How to Avoid Workers’ Comp Liability for Independent Contractors

In Michigan, employers are generally required to carry workers’ compensation insurance for their employees.  If a company hires independent contractors, those individuals or companies are supposed to carry their own workers’ comp insurance.  If they don’t and get injured, however, the hiring company could be on the hook for workers’ comp liability.

The Michigan legislature recently enacted a 20-factor test to determine whether an individual is an employee for workers’ compensation liability purposes (and thus covered under the hiring company’s workers’ comp policy).  This is a significant expansion of the prior four-factor test.

The best way to avoid liability is to require each independent contractor to carry his or her own workers’ compensation insurance.  You should require a copy of the certificate of insurance, and may even want to call the insurance agent to verify that the coverage is still in effect.

This new test uses 20 separate factors to determine if someone is an employee or an independent contractor for workers’ compensation purposes.  The underlying idea is control of the individual’s work and schedule.  The factors are:

1. Instructions (requiring contractor to follow instructions of where, when, and how)
2. Training (requiring contractor to perform job in a particular manner)
3. Integration (if contractor’s services are an essential part of your business)
4. Services rendered personally (requiring contractor to perform instead of contractor’s employees or designees)
5. Hiring, supervision, and paying assistants
6. Continuing relationship
7. Set hours of work (requiring contractor to work set hours)
8. Full time required
9. Work done on premises
10. Order or sequence test (requiring services to be performed in a particular order)
11. Oral or written reports
12. Payments by the hour, week, or month
13. Payment of business and/or travel expenses
14. Furnishing tools and materials (contractor should provide own)
15. Significant investment (contractor should maintain own office)
16. Profit or loss (if contractor realizes a profit or loss, considered independent)
17. Working for more than one firm at a time
18. Making service available to the general public
19. Right to discharge (both parties should be able to terminate, by contract)
20. Right to terminate relationship (both parties should be able to terminate)

The key is to avoid meeting as many of these factors as possible.  Ideally, none would be met, but that’s probably not realistic.

Please contact the attorneys of Demorest Law Firm if you’d like more information.