Workers Compensation: When Is a Worker Not an Employee?
Self-employed individuals who hire others without
purchasing workers comp insurance assume a serious liability.
Workers compensation is a
double-edged sword: It benefits employees who are hurt on the job, and it
protects employers and co-workers from injured employees’ claims.
disputes still occur, though, especially when there’s uncertainty over whether
the injured person was an employee as defined by the Workers Compensation Act
and related case law.
A.R.S. § 23-901, an employee is anyone in the service of an “employer” as
defined by the Act, except for someone whose employment is both casual and not
in the course of the employer’s trade, business or occupation.
If that definition seems
a little murky to you, welcome to the club. The vagueness of the statute has
prompted a series of appellate court decisions that offer little certainty or
clear guidance, particularly where the alleged “employer” is self-employed and
does not normally have employees (see
related article below).
Who Is an Employee?
Generally speaking, for an injured worker to have standing as an employee, there
must be a “contract of hire” to create an employment relationship, which may be
either express or implied.
Further, whether a
claimant is an “employee” within the meaning of the workers compensation laws
depends on several factors, including these:
Which party – the
employer or the worker – had control over the method by which the claimant
did his work?
Was the claimant
engaged in a distinct trade or business and, thus, clearly not intending to
serve as an employee?
What was the
claimant’s primary occupation?
What skills did the
claimant’s primary occupation require?
What standard of
performance was expected of the claimant?
Who supplied the
tools and place of work?
What was the duration
What was the method
of payment, and how was compensation determined?
Was the claimant’s
work part of the employer’s regular business?
Did the parties
believe they created the relation of master and servant?
Was the “employer”
actually engaged in a business activity?
Who had the right to
hire and fire the claimant?
(No single factor is in
itself conclusive or controlling.)
Some factors have been
deemed insufficient to prove employment relationship. In some cases, the courts
have determined facts that do not prove employee status:
coverage was obtained after an accident in order to avoid future disputes
Payment of medical
expenses for the injured worker occurred at the request of a third party
that had hired the worker, and the alleged employer had passed on the costs.
The alleged employer
exercised actual control over the manner of work performed.
There was sharing of
profits gained on projects to which the claimant supplied work.
Quickly now: If
you’re self-employed and have no employees, and you bring in extra help to
perform a short-term task for your company, do you have to include them in your
workers compensation coverage?
Naturally, the answer is,
“It depends.” More to the point, it depends on how regularly and predictably you
have a need for day workers.
Under Arizona law (A.R.S.
§ 23-902[A]), with a few exceptions that don’t apply here, “every person who
employs any workers or operatives regularly employed in same business or
establishment under contract of hire” is on the hook for workers compensation
coverage. If anyone knew for sure what that meant, this would be a short
article. But interpretations of that statute have been all over the map, and,
thus, we write on.
Three court decisions may
help you determine whether you are liable for on-the-job injuries suffered by
Donahue v. Industrial Commission
In Donahue, the Arizona Court of Appeals
found that liability depends on your hiring patterns. The court tried to
determine whether the statute’s “regularly employed” phrase meant that the
Workers Compensation Act applies to (a) all people who ever bring in extra
workers, or (b) only
people who routinely and predictably hire workers in the normal or usual course
of their business.
In a bit of good news,
the court decided that a self-employed person is not required to provide
coverage for workers hired “occasionally and unpredictably.” Because the
employer’s “infrequent and unpredictable” hiring practices in Donahue did
“not equate with having workers regularly employed,” Donahue was not subject to
the Act. Thus, companies that do
not hire workers in the normal or usual course of their business are not subject
to the Act, regardless of the type of work performed by the workers. To support
this finding, in Marshall v. Industrial Commission the Arizona Supreme
Court examined the company’s “established business plan or mode of operation” as
evidence of its hiring practices to determine whether hiring was performed in
the normal or usual course of business.
The Supreme Court’s Marshall decision didn’t specify the type of “established
business plan or mode of operation” that would make a company liable for workers
To the rescue came the
Court of Appeals in the Modern Trailer case, where the dealer hired
short-term labor up to 25% of the time for such tasks as lot maintenance and
preparation of newly delivered mobile homes. Though intermittent, the hiring of
additional labor was ongoing and predictable, leading the court to conclude that
the use of additional labor was a customary or regular practice that constituted
an “established mode of operation.” Thus, the company was subject to the Act and
required to carry coverage.
Putz v. Industrial Commission
In a recent case, Putz v. Industrial Commission of
Arizona, et al., the Arizona Court of Appeals decided that, because Putz did
not “regularly employ any workers,” he was therefore not an employer covered by
the Act and not liable.
The court focused on the
fact that Putz’s need for short-term labor arose far less predictably than it
had in Modern Trailer because the work itself was varied, unpredictable,
and dictated by customers’ demands. The court also found it significant that
Putz did not know when he would need to hire extra labor again. In addition, in
the year preceding the injury that set the case in motion, Putz had hired extra
labor for approximately 32 eight-hour workdays, fewer days than Modern Trailer
had. From that record, the Court of Appeals could not detect a hiring plan that
was anything but “occasional and unpredictable.”
However, the Court of
Appeals cautioned that if, in the ordinary progression of its business, Putz’s
company would begin to consistently undertake projects requiring the use of
other workers on a more regular or predictable basis, then it would become
subject to the Act and required to purchase workers compensation insurance.
Determining Your Liability
As the Putz case demonstrates, no bright-line rule exists
to notify a self-employed person or group when they become subject to the Act
for occasional part-time help. In general, the Court cautions that “there is a
risk involved when those who are self employed hire others without purchasing
Workers Compensation Insurance.”
Any of the following
conditions may make them liable:
Hire extra help 25%
of the time or more.
Hire extra help at
the occurrence of predictable or regularly recurring events.
Employ laborers on a
predictable cycle (e.g. monthly, quarterly or seasonally).
The business plan
includes seeking out and obtaining work that requires extra help.
There are regular or
long-standing customers whose work normally requires hiring extra help.