Workers’ compensation laws exist in PA and every other state or commonwealth in the country. These laws, which first came into existence in Wisconsin in 1911, are designed to provide protection for both workers and employers. Injured workers who can prove their injuries were work-related are entitled to benefits to help them while they are disabled. Employers know that by taking part in a worker’s compensation system pay insurance premiums for the program, but they will not face potentially crippling lawsuits as a result.
The number of employees a business needs to have on its staff before workers’ compensation insurance is required varies from state to state. In Pennsylvania, most businesses hire even one employee are required to participate in a workers’ compensation program. There are some exceptions to this law, which we will explore more in depth below, and one of the most important exceptions is independent contractors. In Pennsylvania, independent contractors are not covered by workers’ compensation if they are injured while doing a job for another business.
Yet there are exceptions even to this exception, and it is in the best interest of all parties involved, large or small businesses and independent contractors, to be aware of how the workers’ compensation law in Pennsylvania affects them.
Do Independent Contractors Need Workers’ Compensation Insurance?
No, in most cases, independent contractors working for your business do not require workers’ compensation insurance. You will have to prove the contractor is not an employee, and if you cannot provide this documentation, then you may be required to pay workers’ comp insurance fees for them.
If you operate a small business, here are some additional questions you should ask yourself when thinking about workers’ compensation insurance.
1. How Many Employees Do You Have?
As stated, in Pennsylvania, if you employ even one person, you are required to carry worker’ compensation insurance. The penalty for not having workers’ compensation insurance in PA may include fines or even prison time, depending on whether the offense is a misdemeanor or felony.
2. Can I Self-Insure My Business?
Yes, Pennsylvania allows any business to self-insure if they meet the state’s strict requirements. Large entities like hospitals or hospital systems may self-insure because they have the financial means to meet the requirements. If a small business wishes to self-insure, it needs to make an application to the Pennsylvania Bureau Of Labor and Industry Bureau of Workers’ Compensation Self-Insurance Division. The bureau will review your application see if you meet the standards required.
While self-insurance may seem like a good idea for a small business to save money, if an employee does get hurt, it could set you back a great deal financially. It makes much more sense to buy insurance from a private carrier.
3. Do I Still Need to Have Workers’ Compensation for Volunteers or Subcontractors?
If you are a small business or a nonprofit organization, you do not need to carry workers’ compensation for unpaid volunteers, even if you provide transportation, food and lodging for them.
It’s a different situation, however, for subcontractors. If you are the principal contractor and an employee of a subcontractor is injured while working on your job, you are responsible for that employee’s workers’ compensation if the subcontractor does not carry it. This is one reason why you should always check to make sure any subcontractor carries the appropriate workers’ compensation insurance. Seasonal, part-time or temporary employees must be covered under workers’ compensation insurance, too.
4. If I Operate a Small Business, Can I Ask My Employees to Pay for Part of Their Workers’ Compensation Premiums?
No. A business of any size cannot ask its employees to pay for some or all of its workers’ compensation insurance. Providing workers’ compensation insurance is a cost of doing business in Pennsylvania.
5. If I Am the Sole Proprietor of My Business, Do I Need Workers’ Compensation Insurance?
If you are the sole employee of your business, you are not required to purchase workers’ compensation insurance in Pennsylvania. There is, however, a difference between “need” and “should” when it comes to workers’ compensation insurance for the self-employed.
It is not a bad idea for self-employed business owners to purchase workers’ compensation insurance. Consider what would happen if you were injured while doing a job. Think about the lost wages and the cost of medical coverage you would have to pay for on your own. Insurance rates will depend upon the nature of your job. If you run a food stand selling coffee and donuts, you may pay less than someone who does heavy physical labor, like a construction worker or a roofer.
Depending on the kind of work you do, even if you’re the sole proprietor, you may still need to hire subcontractors. And as we noted above, if an employee of that subcontractor becomes injured on your job, you are responsible for paying their workers’ compensation claims if that subcontractor does not carry insurance.
Other businesses that hire independent contractors may find it more attractive to choose one that carries their own workers’ compensation insurance. Since independent contractors are not covered by the workers’ compensation system if they are injured while performing a job for a company, they can sue that company if they can show that they were injured because of the company’s negligence or failure to provide safe working conditions. Companies may choose not to hire independent contractors if the job in question is a risky one. Providing your own workers’ compensation insurance then becomes an important reason for a company to hire you.
Regardless of the cost, however, if you are a sole proprietor, carrying workers’ compensation is a good business decision. It provides you with a level of financial protection that may make the difference between the survival or failure of your business. While larger carriers may find it unprofitable to provide insurance for sole proprietors, smaller insurance firms will be much more open to the idea.
Employee Vs. Independent Contractor
So what’s the difference between an employee and an independent contractor, and does it matter? In Pennsylvania, the workers’ compensation program generally covers all employees of any business. There are some exceptions to this rule. For instance, federal government employees, members of the military, railroad workers and longshoremen are not covered because they have their own insurance programs. Independent contractors also are not covered.
Knowing the differences between an employee and an independent contractor is important. Definitions vary between states, and even the description provided by the Internal Revenue Service for what constitutes an “independent contractor” can be different than what is required by your state’s workers’ compensation program.
A number of important factors determine the difference between the two.
1. Independent Contractors Control the Manner and Type of Work They Do
When you hire an employee, you tell them what they are going to do and how they are going to do it. But when you hire an independent contractor, you just tell them what job you want to be done. You don’t stand over them telling them how to paint or how to fix your sink or the order of things that need to be done.
2. Independent Contractors Are Hired for a Particular Skill
You hire an independent contractor because they are known to be very good at what they do, whether that be painting, installing a security system, fixing an electrical problem or putting in a new sidewalk in front of your business.
3. Independent Contractor Do Not Have Taxes Paid by Your Business
When you hire an employee, you must deduct Social Security and Medicare taxes from their paycheck. A business does not deduct any of these taxes from an independent contractor. When you hire an independent contractor, you agree to pay them a set fee. It is up to that independent contractor to pay their own taxes.
4. Independent Contractors Only Work for a Specific Length of Time
In most cases, a business hires a contractor to do a specific job that needs to be completed in a specific amount of time. To use our example of putting in a new sidewalk in front of a business, that may be a job that takes anywhere from a week to months. When the job is completed, the business no longer has any dealings with the independent contractor.
If you use the independent contractor on a regular basis, however, and they are performing the same task for you, again and again, year in and year out, a workers’ compensation judge can sometimes see this as falling under the definition of an employee. You should check with an experienced workers’ compensation lawyer who can advise you how to proceed in this situation.
5. Independent Contractors’ Work Does Not Fall Under the Rubric of Your Regular Business
If you run a grocery store and you hire an independent contractor to paint your store, this is not seen as performing a task that is part of your regular business. If you operate a grocery store, however, and you hire an independent contractor to provide you with fresh produce each day, it may be possible that they could fall under the definition of an employee because selling fresh produce can be seen as part of a grocery store’s regular business.
6. Independent Contractors Provide Their Own Tools
An independent contractor provides their own tools. They do not use any tools at the business where they are doing the job.
7. Independent Contractors Work on Their Own Schedules
An independent contractor does not operate according to the regular business hours of the company for which they perform a job. An employee works a schedule that is determined by the business. But an independent contractor will work on their own timetable, although that may be specified in consultations with the business. For example, an independent contractor may work during a day or a time when the company is closed.
8. Independent Contractors Have a Separate Place of Business
Independent contractors have their own office and business address. An independent contractor who conducts all their work at a business would not be seen as an independent contractor but as an employee.
9. Independent Contractors Hire Their Own Workers
When a company hires an independent contractor to do a job, they have no control over how many employees the independent contractor may hire to work on the job or if they contract any part of the job out to a subcontractor.
Do I Need Workers’ Compensation Insurance for Contractors Under PA Law?
There are also specific ways to define employees under Pennsylvania law.
1. An Employee Is Hired for a Continuous Period Even If That Employee Works Part Time
Employees have regular work schedules that their employer determines each week or month.
2. Employees Are Economically Dependent on Their Employers
Employees depend on the wages they regularly receive from their employers.
3. Employees Are Protected by Federal, State and Municipal or County Laws
The way employers treat their employees and what happens to an employee if they are injured on the job is regulated by law. Independent contractors, however, are not covered by any of these laws.
4. Employees Receive a W-2 Form From Their Employer Each Tax Year
The W-2 shows the wages that the employee has received from the employer. An employer needs to provide a 1099 for an independent contractor if the amount paid for the completed job is more than $600.
Penalties for Operating Without Proper Workers’ Compensation Insurance
Any business in Pennsylvania that hires more than one employee is required to carry workers’ compensation insurance. Even if an employee is working on their first day and in their first hour and they are injured on the job, they are covered by workers’ compensation. This is also true in situations like farm work where a farmer may hire their spouse or their older children to work for them.
If an employee is injured on the job and the employer does not carry workers’ compensation insurance, not only could the business face fines and penalties from the government, but it also can also face potentially damaging lawsuits from the injured employee. The business owner(s) may also face jail time.
Under Pennsylvania’s Workers’ Compensation Act, an employer who, through misunderstanding the act or not knowing they need to provide workers’ compensation insurance, operates without this insurance can be charged with a third-degree misdemeanor, fined as much as $2,500 and face as much as a year in jail.
If a business is found to be intentionally operating without workers’ compensation, the potential penalties become much more severe. The owner can be charged with a third-degree felony, face a $15,000 fine and face as much as seven years behind bars.
Each day that the business fails to carry workers’ compensation insurance can result in additional legal problems that add to any penalties, fines or jail time. It’s easy to see why carrying workers’ compensation insurance is a necessity for any size of business with employees, particularly a small business.
How Much Workers’ Compensation Insurance Do I Need? Let Strock Insurance Find the Anwer
Not having the right kind of insurance for your business can result in problems with serious consequences. If you are looking to purchase workers’ compensation insurance for your small business in Harrisburg, Lebanon or Camp Hill, talk to us at Strock Insurance. We specialize in business insurance, and you can visit any one of our locations in York, Dauphin or Cumberland counties.
You can also visit our contact us page, where you can leave your contact information and ask questions about, or get a quote on, a policy for your small business. Get in touch with us today.
