It is very tempting to rationalize that you treat an individual as an independent contractor when in the legal reality the State in which they are employed construes your action as a bad decision. 
Misclassifying employees as subcontractors can lead to severe penalties, varying by state. As insurance brokers, we emphasize the importance of seeking legal counsel to navigate these complex regulations. Here’s a brief overview of the distinctions and penalties in California (CA), Texas (TX), Oregon (OR), Washington (WA), Nevada (NV), Arizona (AZ), and Colorado (CO).
California (CA)
Regulations: California uses the “ABC” test to determine worker classification. For certain occupations and industries, California law allows the use of the Borello test, which is a multifactor test that considers various factors to determine the nature of the working relationship. The Borello test emphasizes the right to control the manner and means of the work performed but also considers other factors, such as whether the worker has an independently established business and the degree of permanence of the working relationship.
As always, you should be seeking legal counsel in such matters because California regulations using the above referenced tests are so complex that you need that professional guidance.
Penalties:
- Fines ranging from $5,000 to $25,000 per violation.
- Liability for back taxes, unpaid wages, and benefits including health insurance.
- Workers Compensation Carrier will be required to add these individuals as employees and you will be subjected to large additional premiums.
- Will be additionally charged on your General Liability policy for additional employees
- For your Employee Practice Liability Policy you will be charged additional premium
- For your Cyber Liability Policy you will be charged additional premium
Texas (TX)
In Texas, private employers are not required to carry workers' compensation insurance. This means that while they have the option to purchase workers' compensation insurance or become certified self-insured, they are not mandated by law to do so. However, if employers choose not to carry workers' compensation insurance, they must inform their employees and display a notice in the workplace indicating their non-coverage status.
For employers who do not provide workers' compensation insurance, employees have the right to file a civil lawsuit against the employer for workplace injuries. In such cases, employees must prove that the employer's negligence caused their injuries, which can be a more challenging process compared to filing a workers' compensation claim.
Employers who opt to carry workers' compensation insurance benefit from protection against most lawsuits related to workplace injuries, as employees typically cannot sue employers who provide this coverage unless certain exceptions apply, such as injuries from intentional acts or gross negligence.
For more detailed information, you can refer to the Texas Department of Insurance and other resources on workers' compensation in Texas.
Penalties:
· Contact TX Department of Insurance for a full explanation of any penalties that they would impose.
· Health insurance liability.
- Will be additionally charged on your General Liability policy for additional employees
- For your Employee Practice Liability Policy you will be charged additional premium
· For your Cyber Liability Policy you will be charged additional premium
Oregon (OR)
Regulations: Oregon employs an Economic Realities Test focusing on:
- Degree of control.
- Opportunity for profit or loss.
- Investment in equipment or materials.
- Skill required.
Penalties:
- Back pay for overtime and benefits.
- Civil penalties up to $2,000 per employee.
- Health insurance liability.
- Workers Compensation Carrier will be required to add these individuals as employees and you will be subjected to large additional premiums.
- Will be additionally charged on your General Liability policy for additional employees
- For your Employee Practice Liability Policy you will be charged additional premium
- For your Cyber Liability Policy you will be charged additional premium
Washington (WA)
Regulations: Washington uses the “ABC” test, similar to California, with stringent requirements for independent contractors.
Penalties:
- Back wages and taxes.
- Employers who misclassify workers and fail to pay the necessary workers' compensation premiums may be required to pay back those premiums, often doubled, as well as additional fines. This includes covering any unpaid premiums retroactively Liability for unpaid health insurance premiums. The employer may face legal action from the state for failing to comply with workers' compensation laws. This can include lawsuits and administrative penalties imposed by the Washington State Department of Labor & Industries. Plus other penalties assessed by the Governmental Bodies.
- Workers Compensation Carrier will be required to add these individuals as employees and you will be subjected to large additional premiums.
- Will be additionally charged on your General Liability policy for additional employees
- For your Employee Practice Liability Policy you will be charged additional premium
- For your Cyber Liability Policy you will be charged additional premium
Nevada (NV)
Regulations: Nevada follows a modified “ABC” test, considering the independence and nature of the work performed.
Penalties:
- Fines up to $15,000 per violation.
- Back taxes and wages.
- Health insurance liability.
- Workers Compensation Carrier will be required to add these individuals as employees and you will be subjected to large additional premiums.
- Will be additionally charged on your General Liability policy for additional employees
- For your Employee Practice Liability Policy you will be charged additional premium
- For your Cyber Liability Policy you will be charged additional premium
Arizona (AZ)
Regulations: Arizona uses a combination of the Common Law and Economic Realities tests to determine classification.
Penalties:
- Back pay and taxes.
- Civil penalties up to $1,000 per employee.
- Employer liability for health benefits.
- Workers Compensation Carrier will be required to add these individuals as employees and you will be subjected to large additional premiums.
- Will be additionally charged on your General Liability policy for additional employees
- For your Employee Practice Liability policy you will be charged additional premium
- For your Cyber Liability Policy you will be charged additional premium
Colorado (CO)
Regulations: Colorado applies a combination of the “ABC” test and the Economic Realities test.
Penalties:
- Civil penalties ranging from $5,000 to $25,000.
- Liability for back wages and taxes.
- Health insurance contributions for misclassified employees.
- Workers Compensation Carrier will be required to add these individuals as employees and you will be subjected to large additional premiums.
- Will be additionally charged on your General Liability policy for additional employees
- For your Employee Practice Liability Policy you will be charged additional premium
- For your Cyber Liability Policy you will be charged additional premium
Conclusion
Misclassifying workers can lead to substantial financial penalties and legal consequences. Each state has specific tests and criteria for classification, making it crucial to consult legal professionals to ensure compliance. If you have any questions about your insurance needs or how misclassification might affect your coverage, please reach out to us at Aimee@brmins.com or (925) 674-1000 ext. 107.