WORKER'S COMPENSATION INSURANCE: What you don't know could bankrupt you!!!
Detailers play the contract laborer game with the IRS to avoid paying payroll taxes & social security benefits, but few know the penalties for not having Worker's Compensation Insurance.
Workers' compensation laws are designed to provide a means of protecting the worker from job related injuries. A 20th century development in North America, laws evolved as the economy became more industrial and less agricultural.
The first comprehensive workers compensation laws were enacted in the United States in 1911 and Canada in 1915.
Today, each of the 50 states, as well as American Samoa; Guam; Puerto Rico and the US Virgin Islands has a workers' compensation law. Federal workers' compensation laws have also been enacted. Each of the Canadian provinces and territories has a compensation act as well.
In essence, workers' compensation laws hold that industrial employers will assume costs of any occupational disabilities without regard to fault involved. The resulting losses are considered costs of doing business, chargeable to the company's price of goods or services. By providing this insurance coverage for the worker, the worker gives up the right to sue the employer for any job-related injury or sickness.
There are 6 basic objectives that underlie workers' compensation laws:
- Provide prompt and reasonable income and medical benefits to work-accident victims, or income benefits to their dependents; regardless of fault.
- Provide a single remedy and reduce delays, costs and workloads arising out of personal injury lawsuits.
- Relieve public and private charities of financial drains, related to uncompensated industrial accidents.
- Eliminate payment of fees to lawyers and witnesses as well as time-consuming trials and appeals.
- Encourage maximum employer interest in safety and rehabilitation through appropriate experience-rating mechanisms; and
- Promote frank study of causes of accidents (rather than concealment of fault) reducing preventable accidents and human suffering.
Therefore, every business, in every state must carry Workers Compensation Insurance. That even includes detail shops of every type and kind, if they have employees.
Again, every business must carry Workers Comp Insurance and only a business can carry the insurance, not individuals. This is a very important distinction, as you will see.
Who Can Avoid Carrying Workers Comp Insurance?
This is very simple, there are only two situations where Workers Comp. coverage can be excused:
- The Self-Employed - a self-employed person can opt-out, HOWEVER, they must meet all of the Internal Revenue Service guidelines for a self-employed person, including a formal filing with the State where they do business.
- Principals of a business who own a minimum of 10% of the stock of the company.
Other than this, everyone must be covered by Workers Comp Insurance.
To gain either of these two exceptions you must file as a business with the State, that is, obtain a business license for your business, then and only then will you be given a Certificate of Exception.
Contract Labor & the Detail Business
Most detailer shop owners, in their minds, may think they are putting one over on the IRS by paying their employees by the car and saying they are contract labor. All one has to do is contact the IRS for their guidelines as to what constitutes a contract laborer and you will quickly see that what is done in the detail business does not meet the requirements for contract labor.
That aside, you will find that with regard to Workers Comp Insurance, detail shop owners don't even come close to excusing themselves from purchasing the coverage. Why? Read carefully if it is not clear to you yet.
- Everyone must be covered by Workers Comp Insurance.
- For you to have individuals in your shop doing work as contract laborers they must be "Self-Employed." Individuals cannot be self-employed, only licensed businesses meet the definition of self-employed.
- Therefore, if you use, legitimate "contract labor" to avoid paying payroll taxes and Workers Comp Insurance, the "contract labor" or "self-employed" labor must present you with either: A Certificate of Coverage or A Certificate of Exception from the State with regard to Workers Compensation Insurance. If they do not have either, you are liable for any injury or sickness that they might incur working in your detail shop.
You might look at it another way. Say you hire an individual to paint your house. Unless this painter can show you a Certificate of Coverage or Certificate of Exception with regard to Workers Comp Insurance and they were injured while painting your house, they would be considered your employee and you would be liable. Frightening isn't it?
What is a Workers Compensation Claim?
Any injury or sickness caused by an on the job incident that requires medical attention and costs beyond basic first aid.
For the worker it can be a "gravy train." That is, the benefits are very lucrative.
For example:
- Payment for all related medical bills and expenses. In most states the cost for medical procedures performed under a W/C claim are higher than a doctor or hospital would receive through health insurance or Medicare. Think about the impact of that on your W/C Insurance rates?
- If the injured worker is off work for 3 continuous days they will receive a wage replacement equal to an average of 66% of their normal weekly income, TAX-FREE, up to a specific maximum up to about $600 per week.
- Permanent or Partial Impairment Awards - if any injury or sickness results in any kind of permanent problem the injured worker will receive a cash award. For example, for carpal tunnel surgery the normal award is $2500.
As you can see these are very rich benefits for the doctor, hospital and the employee. And to make matters worse for those of us who pay for Workers Comp Insurance it is a very liberal program, meaning that most states would rather pay a questionable claim than allow a true claim being denied.
Who Can File a Claim?
Typically an employee will suffer a job-related injury or sickness and notifies the employer. The employer must notify the insurance carrier with 24 to 48 hours, depending on the state. Obviously you should know the law in your state on notification.
The employee can also file a claim through the doctor's office or hospital. If you have ever gone to the Emergency Room at the hospital they always ask if the injury occurred on the job. Even the doctor's office will ask this, if they suspect the injury is job related. Why? It is simple, economics. The medical provider will receive a higher payment for their medical services under a Workers Comp claim than from medical insurance or Medicare.
The hospital or doctor will notify the employer for coverage information so they can bill the W/C carrier. If they are unable to obtain this information they will file a claim through the State who will then verify that a business has coverage. If you do not have Workers Comp Insurance coverage there are huge penalties.
Sooner or Later You Will Get Caught.
For those of you who aren't convinced that you need to have W/C Insurance coverage, statistics show that sooner or later you will get caught. As you can see the benefits are just too rich for the workers and the medical provider, and it is far too easy to file a claim. Bottom line, both workers and medical providers are literally encouraged to move an injury or sickness into the Workers Compensation System.
I am sure that there are many of you that carry Workers Comp insurance who have been "stung" by the professional Workers Comp employee. They work for you only a few weeks, if that long, make a claim based on some alleged injury that occurred on the job.
Another thought. Suppose a person worked for you and had a job related accident. Being very generous, or smart, you pay all the medical expenses and even for his days off. All is okay! Then he leaves you and at his new job a smart employee tells him all about Worker's Comp claims. He can file a complaint against you and you'd be liable for a fine, back premiums, etc. Is it worth it?
What Happens if You Get Caught Without Workers Compensation Insurance?
Depending on the state the costs can be astronomical. What I suggest you do is contact the US Dept of Commerce in your area or at:
Department of Business Information & Development
US Chamber of Commerce
1615 H Street, NW
Washington, DC 20062-2000
Request a copy of the following book: "Analysis of Workers' Compensation Laws." The non-member price is $40 and member price $20. It will be well worth the investment. Or, contact your Workers Compensation carrier.
Let's look at the penalties on failure to provide insurance for a few states:
CALIFORNIA - The employer will be enjoined (prevented) from doing business. Mandatory penalty upon issuance of stop order is $1000 per employee. Failure to obey a stop order is a misdemeanor; penalty is up to $10,000, imprisonment up to 60 days, or both. $500 penalty for failure to respond to Director's inquiry. Upon final adjudication of a claim, the uninsured employer shall be assessed: (a) in noncompensable cases, $2,000 per employee employed at the time of injury, or (b) in compensable cases $10,000 per employee employed. The maximum shall be $100,000. Payments are credited to the Uninsured Employer Fund of the State Treasury.
LOUISIANA - Compensation increased 50% and civil fine up to $10,000 ($250 for the first offense and $500 for the second, per employee). Employer may be enjoined from doing business. Willful failure to insure is a felony, and is subject to a criminal fine up to $10,000 and one year at hard labor. Willful misrepresentation is a felony subject to a criminal fine of up to $10,000 and 10 years at hard labor.
NEVADA - Employer liable to suit with defenses abrogated and may be enjoined from doing business. Offending employer will be charged the amount that would have been due for the period the employer conducted business without providing, securing or maintaining compensation, not to exceed 6 years. Policy reinstatement costs by carrier may not exceed 10% of the premiums owed by the employer plus interest. First offense- misdemeanor, punishable by a fine up to $1000 and jail up to 6 months; second offense within 7 years- Class C felony punishable by imprisonment 1 to 5 years and/or administrative fines of up to $10,000.
So you think it is a gamble going into business. Well, it is suicide if you don't provide Workers Compensation Insurance, as you can see.
How to Minimize the Cost!
Now that the danger to both your business and you personally for not having Workers Comp Insurance coverage is clear, what I would like to do is show you how to minimize the costs for such coverage.
1. FIND THE CHEAPEST RATES - Whether you realize it or not, small businesses are the most profitable for insurance carriers who specialize in Workers Comp Insurance. That's right, they want your business. All you have to do is know how to find the "cheapest" rates or program in your area.
Many states have Workers Comp programs for small businesses called Group or Association plans that can give you the same rates and payment plans as many of the largest employers in the country.
These types of plans can be found through organizations such as:
- Local Chamber of Commerce
- Trade or Professional Associations (ICA where are you?)
- Special Insurance Carrier Programs
For example, employer members of the Association of Oregon Industries are paying W/C insurance rates at the same level and payment plans as NIKE, one of the largest employers in the State of Oregon. All you have to do to qualify is join the Association.
These plans can provide discounts or a return of part of the premium if losses are lower than expected.
Contact an agent or broker to research what is available in your area. Stay away from assigned risk pools, the rates here can be 50% to 75% higher than average.
Also, be sure that they have your detail business in the correct classification. Since there is no specific classification for detail shops they will no doubt, put you in some type of auto service classification, often in one that would be higher rates than a detail shop. Keep on top of this.
2. HIRING PROCEDURES - It is said among Worker Comp Insurance carriers that an employer hires their W/C claims. That's right, your claims will be a clear reflection of the type of people you hire. Unfortunately, the type of "low-wage" person that is hired in most detail shops is the type of person who is likely to make an injury claim working for you. They are the ones who abused the system once they are in.
Remember there is a very RICH benefits package that encourages the worker to "get injured" and once injured to stay home as long as they can.
As I have been preaching for years, you want to hire people with a good work ethic and good values and give them the skills they need. To hire the "typical" employee found in most detail shops is just a way to increase Workers Comp claims and rates.
3. WORKPLACE SAFETY - This is an OSHA Requirement
Prevention is the best way to keep Workers Compensation insurance premiums down. No accidents, no increase in premium costs.
And, there are ways to implement prevention in your shop.
- OSHA - Every state has an agency that is affiliated with OSHA, but is not an enforcement agency. It is the purpose of this agency to visit your shop, on request only, for the purpose of evaluating things in your shop that are not up to OSHA safety regulations. They will give you a written report on what you need to do to remedy these problems. They are not an enforcement agency and it is against the law for this agency to report their findings to the OSHA enforcement agency. However, if in their report they find violations you will have a certain period of time to remedy these violations. If you do not remedy the violations then, and only then, can your shop be reported for violations.
- Your Workers Compensation Insurance Company will have personnel whose job it is to help companies improve safety in the workplace. They will come out at no charge to evaluate your shop and point out possible OSHA violations. They will help you to see what can cause an accident and what can be done to remedy the problem.
SUMMARY
This is not a pleasant subject for most business people, but it is one that we must face. It is a cost of doing business and, from a practical point of view, most of us were all employees once and weren't we secure in knowing that any job-related accident or injury was going to be covered? We all own it to our employees to provide this security. It can even cover us personally if we choose to pay the premiums on ourselves.
The key is that you realize you must have it, if you have employees. And, you have employees unless they have a business license and a Certificate of Coverage or a Certificate of Exception from the State. If they do not provide you these certificates and an accident happens you are liable and if you do not have coverage, look out.
If you want more professional advice on the subject of Workers Compensation please feel free to call me at 1-800/284-0123 or email at detailplus@detailplus.com, I can put you in contact with a person who has over 25 years experience in the field.
