Independent Contractors, Occupational Accidental Insurance Policies and How It Interplays With New Jersey Workers’ Compensation

Statutorily, in New Jersey, all employers are required to maintain workers’ compensation insurance for all “employees” by either a valid workers’ compensation insurance policy or through self-insurance (based upon the financial ability of the employer to meet its obligations under the law and the permanence of the business).  In some states employers can “opt-out” of the mandatory workers’ compensation requirements.  New Jersey is not one of those states.

The classification of someone as independent contractor and therefore not an “employee” relieves the employer of the obligation to provide workers’ compensation coverage.  The independent contractor is simply not an “employee” and therefore does not require worker’s compensation coverage. 

In New Jersey, there are no clear-cut rules to class
clasify someone as an independent contractor in workers’ compensation.  Through the development of case law, the courts have come to rely on two tests to determine this issue.  The “control test” provides that as long as the employer has the right to control the work done and the manner in which it is done whether or not he actually exercises that control, the worker will be considered an employee.  The “relative nature of the work” test looks at the economic relationship between the parties and seeks to determine if the employee is economically dependent on the employer and if the employee’s work is an essential function of that business.

Regardless of the test used, New Jersey courts liberally construe the term “employee” and often find employment when circumstances would suggest otherwise.  Because of this liberal view of what constitutes an employee, certain practices have become standard by employers to try and clearly define the independent contractor relationship.  It has become quite common practice, for example, for employers to require as part of the hiring, that the new hire execute a written “independent contractor” agreement, a contract clearly defining the “independent contractor” relationship.  The contract defines who owns the equipment, the tools and even the motor vehicle the worker may be driving (like a truck driver, as an example).  It also defines who is responsible for the maintenance and insuring of the equipment, tools and motor vehicles.  The contracts discuss how payment is rendered (1099 v. W-2 wage earner) and even provides indemnity clauses in the event of injury.  These agreements often require that the independent contractor provide its own workers’ compensation insurance coverage as further proof they are not employees.  The contracts require that the proof of insurance be submitted to the employer on an annual basis.

Now, you may be asking yourself at this point: if the independent contractor is not an employee and therefore considered a separate business entity, then isn’t he also required to purchase either workers’ compensation insurance or self-insure under the statutory requirements like every other employer?  To answer that we have to look to the type of entities that are required to insure in New Jersey.

The following employing entities must have workers’ compensation insurance in effect:

  • Corporations – All corporations operating in New Jersey must maintain workers’ compensation insurance or be approved for self-insurance so long as any one or more individuals, including corporate officers, perform services for the corporation for prior, current or anticipated financial consideration.
  • Partnerships/LLCs – All partnerships and limited liability companies (LLCs) operating in New Jersey must maintain workers’ compensation insurance or be approved for self-insurance so long as any one or more individuals, excluding partners or members of the LLC, perform services for the partnership or LLC for prior, current or anticipated financial consideration.
  • Sole Proprietorship – All sole proprietorships operating in New Jersey must maintain workers’ compensation insurance or be approved for self-insurance so long as any one or more individuals, excluding the principal owner, performs services for the business for prior, current or anticipated financial consideration.

 

The independent contractors are often sole proprietors or sole members of an LLC which exempts them from the workers’ compensation insurance requirements.  They do not have to provide coverage for themselves.  They could conduct their business without workers’ compensation insurance.  The independent contractor agreements that they sign, however, often requires them to provide insurance coverage not because of a statute but because of the terms of the contract.

This is where we see the use of “Occupational Accidental Insurance Policies” also known as “Occ. Acc.” Policies.  The independent contractor in these situations has the option of purchasing a standard workers’ compensation policy or an “Occ. Acc.” Policy.  The “Occ. Acc.” Policy is usually much cheaper due to the limited benefits it provides; benefits that are usually significantly less than what is provided under the workers’ compensation laws of NJ.  When faced with the premium costs involved in obtaining a workers’ compensation policy or an “Occ. Acc.” Policy, the independent contractor will usually choose the “Occ. Acc.” Policy.  These policies are sometimes as much as 50% cheaper than a workers’ compensation policy.

Upon the happening of an accident, the “Occ. Acc.” Policy will provide benefits which will usually include a fixed amount of temp and medical benefits with different minimum and maximum rates than workers’ compensation provides (usually not in the injured worker’s favor) and often places “caps” on the maximum medical benefits provided.  Some injured workers receive benefits under these policies with no problems.  However, once an injured worker seeks the advice of an attorney, as many often do, the situation changes.  Most attorneys will advise the injured worker of the rights they are entitled to in workers’ compensation court should they succeed in being classified as an “employee” and how these rights far exceed the rights they are entitled to under the “Occ. Acc.” policy.  The injured worker may be entitled to a permanency award which they are not entitled to under the “Occ. Acc.” Policy.  They may be entitled to a greater amount of temporary disability or medical benefits than was afforded under the “Occ. Acc.” Policy.

Once an attorney is hired, a claim petition is filed with the court to try and obtain workers’ compensation benefits.  The “Occ. Acc.” policies usually provide that benefits under the policy are provided unless there is a claim made for relief under workers’ compensation.  Should a claim petition be filed, the benefits under the “Occ. Acc.” Policy will be terminated.  In addition, many of the policies also provide for reimbursement of any benefits paid out if, in fact, the matter is determined to be a workers’ compensation case.

From a defense perspective, upon the filing of a Claim Petition, the parties now enter into significant litigation to battle over whether or not injured worker should be classified as an “employee” or an “independent contractor”.  The respondents and their attorneys should be gathering as much information as possible concerning the details surrounding the nature of the relationship between the parties including but not limited to any independent contractor agreements and certainly the existence of other insurance policies like an “Occ. Acc.” Policy.

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Joseph is a Partner at Lois LLC where he defends employers and carriers in New Jersey workers’ compensation claims. Joe can be reached directly at jjones@loisllc.com or 201-880-7213.