Employee-employer relationships regarding workers’ compensation are complicated by the IRS, industrial commissions, the courts and state statute. Each has its own definition or applies a different test to define “employee.”
Certain “employment” situations and arrangements are exempt from the requirements of workers’ compensation. Each state views exempted employment classes differently. Some allow total exclusion, while others may require coverage if certain thresholds are breached (generally very high thresholds in comparison to the standard requirements).
Employments Not Subject to Workers’ Compensation
Fewer Employees than Required by Statute
Thirty-nine states and the District of Columbia require every employer with one employee or more to provide workers’ compensation coverage. However, 11 states allow employers to forego coverage until they surpass a certain threshold number of employees; once eclipsed, it becomes necessary for employers in those states to provide work comp benefits. A few of the “threshold” states lower the threshold number if the employer falls within a contractor classification or involve contact with ionizing radiation.
Workers’ compensation protection is not required in these states when the number of employees falls below the requisite number as specified by the state (generally between three and five). Knowing the threshold is paramount when placing workers’ compensation for multi-state clients.
The eleven states with a number threshold greater than one are: Alabama (5+); Arkansas (3+); Florida (4+); Georgia (3+); Mississippi (5+); Missouri (5+); New Mexico (3+); North Carolina (3+); South Carolina (4+); Tennessee (5+); and Virginia (3+). Five of these states lower the threshold if the insured is within a construction classification: Arkansas (2+); Florida (1+); Missouri (1+); New Mexico (1+); and Tennessee (1+).
Casual Labor – No Workers’ Compensation Required
Workers engaged in casual labor on behalf of the employer are not considered “employees” and are not required to be protected by a workers’ compensation policy. This exclusionary provision applies in nearly every state with each applying different requirements to the exception. States may:
- Simply define casual labor and exclude the requirement to provide protection. Some states apply subjective terms to this definition such as “brief,” “occasional,” “irregular,” “sporadic” or “infrequent,” which may require arbitration or litigation to objectify;
- Assign a maximum dollar limit that can be paid or a maximum number of days the job can last before the work is no longer considered “casual;” or
- Assign a number of “casual employees” allowed.
Casual labor is generally defined as work that is not in the usual course of trade, business, occupation or profession of the employer (contracting party). This could include relationships such as a manufacturer hiring a landscaping company to maintain the grounds; or the owner of an insurance agency hiring a carpenter to upgrade the office. The contractors hired are not performing duties that would normally be done by any employee; they are doing work outside the normal operational requirements. Essentially, a casual laborer is one that does not directly promote or advance the employer’s business or operation.
Most states specifically remove the requirement of providing workers’ compensation protection for domestic employees. Some states place a payroll limit or a numerical limit above which coverage is once again required.
Agricultural, Farm, Ranch, Aquaculture Employees
Nearly every state excludes these workers from the definition of an “employee” and do not require coverage be provided to these workers. Like domestic employees, some states do limit the exception to operations or individuals with less than a specified number of workers or a specified payroll amount. A few states limit this exception with special provisions such as the type of work being performed or the familial relationships.
Commissioned Real Estate Agents
Many states remove the requirement to provide workers’ compensation protection to real estate agents or subagents paid purely on a commission basis. This exclusion does not apply in every state.
The above are the most commonly found exclusions to the workers’ compensation requirements; however, there are several beyond these that may only apply in a few states. Such limited exclusions include:
- Volunteer ski patrol employees;
- Members of the clergy;
- Some taxicab drivers;
- Professional athletes;
- Athletic contest officials;
- Officers of non-profit associations and corporations;
- Direct sale people (i.e. Mary Kay consultants and directors);
- Newspaper re-sellers; and
This is not an all-inclusive list.
If an exempted worker/employee is injured, the only recourse available to recover any medical costs or lost wages from the employer is the legal system. Essentially, the injured party has the same legal rights as a member of the general public, but the injured party also has to prove that the employer was negligent in causing the injury or illness. The employer is allowed the same defenses as were available prior to the enactment of workers’ compensation laws:
- Assumption of Risk: Proving negligence requires evidence that a duty of care is owed. When an employee assumes the risk of an inherently dangerous or recognizably dangerous activity, the duty of care is lifted from the employer. With no required duty of care, there can be no negligence. Employees in hazardous occupations are believed to understand the hazards and to assume the risk of injury;
- Contributory or Comparative Negligence (depending on the state): Doctrine of defense stating that if the injured person was even partially culpable in causing or aggravating his own injury, he is barred or severely limited in the amount of recovery from the other party; and
- Fellow Servant Rule: Defense against employer negligence asserting that an employee’s/worker’s injury was caused by a fellow employee not by the acts of the employer. If proven, negligence is not chargeable against the employer and recovery could be severely limited or barred.
Unless negligence can be proven, no finding of guilt or a requirement to pay will materialize.
Workers’ Compensation Coverage Provided
Workers’ compensation coverage can be extended to many of these exempt employments by attaching one of the available Voluntary Compensation Endorsements. These endorsements extend workers’ compensation protection to employments customarily exempted by individual state law by allowing the employer to designate the class of employees they wish protected. Essentially, workers become de facto employees, removing the employee’s need to sue and prove negligence and the employer’s requirement to provide and pay for a defense.
Academy of Insurance Workers’ Comp Month
April 2015 is Workers’ Compensation Month for the Academy of Insurance. During the month the Academy hosts an in-depth, four-part webinar series focused on workers’ compensation. The topics are:
- The Course and Scope Rule and its Gray Areas (April 2)
- Employees, Independent Contractors, General Contractors and Contractual Risk Transfer in Work Comp (April 9)
- When to Add Additional States – Extraterritorial Jurisdiction Problems (April 16)
- The Surprising Importance of Employers’ Liability Protection (April 23)
Register now to assure a spot. Invite everyone in your office to attend (everyone in your office is welcome, only one registration required).
Workers’ Compensation Series
This is the fourth in a series of articles on workers’ compensation. The series is taken from the book, “The Insurance Professionals’ Practical Guide to Workers’ Compensation: From History through Audit.” The articles in this series are:
- Workers’ Compensation History: The Great Tradeoff
- Benefits Provided Under Workers’ Compensation Laws
- Second Injury Funds: Are They Still Necessary or Just a Drain On the System?
- Employees Exempt from Workers’ Compensation
- Nonemployee ‘Employees:’ The Borrowed Servant Doctrine
- Work Comp for PEOs and Their Client/ Employers
- Combinability of Insureds
- Audit Rules and Guidelines
- Audit Problems Leading to Additional Premiums
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