OFFICE LOCATION Employee or Independent Contractor Classification and the Effect on Workers’ Compensation Coverage

The distinction between an employee and an independent contractor is an important one for the purposes of Workers’ Compensation coverage. Employees are generally covered under Workers’ Compensation laws, while independent contractors are not*.

Unfortunately, the classification is often not straightforward. Misclassification of workers as ‘independent contractors’ instead of ’employees’ is a growing problem as employers may avoid various obligations by misclassifying their employees.

The Iowa Code, §85.18, provides that persons who are bona fide independent contractors are not employees. However, a contract that designates a person to be an independent contractor does not make the person an independent contractor if the person functions as an employee.

So how do you determine whether a worker is an employee or an independent contractor? By looking at the degree of control and independence of the worker. The IRS has outlined three general categories to look at concerning control and independence:

1. Behavioral: Does the employer control or have the right to control what the worker does and how the worker does his or her job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3. Type of Relationship: Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? Does the employer have the right to discharge a worker at will and without cause?

A worker doesn’t need to meet all the general characteristics of an employee to be classified as one. The entire working relationship should be considered and certain factors may be more applicable to one relationship than another. If you are unsure whether you or someone you know should be classified as an employee or an independent contractor please don’t hesitate to contact an attorney to clarify your situation.

*If you are correctly classified as an independent contractor you can still be covered by Workers’ Compensation by purchasing a valid Workers’ Compensation insurance policy which specifically includes you. Iowa Code §§85.1A, 85.61(13).

Sources: Code of Iowa; https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

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