Every week I get a call from a client who has an outside contractor.  What makes someone an outside contractor versus an employee? This is a very big sticking point with the IRS and NYS departments of labor.

General guidelines are easy; you have a corporation of your own and you have your own workers compensation insurance for your corporation, the likelihood all governments fed and state will consider you an outside contractor.  So having worker’s compensation generally separates you into that independent/outside contractor group.

If you show to work at a desk provided by the boss and the boss determines the quality of your work chances are you are an employee.  But what about the sole proprietor with no insurance?

Case study: Recently a client had an audit in their car repair business [a sole proprietor] because a government employee from the Dept. of Labor brought his car in to be fixed and noticed what looked like an employee.  It was a relative of the owner who comes by part-time when needed to pick up extra work.  That’s an employee.  And the shop didn’t have worker’s compensation insurance because the relative often wasn’t even compensated many times.  Law requires such a place to have worker’s compensation insurance.

Another example, many yoga teachers have their own worker’s comp insurance [about $250 per year for most individual premiums] as should all independent workers.

Each case is determined by its own merits, and, NYS is much tougher than the IRS.
Worker’s compensation insurance protects employers and employees.  If an employee gets hurt on the job, worker’s compensation makes sure that the employee gets medical treatment with no deductible; and in return, the employee cannot sue the employer in most cases.

Worker’s compensation insurance is mandated by law, and it protects both the worker and employee.

A final question, “What happens when an outside contractor is hurt on a job?” (and here is potential trouble).  Sole proprietors or businesses with 1-2 owner/operators are not required by law to have insurance.  And so the detriment in an accident falls on the customer they are working for.  Is that fair? Perhaps not, but it is the law.

Final note: It is almost always a good practice to get worker’s compensation insurance, even if you think you don’t need it.