WORKERS' COMPENSATION INFORMATION SHEET
EMPLOYEE versus. INDEPENDENT CONTRACTOR
When deciding whether to provide workers' compensation coverage for an individual, employers are often confronted with the question of whether a worker is properly classified as an employee or an independent contractor. This information sheet attempts to explain the distinctions between these two classifications and clarify when workers' compensation insurance is required.
Pursuant to, the Vermont Workers' Compensation Act, an employer/employee relationship is generally presumed. However, recognizing that there are true independent contractors for which an employer should not be required to provide workers' compensation coverage, Vermont does retain a limited exception to this presumption. Two tests are utilized to determine if a worker is an independent contractor or an employee for purposes of requiring worker's compensation coverage. First, the “right to control” test. If application of the “Right to Control” test demonstrates that an employer “controls” the worker, then the inquiry ends and the worker will be classified as an employee and workers' compensation coverage is required. But, if the “right to control” test reveals otherwise, then the next inquiry, the “nature of the business”, test, must be employed in an effort to determine if workers' compensation insurance would nevertheless still be mandated for that worker.
Under the “right to control” test, courts examine numerous factors to ascertain whether a company has exercised enough control over an individual to classify the relationship as employer‑employee within the meaning of the worker's compensation statute. This test does not require an employer to actually exercise control, it merely requires that an employer could, if it chose to do so, exercise control over the employee. This classification is entirely factually specific. The Department of Labor, as well as the Vermont courts, consider the totality of circumstances pertinent to a particular employment relationship before classifying a worker as an employee or independent contractor. If an analysis of the totality of circumstances indeed reveals that an employer "controls” an employee, then the inquiry ends and workers’ compensation insurance is required. However, in the event that the “right to control” test fails to identify a worker as an employee for workers' compensation purposes, then the “nature of the business” test must next be applied to the specific set of factual circumstances. Under the “nature of the business test,” if the work being performed equates with the business, trade or occupation of the employer, an employee‑employer relationship exists. In other words if the work performed by the alleged independent contractor is work that would otherwise be performed by employees workers' compensation coverage would be required.
The following list of sample questions can assist in the determination of an employer‑employee relationship. This list of questions is not exclusive. In addition, no one question is determinative.
A. “RIGHT TO CONTROL” TEST
1. Who controls the means and methods of the work performance?
2. Does the worker hold his services out to the general public?
3. Does the worker perform the task without supervision?
4. Does the worker possess the required permits, licenses and certificates?
5. Is the worker doing business as a corporation or under an assumed business name?
6. Does the work require extensive skill, education or experience?
7. Who establishes the routine or schedule?
8. What is the duration of the relationship?
9. What is the method of payment, whether by time or by job?
10. Are taxes deducted or withheld from the workers' check?
11. Who determines the hours of work?
12. Does the worker receive fringe benefits or bonuses?
13. Who provides the equipment necessary for completion of the work task?
If the totality of responses to these questions leads to the conclusion that an employer “controls” its worker, then the analysis concludes and the employer must be insured for workers' compensation purposes. On the other hand, if the cumulative results reveal that a worker should not be classified as an employee under the “right to control” test, then the next list of questions must be asked.
B. “NATURE OF THE BUSINESS” TEST:
1. Is the work being performed of the type that normally could be carried out by an
employee in the usual course of business?
2. Are the activities being performed by the workers an integral part of the employer's regular business?
If the response to these questions is in the affirmative, then a statutory employee-employer relationship exists, and the employer must provide workers' compensation coverage for that worker.
The following examples may prove helpful when determining whether a worker is properly classified as an employee or an independent contractor for workers' compensation purposes.
1. Under the “right to control” test, a truck driver is an employee when the company/employer exerts the requisite amount of control over their drivers. Specifically, if the employer instructs the driver on maintaining, parking and loading the truck; provides specific travel routes to the driver; instructs him not to drive during inclement weather; pays all maintenance and fuel costs for the truck and handles all contracting with third parties; then the employer controls the truck‑driving activities. Therefore, an employee‑employer relationship exists between the parties and workers' compensation is required.
2. A manufacturer is a “statutory employer”, for workers’ compensation purposes, of a worker hired through a temporary agency, where the manufacturer owned the premises and carried on the business where the worker worked, supervised the work, and had the power to replace the worker if the work was unsatisfactory.
3. A manufacturer that owned lumber to be shipped to its factory was in the business of hauling lumber, and thus was the statutory employer of a worker hired under contract to haul the lumber and load it on railcars at a specified price per thousand. If the work being performed pertains to the business, trade, or occupation carried on by the claimed employer for pecuniary gain, then the person performing the work is an employee, even if hired as an independent contractor.
4. A landowner, who is not in the lumber or logging business, but hires a logger to cut and remove trees from the land is not the “statutory employer” of a worker hired by the logger to assist in cutting and removing the timber. The logging work was not part of the landowner’s regular trade or business and the landowner did not direct the means or method the work was to be performed.
In conclusion, all employers, employees and workers in the State of Vermont should be careful to consider seriously the ramifications and consequences of establishing an independent contractor relationship. The Department, and the Vermont court, narrowly interprets exceptions to workers' compensation coverage requirements. Accordingly, if an employer has any doubt as to the proper classification of a worker, the Department recommends that workers' compensation insurance be purchased. This coverage will minimize the risk to an employer. It can be an expensive mistake for both parties if handled incorrectly. Any questions on this issue should be forwarded to the Department of Labor at (802) 828-2286.