Employee vs. Independent Contractor and How it Affects Your Workers’ Compensation Insurance

Posted in: Commercial Insurance

As the economy changes, we have seen an increased use of “independent contractors” in all areas of business as a way to try and reduce employer expenses. While there are many advantages to the use of independent contractors, as a business loans-cash.net executive you also need to be aware of some real hazards. Audits by your workers’ compensation insurance carrier as well as government agencies such as the IRS and the Department of Labor could lead to major consequences such as fees or fines if you are mis-classifying employees as independent contractors.

Independent Contractor vs. Employee

It is first important to understand the differences between an independent contractor and an employee. Below are a few of the key differentiators that workers’ compensation insurance carriers use:

Independent Contractor


Sets his or her own hours An employer dictates time and place of employment
Establishes his or her own working conditions An employer oversees the work environment and establishes policies on what is and isn’t permitted
Chooses his or her own dress An employer establishes an expectation of working dress even to the point of providing uniforms some circumstances
Supplies his or her own tools Employer supplies tools


The Injured Workers’ Insurance Fund (IWIF) has also developed guidelines to help you identify whether a worker is an independent contractor or an employee. If you answer “yes” to any of the following, the individual contract laborer is most likely an employee:

  • Is the person paid hourly (or by piece, day, or week)?
  • Does the person perform work that regular employees of your business perform?
  • Is all, or a majority of the work that comprises the general nature of your business performed by contract labor?
  • Do you provide the material for the job(s)?

Important Documentation

Once you have properly identified your employees and independent contractors, it is then essential to obtain and retain the following documents from any independent contractor. You will need them when you are audited by your workers’ compensation insurance carrier:

  • A Certificate of Insurance for General Liability Coverage (keep originals not photocopies on file). Make sure to verify the limits are at least equal to that which you have on your company’s insurance program and be sure that the period of coverage on the certificate matches the period when the work was performed as closely as possible.
  • A Certificate of Insurance for Workers’ Compensation if the independent contractor has workers’ comp Insurance.
  • A copy of the independent contractor’s business license.
  • A written subcontract in place for each job conducted by the individual contract laborer, per Title 9-508 of the Maryland Workers’ Compensation Statute.
  • A signed copy of the “Sole Proprietor’s Status as a Covered Employee” form.

If you do not have these documents on file for each and every independent contractor that your company works with, you could face additional premiums upon audit from your workers’ compensation insurance carrier and the risk of adverse claims experience, which could result in higher future premiums.

Important Changes to Workers’ Compensation Law in Maryland

Legislation passed during the 2009 session amends the Maryland workers’ compensation law whereby an individual is presumed to be an employee and not an independent contractor. Effective since October 1, 2009, the burden now rests with you, the employer, to prove independent contractor status.

Is Your Insurance Broker Helping You Prevent Claims Before They Happen?

Final Caution

One last recommendation for working with independent contractors –  if you are a “sole proprietor” or are the owner of an LLC without employees and opted out of workers’ compensation, do not allow subcontractors to bring another subcontractor(s) on the job until you validate their insurance. If that person(s) were injured and they don’t have their own workers’ compensation policy, you could be held responsible for injuries to that person.

Please contact me directly at bmarx@psafinancial.com if you have any questions about the classification of individual contract laborers and employees as it relates to your workers’ compensation insurance. Many cases have gone to court over whether an employee is being masked as an independent contractor. Don’t wait until there’s an accident or an insurance carrier’s audit to make sure you are following the proper protocols.

The information provided is for general purposes only.  As regulations are subject to change, always consult with a qualified professional.