Navigating the Heavily Regulated Landscape for Independent Contractors

Maintaining an effective insurance program, along with monitoring legal and regulatory requirements, is part of a sound risk management strategy.

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Independent contractors are often the backbone of industries like trucking and shipping. Their role can be vital in ensuring goods are delivered, from motor carriers hiring owner-operators, to gig workers fulfilling tasks in last-mile delivery. Hiring independent contractors can provide businesses more flexibility to meet customer needs but can also present challenges for regulatory compliance, worker classification and insurance coverage.

However, with the right coverage, companies can effectively navigate worker classification in conjunction with providing an effective insurance program for independent contractors.

Classification Challenges

How a company classifies its workers is a key issue for any business using an independent contractor model. One hallmark of determining a worker’s status is understanding which party has “direction and control” over the work being performed.

Generally, an employer has the right to direct and control an employee’s work, whereas an independent contractor is free from such oversight. But there are nuances that apply depending on the jurisdiction—state or federal—and context—wage and hour, tax, workers’ compensation, unemployment insurance and so on.

Certain state and federal laws, like California's Assembly Bill 5 (AB 5) and the Department of Labor's (DOL) new classification rule, provide direction on how independent contractors are classified.

  • AB 5, which became effective in 2020, uses a three-part test often referred to as the ABC test. A worker is considered an independent contractor only if all three of the following requirements are met.
    • The worker’s performance of the work is free from the company’s direction and control, both under the contract and in fact.
    • The worker is performing work outside of the company’s usual operations.
    • The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
  • In contrast, the DOL rule adopted this spring uses an “economic reality” test for worker classification under the federal Fair Labor Standards Act. That rule has six factors, which are non-exhaustive, that consider:
    • the worker’s opportunity for profit or loss;
    • investments made by the worker and hiring entity;
    • permanence of the work relationship;
    • the nature and degree of the hiring entity’s control;
    • the extent to which the work performed is integral to the hiring entity’s business; and
    • the worker’s skill and initiative.

These laws and regulations are also subject to litigation and challenge, so it is crucial to monitor and understand the ever-changing landscape to ensure compliance with evolving requirements.

The Benefits of Occupational Accident Insurance and Contingent Liability

Proper classification of workers is key but must be supported with the right insurance coverage to ensure a company and their independent contractors are protected.

For example, workers’ compensation coverage is often mandatory for employees, but that coverage may not apply to independent contractors. And if a worker who is classified as an independent contractor succeeds in obtaining workers’ compensation coverage, it can lead to unintended claim benefits and additional premium owed.

Such issues can be avoided by having occupational accident insurance (OAI) in place to provide coverage for independent contractors who are injured while working. OAI benefits typically include:

  • Accident medical expense for medical treatment, including hospitalization, surgery, medication and rehabilitation.
  • Benefits for accidental death and dismemberment or paralysis.
  • Survivor benefits for a spouse or dependents.
  • Accident disability income benefits for:
    • Temporary total disability, which pays a percentage of earnings for a limited duration.
    • Continuous total disability, which pays a percentage of earnings for an extended duration.

In addition, a contingent liability policy can help a company transfer the risk of workers’ compensation claims made by independent contractors. If an independent contractor asserts a workers’ compensation claim, the contingent liability policy provides defense and benefits for that claim.

Pairing OAI in conjunction with a contingent liability policy provides several additional benefits, such as:

  • Mitigating Financial and Legal Risks: Reduces the chance of independent contractors filing for workers’ compensation claims by providing alternative coverage.
  • Compliance with Regulatory Requirements: Supports adherence to state and federal regulations by avoiding direction and control.
  • Competitive Advantage: Attracts and retains top talent by showing a commitment to safety and financial security, attracting safety-minded independent contractors and enhancing the company’s reputation.
  • Improved Claim Management and Cost Efficiency: Ensures efficient claims handling, leading to lower overall claims costs and potentially reduced premiums.

Securing the Right Coverage

To make sure the right OAI coverage is in place, carefully consider each of these issues.

  • Evaluate Coverage Needs: Assess independent contractor needs to select a policy that provides adequate coverage and benefit amounts for medical expenses, disability income, and accidental death. Also consider whether to include extended coverage for non-occupational injuries.
  • Shop Around: Research and compare various insurance options to find the best coverage for your business needs. Look for policies that offer competitive rates and comprehensive benefits. Work with an insurance broker who understands coverage needs for independent contractors and the hiring entity.
  • Educate Workers: Communicate the policy’s benefits and terms to independent contractors. Provide information on how to file claims and what to expect regarding coverage. Implement a process to receive from the independent contractor, and report to the insurance company, timely notice of accidents.
  • Monitor Claims: Use a system to track and manage claims. Build a relationship with the insurance company and its claim adjusters to support timely and efficient claims processing, which can help reduce costs and improve independent contractor satisfaction.
  • Adapt When Necessary: Keep abreast of legal and regulatory changes affecting worker classification to understand how business practices and insurance policies may need to adapt. Subscribe to industry newsletters, attend relevant webinars and conferences, and consult with legal and insurance experts.

Safeguard for the Future

Occupational accident insurance provides critical coverage for work-related injuries for independent contractors, bridging gaps left by workers’ compensation, while contingent liability insurance protects against potential workers’ compensation claims made by independent contractors. These solutions can support compliance efforts, minimize legal risks and provide needed coverage for independent contractors.

Once coverage is in place, implement practices and policies to support an effective and efficient insurance program. Maintaining an effective insurance program, along with monitoring legal and regulatory requirements, is part of a sound risk management strategy.

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