Why Do I Need Workers’ Compensation?

Workers’ compensation is designed to ensure that employees who are injured or disabled while on the job are compensated properly, negating the need for related lawsuits. It also provides benefits for dependents of workers killed by work-related accidents or illness. Some laws also limit the amount an injured employee can recover and eliminate co-worker liability in most accidents.

Here is an example: Barb Woods decides to open a tanning salon. She manages the business and has four people who work at the front desk checking clients in for tanning services and selling products. When she purchased her business insurance, Barb told her agent she didn’t need workers’ compensation coverage because her front desk workers are not employees but independent contractors.

Is there a problem in this scenario? Probably. Workers’ compensation laws vary by state, and most states have some form of statute regarding coverage. Businesses that meet certain requirements must provide workers’ compensation for all employees or face fines and consequences if they do not. The question comes in determining who qualifies as an “employee”.

According to law, an employee is someone hired to perform services under the direction and control of another person or company, known as “the employer.” Since each state has its own definition to explain what constitutes an employer, Barb must determine the exact relationship her business has with hired help. A rule of thumb is that an employer is any person or entity who gives direction to and exercises control over a worker.

Because workers’ compensation is intended only to cover employees, it is important to define the difference between an employee and an independent contractor. An independent contractor makes an agreement with a person to provide a service but remains in control of the work performed. Services are bound by written agreement.

Hiring an independent contractor can be beneficial because you don’t have to withhold federal, state and Social Security taxes, or pay unemployment or workers’ compensation insurance. In fact, salon owners don’t have to offer much of anything to independent contractors, except that for which they have agreed by contract.

Keep in mind that when you hire a licensed contractor or vendor, you assume the work and materials will be of high quality and the workers involved will be competent. This is true in most cases; however, misfortune can happen to even the most reputable company. Accidents that result in property damage or injury to your clients, employees or the general public are known to occur. Hiring contractors that have proper insurance coverage is imperative to protect your business.

The best way to brace your business against vendor liability exposure is to take appropriate measures when hiring. Seek out reputable companies that are licensed, bonded and insured. Get references from past clients, and request a certificate of general liability and workers’ compensation insurance.

A certificate of insurance is evidence that the vendor is insured by a financially-stable company and carries adequate coverage for the service being performed. It should contain information on the insurer, insurance agency, types of coverage, policy numbers, effective dates, limits, certificate holders and any special provisions. Confirm that the limits of the vendor’s policy are equal to—if not greater than— your salon’s limits and that the policy’s effective dates are current.

When hiring employees, follow your state’s statutes and purchase adequate workers’ compensation coverage to protect your business from staff-related injury or illness claims. When hiring licensed independent contractors or subcontractors, ensure they carry adequate insurance to reduce your liability in vendor exposure claims.

One last thought: having friends or acquaintances do work for you may be less expensive in the short run. However, if they are injured or cause damage to your salon, it could become more costly and cause hard feelings. Beware of the business aspects of running your salon in a professional manner. 

For more information or to get a quick, no-obligation quote, call (800) 844-2101 or visit www.universalinsuranceltd.com.