiana is losing between $250-400 million in income and payroll taxes annually
· estimates that as many as 16.8% of all employees in the state are misclassified as independent contractors
· impact of misclassification includes a pricing edge for employers cheating the system by decreasing payroll costs by as much as 10% to 20%
· employee misclassification is really about tax evasion
· the Commission recommended that the Department of Revenue, the Department of Labor, the Department of Workforce Development, and the Worker's Compensation Board submit by November 1, 2010, a joint report on the following:
(1) An estimate of the potential revenue recoverable annually by the state through the enforcement of existing statutory provisions concerning worker misclassification.
(2) An estimate of the annual costs of enforcement to recover the revenue estimate provided in (1), above.
(3) An estimate of the amount of additional potential expenditures for state benefits, such as unemployment insurance and worker's compensation benefits, resulting from the reclassification of workers as employees as the result of the enforcement efforts described in (1), above.
(4) Recommendations concerning the funding of the estimated annual enforcement costs provided in (2), above, including a mechanism for paying for the additional costs of enforcement and compliance.
o. Utah SB35 signed 04/26/11
Gov. Gary Herbert signed SB35 that addresses worker misclassification in the construction trade. The bill defines what an employee is and what an owner is, and establishes rules about who can be classified as a worker versus an owner of an LLC business. To be classified as an owner, a person must be an active manager, hold at least 8 percent ownership interest, or not be subject to workplace supervision.
p. USDOL coordinates with states and IRS
U.S. Department of Labor, Wage and Hour Division, maintains a web page on the subject of Employee Misclassification as Independent Contractors.
The USDOL and the IRS signed a Memorandum of Understanding (MOU) between them. Under this agreement, the agencies will work together and share information to reduce the incidence of misclassification of employees, to help reduce the tax gap, and to improve compliance with federal labor laws.
Additionally, labor commissioners and other agency leaders representing fourteen states have signed MOUs.
PowerPoint presentation titled "2008: An Independent Contractor Odyssey" presented to the Big I state convention 11/17/08.