With the rise of side hustles and people leaving the general work force in droves to be “their own boss”, it is inevitable that the number of workers classifying themselves as “independent contractors” is on the rise. Employers are warned to be cautious and avoid this poisonous apple, as misclassification by the worker can be costly to the employer in the realm of worker’s compensation.
INDEPENDENT CONTRACTOR DEFINED
An independent contractor, pursuant to Wisconsin worker’s compensation law, must run his or her own business and perform work for hire. However, this is not the sole focus of the inquiry.
Employers cannot rely on the individual’s claimed status or federal policies when it comes to classifying a worker as an independent contractor. While normally federal guidelines are more restrictive, in the case of the independent contractor for purposes of worker’s compensation, Wisconsin law controls the classification, specifically section 102.07(8) of the Wisconsin Statutes.
Wis. Stat. § 102.07(8) sets forth a nine-part statutory test to determine if a worker qualifies as an independent contractor when determining if the worker is covered by the Worker’s Compensation Act.
Strict compliance with the statute is required and all nine elements must be satisfied for a worker to be classified as an independent contractor in Wisconsin. Failure to meet even one part of the statutory test will result in the worker being identified as an employee. It is a rarity for a worker to actually be an independent contractor exempt from the Worker’s Compensation Act.
Pursuant to the Worker’s Compensation Act, “[a]n independent contractor is not an employee of an employer for whom the independent contractor performs work or services if the independent contractor meets all of the following conditions:
Maintains a separate business with his or her own office, equipment, materials and other facilities.
Holds or has applied for a federal employer identification number with the federal internal revenue service or has filed business or self-employment income tax returns with the federal internal revenue service based on that work or service in the previous year.
Operates under contracts to perform specific services or work for specific amounts of money and under which the independent contractor controls the means of performing the services or work.
Incurs the main expenses related to the service or work that he or she performs under contract.
Is responsible for the satisfactory completion of work or services that he or she contracts to perform and is liable for a failure to complete the work or service.
Receives compensation for work or service performed under a contract on a commission or per job or competitive bid basis and not on any other basis.
May realize a profit or suffer a loss under contracts to perform work or service.
Has continuing or recurring business liabilities or obligations.
The success or failure of the independent contractor's business depends on the relationship of business receipts to expenditures."
(2022) (emphasis added).
The individual must meet and maintain all nine of the statutory requirements to be considered an independent contractor rather then an employee under the Worker’s Compensation Act.
THE INDEPENDENT CONTRACTOR VERSUS THE EMPLOYEE
In Wisconsin, the distinction between who is an employee versus an independent contractor is impactful to both the employer and the worker.
Employees are entitled to benefits and protections of the Worker’s Compensation Act while independent contractors are denied the same. However, because of this, independent contractors are not prohibited from filing a third-party liability lawsuit for damages whereas the Wisconsin Compensation Act is considered to be the “exclusive remedy” available for employees injured while working.
The Worker’s Compensation Act sets forth the boundaries for compensation of an injured employee. Employers are able to protect their businesses and livelihood along with providing for their employees given the parameters outlined by the Worker’s Compensation Act.
However, if an independent contractor is injured, while the employer is not automatically liable for compensating the injured worker, the employer may in fact be subject to higher liabilities as an independent contractor is not limited by the Worker’s Compensation Act.
The independent contractor may file a claim outside of the Worker’s Compensation Act which carries potential penalties for pain and suffering and punitive damages along with the traditional damages of lost earnings and medical expenses.
Employers, now more than ever, are being faced with workers attempting to self-classify as independent contractors and, as is with most things that appear too good to be true, employers should be cautious. It is the employer, not the employee, that will pay the price for misclassification by the worker.
The independent contractor in Wisconsin, for purposes of worker’s compensation, is, and still should be considered, a unicorn – often claimed but seldom seen.