Worker's Compensation Exemptions for Independent Contractors

Worker's Compensation Exemptions Explained
Worker's Compensation Exemptions Explained. Stewart Cohen/Getty Images

Worker's compensation is a state-based program that provides insurance benefits to employees who become ill or injured on the job. All businesses with employees must pay the cost of worker's compensation insurance, but some small businesses that have been classified as employers can exempt themselves from having to pay these costs. Sound confusing? I'll attempt to explain. 

What is a Workers Compensation or Exemption?  

In all states, businesses hiring employees must pay for state workers compensation insurance coverage in the event that an employee is injured or becomes ill due to a workplace illness or injury.

Thus, workers are required to be insured under a workers compensation policy. 

A Workers Compensation Waiver or Exemption is a form used by some states to allow certain individuals to be exempt from worker's compensation payments. 

Independent Contractors as Exempt from Worker's Compensation

Each state has different regulations allowing certain employees to be exempt from worker's compensation. One common situation is independent contractors. While the term "employee" is used in this situation, independent contractors are not employees. An independent contractor is a self-employed individual.

As business owners, independent contractors can attempt to exempt themselves from being covered by workers compensation insurance in that state. The terms "waiver" and "exemption" mean essentially the same thing; the two terms are used interchangeably.

In some states, these independent workers are required to state that they are "free from control" for specific occupations.

Typically, the statement must be notarized and a fee is charged for this waiver or exemption declaration.

How To Find Out If Your Small Business Qualifies as Exempt

Some states exempt sole proprietors, LLC owners, and partners in partnerships from worker's compensation payments. 

The US Department of Labor has a list of all the state worker's compensation offices.

To find information about whether you might be exempt, you will need to do some searching on the state website. Here are a couple of examples

Florida considers LLC owners (members) to be employees. But they do allow an individual to file an application for an exemption from workers compensation.

The Tennessee workers compensation exemption is specifically for certain construction service providers.

Indiana's worker's compensation law says, "A person is an independent contractor and not an employee under IC 22-3-2 through IC 22-3-6 if the person is an independent contractor under the guidelines of the United States Internal Revenue Service." Unfortunately, the IRS looks at independent contractors on a case-by-case basis, applying certain criteria to each case, to determine independent contractor status.  

In New York, you may only apply for a workers compensation exemption if you are an "entity" "with no employees and/or out-of-state entities obtaining a contract or license in which all the work is being performed outside of New York State."

Iowa's Worker's Compensation Division, for example, states that, "Proprietors (independent contractors), limited liability company members and partners are not considered employees." 

This type of exemption is most common in the construction industry.

Applying For This Exemption Depends on Your State

As you can see, the requirements for filing a workers compensation exemption differ widely from state to state.

Florida's application, for example, begins by asking you to describe the general category of exemption (construction or non-construction) and within non-construction, whether the exemption is for an officer of a corporation or a member/owner of an LLC. The business document number, from the filing with the state, is required. The application also asks for "scope of business or trade," which is the business's industry type. 

To find information about applying for a workers compensation exemption or waiver, contact your state secretary of state or search under "workers compensation" and your state's name.

For More Information on Worker's Compensation Exemptions

The National Federation of Independent Businesses {NFIB) has a list of worker's compensation laws (a brief overview) for each U.S. state. https://apps.fldfs.com/bocexempt/Identify_Industry.aspx

Marianne Bonner, Business Insurance expert, has a comprehensive article about worker's compensation, its history and how worker's compensation insurance works.