By Molly E. Czernik
Independent contractors are usually excluded from coverage under the Indiana Worker’s Compensation Act. Accordingly, an individual’s status as an independent contractor may serve as a defense to an otherwise compensable claim. While this general principle – that independent contractors are not covered by the Act – seems simple enough, the provisions of the Act addressing independent contractors can give rise to some complex legal and factual issues. Also, it is important to note that the definition of an independent contractor was recently amended in the Act. The change appears insignificant at first glance, and discussion about the change was relatively limited in comparison to other amendments handed down last year. This article takes a closer look at the statutory provisions governing independent contractors and issues that can arise in cases in which they are involved.
General rules and ‘independent contractor’ defined
The Act applies to every employer-employee relationship in Indiana, unless specifically exempted. See Ind. Code §22-3-2-2 (2013). An independent contractor is not an employee and is therefore excluded from coverage. Before July 1, 2013, Indiana Code §22-3-6-1(b)(7) provided that “[a] person is an independent contractor in the construction trades and not an employee under IC 22-3-2 through IC 22-3-6 if the person is an independent contractor under the guidelines of the United States Internal Revenue Service.” Ind. Code §22-3-6-1(b)(7) (2012) (amended 2013).
House Enrolled Act 1320, effective July 1, 2013, removed the phrase “in the construction trades” from the definition so that it now reads: “[a] person is an independent contractor and not an employee under IC 22-3-2 through IC 22-3-6 if the person is an independent contractor under the guidelines of the United States Internal Revenue Service.” Ind. Code §22-3-6-1(b)(7)(2013). Under the caselaw, the courts had adopted a 10-factor balancing test based on the common-law test as stated in the Restatement (Second) of Agency to determine the status of independent contractor relationship versus that of an employer-employee relationship. Expressway Dodge, Inc. v. McFarland, 766 N.E.2d 26, 29 (Ind. Ct. App. 2002). These factors include:
a) the extent of control which, by the agreement, the master may exercise over the details of the work;
b) whether the one employed is engaged in a distinct occupation or business;
c) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;
d) the skill required in the particular occupation;
e) whether the employer or the workman supplies the instrumentalities, tools and the place of work for the person doing the work;
f) the length of time for which the person is employed;
g) the method of payment, whether by the time or by the job;
h) whether the work is a part of the regular business of the employer;
i) whether the parties believe they are creating the relation of master and servant; and
j) whether the principal is or is not in business.
Id. All 10 factors must be considered, and no single factor is dispositive. Howard v. U.S. Signcrafters, 811 N.E.2d 479, 482 (Ind. Ct. App. 2002). That being said, caselaw implementing a notably similar seven-factor test to examine whether an employer-employee relationship exists notes that the right to control the manner and means of the work are the most important factors. GKN Co. v. Magness, 744 N.E.2d 397, 406 (Ind. 2001).
By comparison, the IRS general guidelines reference a similar factor-balancing test used to analyze the degree of control versus independence of a particular employee or independent contractor. The IRS guidelines describe the fact-weighing analysis as a common-law test, although the specific factors identified are different from the caselaw cited above.
Nevertheless, the analysis in the workers’ compensation context and under the caselaw is not expected to change because of the recently amended definition. The change in the definition seemed to make practical sense so that there is now one definition of an independent contractor contained within the Act, regardless of the trade the contractor practices.
Coverage for certain independent contractors and certificates of exemption
Notwithstanding these general principles, the Act allows certain individuals who have been viewed previously as independent contractors to elect coverage as employees under their insurance contracts. Ind. Code §22-3-6-1(b)(4)-(5) (2013). This includes an owner of a sole proprietorship or partner in a partnership if the owner or partner is actually engaged in the proprietorship or partnership business. Id. However, the owner or partner must serve written notice to its insurance carrier and to the Worker’s Compensation Board of its election. Id. Interestingly, Indiana Code §§22-3-6-1(b)(4) and (b)(5) provide that if an owner of a sole proprietorship or partner in a partnership works as an independent contractor in the construction trades and does not elect coverage, the owner must obtain a certificate of exemption under Indiana Code § 22-3-2-14.5. Id. Under these same provisions, any other independent contractors (not in the construction trades) may obtain a certificate of exemption under Indiana Code §22-3-2-14.5. Id.
However, Indiana Code §22-3-2-14.5 makes no such distinction about those working in the construction trades: “[a]n independent contractor who does not make an election under IC 22-3-6-1(b)(4) or IC 22-3-6-1(b)(5) is not subject to the compensation provision of IC 22-3-2 through IC 22-3-6 and must file a statement with the department of state revenue in accordance with IC 6-3-7-5 and obtain a certificate of exemption.” Ind. Code §22-3-2-14.5(c) (2013). That suggests that all independent contractors would be well served to obtain the certificate of exemption regardless of their specific trade.
Any person contracting for the services of one who is not covered by the Act (i.e., an independent contractor) to perform work must secure a copy of a stamped certificate of exemption issued by the Worker’s Compensation Board. Ind. Code § 22-3-2-14.5(h) (2013). The certificate of exemption is binding and holds any person that contracts with an independent contractor, as well as that person’s workers’ compensation insurance carrier, harmless from all claims. It seems reasonable, then, that a certificate of exemption would be fairly compelling evidence of an individual’s independent contractor status and corresponding exemption from the Act. However, depending on the facts of a particular case, even if the form was not perfected, using the 10-factor test cited above may clarify the independent contractor status.
To obtain a certificate of exemption from the board, the independent contractor first files an application for a workers’ compensation clearance certificate (which is also described as an “Affidavit” on the form) with the department of state revenue along with a filing fee and documentation of independent contractor status. The department of revenue verifies that the independent contractor’s taxes are current, and if cleared by the department of revenue, the department submits the approved application to the Worker’s Compensation Board for further processing and approval. The board will then issue a stamped certificate of exemption to the independent contractor. The certificates of exemption are kept on file by the board and are good for one year. The Act requires that a person hiring an independent contractor obtain a stamped certificate of exemption from the person hired, but the board may also verify that a certificate was filed. The independent contractor must re-apply for the certificate of exemption every year to maintain exempt status. Once the independent contractor produces his certificate of exemption, he can collect no compensation under the Act. Likewise, once a stamped certificate of exemption is produced, the person hiring that independent contractor cannot require the independent contractor to have workers’ compensation coverage for himself. See generally Ind. Code § 22-3-2-14.5 (a)-(i) (2013).
Secondary liability and certificates of compliance
While they are usually excluded from coverage, independent contractors can – and often do – have their own employees and are thus obligated to comply with the provisions of the Act. In other words, an independent contractor, although exempt himself, must still provide coverage for his employees. Ind. Code §22-3-5-1 (2013). If an independent contractor fails to comply with the Act in this regard, the state or any political division thereof, any municipal corporation, corporation, limited liability company, partnership, or person who contracts with an independent contractor for the performance of work exceeding $1,000 can be held liable for benefits owed because of a work-related injury to an employee – unless that person contracting with the independent contractor obtains a certificate of compliance from the board. Ind. Code §22-3-2-14 (b) (2013). Stated differently, the party hiring the independent contractor can be held secondarily liable for work-related injuries of the independent contractor’s employees. Id. This provision includes a contractor subletting work to a subcontractor but excludes homeowners who contract for work on the owner-occupied residential property. It also excludes a nonprofit corporation exempt under section 501(c)(3) of the Internal Revenue Code when the independent contractor agreement is for the performance of youth coaching services on a part-time basis. Ind. Code §22-3-2-14 (2013).
The certificate of compliance is not to be confused with the certificate of exemption. To the contrary, there could be some instances in which the hiring party would want to secure both the certificate of compliance and the certificate of exemption. The certificate of compliance should be obtained from the board in situations contemplated by this provision to avoid secondary liability. It is also important to note that the board will reject a certificate of insurance as a substitute form to overcome or avoid secondary liability under this section without more evidence for the exclusion.
In cases where secondary liability might be an issue, the claim filed with the board shall be filed against all parties potentially liable. Ind. Code §22-3-2-14(e) (2013). The board then enters an award stating the order in which the responsible parties are liable, starting with the employer or primarily liable party. Id. The board shall also determine in its award whether the primarily liable party or subcontractor has the financial ability to pay benefits under the Act. If that party cannot pay, then the board will order the general contractor, or up-the-ladder party, to pay the award. Id.
Once a secondarily liable party pays an award pursuant to this statutory provision, that party can recover the amount paid from the primarily liable party, plus fees and expenses incurred in the action before the board as well as the action to recover. Ind. Code §22-3-2-14(d) (2013).
Cases involving the independent contractor defense are highly fact-specific. It is hoped that the principles and statutory provisions discussed here provide at least a glimpse into issues that can arise in such cases. The parties involved may be unaware of the Act’s requirements for independent contractors, but a critical look at the facts of your particular case may nonetheless give rise to the defense. It may be worth remembering that – even if the facts of a particular case are not entirely predictable (perhaps some of the factors weigh in favor of each party or perhaps a party did not secure the certificate of exemption) – the independent contractor exclusion may still be a valuable resource in negotiating a compromise. General familiarity with the basic principles will help ensure that clients obtain the necessary forms for independent contractors and lay to rest contentious issues before litigation arises.•
Ms. Czernik is an associate in the Indianapolis office of Dugan & Voland and is an active member of the DTCI’s Worker’s Compensation Section. The opinions expressed in this article are those of the author.