One of the most common workers’ compensation premium fraud schemes occur when business owners intentionally misclassify their employees as independent contractors or subcontractors. This is typically done to reduce not only their insurance premiums but also reduces or eliminates employee expenses such as:
- Workers Compensation
- Taxes (Social Security, Medicare, Federal & State unemployment, etc)
- Employee medical benefits
- Employee retirement benefits, holiday/sick pay, vacation
- Overtime and minimum wage
Misclassifying your employees, independent contractors can carry serious penalties, risks and unintended consequences. Many employers don’t realize that by intentionally misrepresenting an employee’s classification or pay rate is punishable. Doing this to lower the workers compensation premiums or avoid taxes can result in penalties, fines, back payments, benefits owed to reclassified employees or even prison time for tax evasion! We don’t want that to happen to any entrepreneur so please allow our team of solution providers work with you and your business as a partner. Have questions? Contact us at 1-800-686-8664 or [email protected]. Or you can use the resources below to help in properly classifying employees.
One way you can ensure you’re properly classifying your independent contractors is to follow this 20-point questionnaire to determine Are you an Independent Contractor?
Make sure you are in full compliance and do not position yourself or your company for any unnecessary liability. Below you will find the 20-points that have been established by the Internal Revenue Service (IRS):
1. Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
2. Does the individual receive training from your company?
3. Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
4. Must the individual personally perform the contracted services?
5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
6. Is there a continuing relationship between your company and the individual?
7. Must the individual work set hours?
8. Is the individual required to work full time at your company?
9. Is the work performed on company premises?
10. Is the individual required to follow a set sequence or routine in the performance of his work?
11. Must the individual give you reports regarding his/her work?
12. Is the individual paid by the hour, week, or month?
13. Do you reimburse the individual for business/travel expenses?
14. Do you supply the individual with needed tools or materials?
15. Have you made a significant investment in facilities used by the individual to perform services?
16. Is the individual free from suffering a loss or realizing a profit based on his work?
17. Does the individual only perform services for your company?
18. Does the individual limit the availability of his services to the general public?
19. Do you have the right to discharge the individual?
20. May the individual terminate his services at any time?
In general “no” answers to questions 1-16 and “yes” answers to questions 17-20 indicate an independent contractor. However, a simple majority of “no” answers to questions 1 to 16 and “yes” answers to questions 17 to 20 does not guarantee independent contractor treatment. Some questions are either irrelevant or of less importance because the answers may apply equally to employees and independent contractors.
Make sure you are handling your sub-contractors properly. If they act like an employee—they are.
Sources:
Sources: https://www.michigan.gov/wca/0,4682,7-191-60874—,00.html; EMC Insurance
