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Business Insurance

Workers Compensation Insurance: Do You Need It?

By April 21, 2010 February 26th, 2019 No Comments

There seems to be some debate out there regarding whether you should label your worker as an employee or a subcontractor. This debate involves purchasing workers compensation insurance policy, or maybe I should say, not purchasing a workers compensation insurance policy.

Who Must Purchase Workers Compensation Insurance?

The Workers Compensation section of the PA Department Labor & Industries’s (DL&I) website says, “If you employ workers in Pennsylvania, you must have worker’s compensation insurance – Its the law.”

That seems clear enough but how do you know if the person you are employing is actually an employee or a subcontractor?

Before I answer that question, I must point out that the PA DL&I website goes on to further describe who does and does not need coverage, as well as provides examples of the penalities incurred for employers who fail to provide coverage even though they should have. Also the PA Insurance Department website has a nice piece of information titled “Your Guide to Workers Compensation Insurance.” If you’re in business in Pennsylvania, I suggest you check it out.

The IRS Test

The best way to answer the question as to whether you have an employee or a subcontractor is by using the “IRS Test“. Basically, a subcontractor is defined by the IRS as a person whom you have the “right to control or direct only the result of the work and not the means and methods of accomplishing the results.” Whereas a worker is an employee if you “can control what will be done and how it will be done.”

The IRS test consists of three main catagories to review regarding how to classify your worker: behavior control, financial control and relationship of the parties.

Behavioral Control – This section deals with whether you demonstrate a “right to direct or control how the worker does the work.” Examples are type of or level of instruction and/or training afforded to your worker

Financial Control – This section deals with “whether there is a right to direct or control the business part of the work.” Examples are whether there is significant investment in the work or who is responsible for a majority of the expenses incurred.

Relationship of the Parties – This section deals with “how the business and the worker perceive their relationship.” Examples are employee beneftis and written contracts.

In many cases, the control you demonstrate over a worker, along with your relationship with that worker, can determine how to classify them. Take a look at Publication 1779, “Independent Contractor or Employee”. The document details the three catagories, as well as lays out several questions you can answer to help you better understand how to classify your workers. How you answer the questions in this publication can go a long way in determining whether you need to purchase a workers compensation policy.

In conclusion, determining whether a worker is a subcontractor or an employee can be difficult task. Each situation is unique and a local insurance agent is always a good source to answer questions or help with navigating any of the aforementioned websites. Are you sure if your business has contractors or employees?