Reclassifying workers could affect employer insurance profiles

A U.S. Department of Labor proposal that could put more independent contractors in the employee category has the potential to shake up business models, workers compensation experts say.

“This can be a really big deal, especially in the gig, shared economy,” said Ben Powers, Atlanta-based executive vice president and head of large & complex casualty for the Southeast region at Willis Towers Watson PLC.

“Overall, the employee/employer relationship versus that principal/independent contractor relationship impacts our clients in a lot of big ways,” as workers compensation coverage would be among the largest mandated insurance requirements for companies forced to reclassify workers, he said.

The DOL’s proposed rule, introduced Oct. 13 and open for public comments until Dec. 13, would apply a narrow “economic realities test” to determine whether a worker is an independent contractor. It would assess six conditions to determine whether the worker is economically dependent on the employer or is in business for themself.

The DOL has stated its intention to rein in companies that rely heavily on independent contractors, who lack access to such protections as workers compensation and wage and hour laws.

Comp experts say that, depending on the type of company, a move to reclassify independent contractors as employees would force many businesses to rebalance their risk profile.

If regulation “forces employers to reclassify independent contractors as employees, there is a significant effect on workers comp and on the overall economics of their business model,” said Will Brauer, Marsh LLC’s sharing economy and mobility casualty leader in Chicago.

“There is a fine and sometimes difficult-to-discern line between employee status and independent contractor,” he said. “Each state, and in some cases municipality, define these requirements differently, but most have some common elements.”

While many companies that rely on independent contractors have general liability policies to protect assets in the event of a contractor getting injured — if the worker alleges and can prove negligence on behalf of the company — workers compensation is a wider net, a guarantee of benefits in most cases, and would increase insurance costs drastically, said Paul Primavera, Washington-based executive vice president and practice leader, national risk control group, at Lockton Cos. LLC.

Conversely, the risk could be greater under general liability, as workers comp is the exclusive remedy and is safeguarded by regulations, Mr. Primavera said. “Certainly one could argue that a third-party claim could result in more exposure to an organization than a workers compensation claim simply because there are no limits on wages and pain and suffering,” he said.

With potential federal changes looming, experts say companies also need to ensure they are classifying their workers in line with current state regulations, which have shifted in some cases.

California has tightened rules on who is considered an employee and Vermont and Rhode Island considered measures this year that would have changed the definition. More states could continue to push for clarification on the issue, the National Council on Compensation Insurance reported, naming the issue a major legislative trend.

According to NCCI, three states passed laws this year addressing gig workers, such as those working for transportation network companies including Uber and Lyft, and other marketplace contractors.

S.B. 150 in Alabama excluded certain contractors working for marketplace platforms, such as Uber and the food delivery platform Grubhub, from the definition of employee and considers them independent contractors. H.B. 118 in South Dakota clarified when a worker is an independent contractor of a delivery facilitation platform; and H.B. 2076 in Washington addressed workers compensation coverage for transportation network company drivers under certain conditions.

Hanging over the issue is the DOL’s proposal, experts say.

“This is a key issue to continue to watch,” said Greg McKenna, Rolling Meadows, Illinois-based national practice leader for the public sector at Gallagher Bassett Services Inc. “It would be good advice for employers to continue to see how the federal government is going to take action on this.”