URL: http://www.entrepreneur.com/management/growingyourbusiness/businessexpansionresources/article159756.html

Q: I recently started a business. I've hired a young neighborhood boy to assist me two to three times per week. Do I need to have some kind of insurance for either the business, him or myself in case he's injured on the job, or can I hire him as a contract employee and eliminate the need for insurance? If I can hire him as a contract employee, what's the procedure for doing that?

A: With respect to the issue of injuries on the job, employers need to make certain they are complying with their state's workers' compensation act. While workers' compensation is not truly "insurance," every state has an act with laws that provide for compensation for loss resulting from injuries received at work. Although each state's workers' compensation laws are different and constantly changing, the general purpose of these laws is to afford workers a right to relief for injuries received on the job. Depending on the state, workers' compensation laws can be either compulsory or elective. Under elective laws, an employer may choose to accept or reject the act, but if he rejects it, he loses certain defenses if a worker is injured on the job. Coverage is only elective in two states: New Jersey and Texas. Therefore, most states require employers to accept its provisions and provide the benefits specified therein.

It's worth noting that every state's workers' compensation act provides that minors are covered. In fact, the acts in some states even provide that if a minor is illegally employed, and that minor is injured on the job, he will receive additional compensation.

With respect to the issue of whether a worker is hired as an independent contractor or an employee, each state's workers' compensation law is different with respect to how these categories are treated. Some states require all workers to be covered under its workers' compensation programs, regardless of whether or not they are employees or independent contractors. Other states, on the other hand, only require employees to be covered. It is noteworthy that, if an independent contractor were injured on the job in a state where he is not covered by workers' compensation, he would not be limited in the type of civil action he could file against the employer arising out of that injury. In states where independent contractors are covered by workers' compensation laws, the contractor is limited to the remedies provided under those laws. Accordingly, employers need to research their state's laws to determine who in fact is covered and what is required of them to comply.

Employers need to be particularly cautious not to incorrectly classify a worker as an independent contractor, as the liability for doing so can be significant. To determine whether or not an individual is an employee or an independent contractor, employers must conduct a fact-specific inquiry regarding the particular job duties of that individual. In conducting this inquiry, employers will use different tests under various employment statutes to help make their determination. Generally, these tests consider how much control an employer has over the worker (often referred to as the "right to control") and whether the worker is dependent on the business of the employer for his livelihood. In applying these different tests, many factors will be considered, including: whether the worker is trained by the employer, who furnishes the necessary equipment, whether the services are rendered personally, how the worker is paid (by the hour as opposed to by the job), the duration of the employment and how the employer can terminate the relationship. The workers' compensation statutes in some states also provide specific guidance with respect to what is necessary to establish independent contractor status.

In sum, because each state has its own workers' compensation act, employers must look to their state's statute to determine what is required in order for them to be in compliance.

Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.