"I do not need Workmen's Compensation. My accountant told me so. I pay my employees by 1099."

This statement was recently spoken to me by a potential policyholder. By the words used, employees, it should have ended the conversation right there. It did not.

This individual was adamant that they do not need a Workers Compensation policy because their Accountant told him your 1099 workers are not employees. While every state is different, as a general rule, if you do not have employees, you probably do not need the coverage. How you pay your workers does not determine if they are employees. Paying your help by 1099 does not make them an Independent Contractor. Unfortunately this is a practice being used incorrectly today.

You need to go through the proper checklist to determine if the people doing work for you are considered Employees, Independent Contractors or Leased Employees. The IRS uses 20 common law factors plus other interpretations to determine if an individual is an employee. This of course is for tax purposes. With respects to Insurance, you need to go through similar steps. If a claim occurs, would there be coverage?

Use these questions to determine if they are employees:

• Are you in control of what work will be done?
• Are you in control of how it will be done?
• Are you in control of the means and methods being used?
• Do you assign the times when the work will be done or when this individual is expected to work?
• Does this individual generate a majority of their income from you?
• Does this individual have an assigned desk, extension, business card in your office?

Beyond popular believe, the Workers Compensation coverage is to protect the Employer not the Employee. If you are unsure if you are using Independent Contractors or Employees, buy the policy anyway. Let the Insurance Company determine at audit if you have to pay premium for the individuals classified as Independent Contractors.

Similar to an independent contractor, a company using PEO's can make the same argument that these individuals from the PEO are not their own employees. In New York State, if one of these individuals were injured on the job, it would be determined at time of loss which Workers Compensation policy would pay the claim. If the company decided not to purchase a policy because the entire staff was from the PEO, this company would be responsible for the entire claim. In addition, since they did not have a WC policy, they could be sued by the injured person.

In closing, I hope you take the necessary steps in determining if an individual working for you is an employee or not. Do not use how they are paid as the answer. After making this presentation to the prospect, they are purchasing the policy. I await their tax papers so I can prepare their taxes.