How Gig Work is Creating Special Risks in Workers' Compensation

If you are an employer experiencing high turnover and labor shortages or looking for ways to reduce increasing business costs, and you're considering using gig workers to meet these challenges, buyer beware. Employers who contract with such workers without considering the nuances of workers' compensation (WC) liability may be in for a shock when learning they are responsible for a WC claim under their own WC policy if an injury occurs.

In this article, we'll explain both the WC risks and the rules so employers can plan accordingly and prevent problems. We'll cover the distinctions between different types of workers, the special WC risks, and the strategies to mitigate them.

What Is the Gig Economy?

The gig workforce comprises freelancers, independently employed or subcontracted workers, and staff agency employees hired for project-based and short-term assignments. These workers have less regularity and a diverse clientele compared to traditional workers.

As of 2021, estimates show as much as a third of the working population is working in some gig capacity. These numbers are expected to increase as individuals seek more flexibility, independence, and convenient working arrangements. Experts believe the trend is due to a combination of factors, including:

• The labor shortage and high turnover post-pandemic
• Employers' need for gap workers to maintain productivity
• Employers seeking to reduce business costs
• The changing values brought by the pandemic and among the growing numbers of Gen Z employees entering the workforce.

Many older workers, now unable to make ends meet because of skyrocketing inflation, are also embracing gig work over traditional employment because it offers them greater work-life balance. In fact, there are niche staff agencies specializing in “vintage workers.”

Independent Contractors and Workers' Compensation

Whether or not a worker qualifies as an independent contractor (IC) has long plagued the WC system. Independent contractors are workers who are self-employed. Common examples include construction contractors, attorneys, accountants, real estate agents, freelance writers, and graphic designers. A properly classified independent contractor is not entitled to WC under the principal’s insurance if they are injured. Instead, they could file a personal injury lawsuit for damages if they do not have their own insurance coverage.

Definitions of an IC differ depending on whom you ask. The US Department of Labor and the Internal Revenue Service (IRS) each have their own criteria. The IRS has held to the following regarding employees versus independent contractors:

“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.”

The US Dept of Labor tends to take a more expansive view of an independent contractor, focusing on the economic dependence of the worker upon the principal and how integral the services are to the principal’s business. For example, plumbers working for a plumbing company are likely to be employees and not independent contractors because their services are integral to a plumbing company’s business.

Different states also have their own rules, such as California's AB5 adoption of the ABC test, signed into law in 2019:

“Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:

• The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact
• The worker performs work that is outside the usual course of the hiring entity’s business; and
• The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.”

The common denominator for the worker relationship is control—specifically who controls the details of the work. If an employer hires an IC but directs the hours they work or provides the worker with tools and equipment, that worker will likely be considered an employee, not an IC.

Tech companies in the business of app-based ride and food delivery services sparked controversy and created an exception to the way independent contractors are viewed, at least in these industries. In 2020, California voters passed Prop 22, holding that drivers for such companies are independent contractors as opposed to employees, making them exempt from WC benefits. After being challenged, the law was declared unconstitutional in 2021. Recently in March 2023, the California Court of Appeals reversed the lower court’s opinion and found Prop 22 constitutional. As such, independent contractor status stands amongst these workers (provided other conditions set out in Prop 22 are met). However, this is far from over, as the decision is anticipated to be appealed to the US Supreme Court.

Risks of Worker Misclassification

The consequences of misclassifying workers as independent contractors are many—including fines, penalties, federal and state back taxes and interest, back wages due to legal minimum wage, and overtime pay requirements. WC exposure is also misrepresented because earnings of independent contractors are not reported, and payroll forms the basis for WC premium. This may result in back premiums and increased premiums down the road.

Strategies: Proper Classification of Workers

With so many classification systems and new proposals brewing, this is a tricky area. The best advice is to keep it simple. Remember that independent contractors classified appropriately are not provided company benefits including health insurance and retirement, nor are federal and state payroll taxes withheld. ICs also do not receive reimbursements for business and travel expenses. They are responsible for their own tools, equipment, and supplies to do the work, as well as their own schedule, working conditions, and manner of performing the work.

While Prop 22 created a nuance to the perception of independent contractors, this legislation pertains to app-based drivers and services such as Uber, Lyft, Door Dash, Instacart, and others. It is too soon to tell if the findings might eventually extend to other types of work. Legal experts recommend most industries continue to follow the previously established worker classification rules and best practices.

Employers should weigh the pros and cons of using independent contractors versus employees carefully by consulting experts such as their legal counsel, business tax advisor, union representatives, and insurance broker. Employers that wish to use independent contractors should check all the boxes of each scheme, IRS, federal, and local labor departments, and remember the concept of giving the worker control.

What About Temporary and Staff Agency Workers?

Temporary and staff agency workers, another sector of the gig workforce, have different WC implications. Like independent contractors, employers hire these workers from a temporary or staff agency for a limited period.

These workers are entitled to WC, but the question is: Which party is responsible? Is it the temp agency or the employer where the employee is placed? Things to consider are who hires and pays the worker, who pays the WC premium, and contractual obligations between the parties. The parties usually fall into two categories. The general employer (staff agency) hires the employee and is responsible for payroll. The special employer is the organization providing the actual work. In the classic scenario, the general employer or staff agency is the entity that hires the employee, pays the WC premium, and is thus responsible for WC.

Problems may arise when the special employer does not properly vet temporary agencies they partner with, or when they inappropriately handle claims arising from the general employer. Under most states, both the general and special employer have joint and several WC liability. Cases like California’s Jacuzzi v Remedy Temp show that when the general employer (temp agency) fails to carry WC insurance, or if its WC carrier becomes insolvent, the special employer is liable for WC coverage regardless of contractual obligations.

Preventing Surprises with Staff Agency Workers

Before contracting with staff agencies, employers should consult Woodruff Sawyer or a legal representative to ensure adequate liability and insurance policies are in place. The same goes for vetting subcontractors the staff agency may partner with, such as professional employer organizations (PEOs), which are on the rise.

It may seem like an indirect third party has nothing to do with you. But if neither the staff agency you contract directly with nor the third-party agency it contracts with has insurance, the coverage for injuries will default to you.

Randy Woolford of Woolford & Associates, a WC defense expert specializing in general-special employer litigation in California, has seen an uptick in fraud in the staff agency world. For this reason, he recommends that employers not only request proof of insurance but take it a step further by calling the carrier to verify the policy is valid. Additionally, since overlapping claims are a possibility, proof of general liability and EPL policies are important.

Organizations should shore up contracts with staff agency partners and obtain a legal review of the language to ensure clarity around holding the staff agency solely responsible for WC claims of workers performing work for you. Jurisdictional WC defense attorneys with general/special employer expertise may be useful in checking local regulations.

Large employers using both regular and temporary workers should document worker classifications and train managers to verify a worker’s employment status (temporary or regular), then direct them appropriately to file a WC claim—the general employer’s WC carrier if they are a temporary worker, and the special employer’s WC carrier and medical provider if a regular employee. When managers are not aware of the existence of temporary workers, they may misdirect the worker to the wrong insurance carrier, leading to unnecessary and duplicate claims and high litigation costs.

Key Takeaways

The WC consequences of both improper worker classification and staff agency partnering are that employers may see higher experience modifications or higher deductible payouts.

In addition to properly classifying workers, employers must take the same preventive measures to maintain the safety of gig workers as it does for regular workers. Even temporary workers under the control of the agency who hired them are at least partially under the direction of the special employer, particularly if they work at a job site(s). Refusal to account for the safety of these workers could result in civil lawsuits.

By knowing both the legal framework and exceptions for different worker classifications, employers can make informed business decisions and not be caught off guard by unanticipated WC exposures. However, laws and practices can change and are subject to interpretation, so employers should consult with labor counsel before making major decisions.

For more information about insurance services, WC, or employee benefits, contact your Woodruff Sawyer service team