Thinking of Not Getting Workers’ Compensation Insurance With 3 or More Employees? Don’t Do It!

Are you a business owner with 3 or more employees and thinking you will save the cost and not secure workers’ compensation insurance? Don’t do it! It’s not worth the risk.

In a recent legal decision by the Virginia Workers’ Compensation—Lagos v. Nathaniel Rorls/Good Deal Tree Service & Firewood (JCN VA02000029120) entered on September 9, 2019 a civil penalty of $50,000 (the maximum permitted by statute) was assessed against an employer for failure to have workers’ compensation insurance. The Deputy Commissioner held that the employer’s “assertion that his business only had subcontractors to be a fiction.” Further, the Commission rejected the employer’s assertion that workers were merely independent contractors. The Commission in assessing the maximum penalty permitted under Va. Code Section 65.2-805 noted “a brazen disregard of his legal duty, justifying the maximum civil penalty of $50,000.”

In Virginia, all employers that employ 3 or more employees regularly in service must have workers’ compensation insurance. The Virginia Workers’ Compensation Commission will assess whether you had 3 or more employees as of the time of the work accident that is subject of the claim before them.

Think you may just call them independent contractors and not count them? Be careful. This might not work. The Commission may not accept this label and instead find that they are in fact employees that must be counted. The Commission examines 4 factors when determining whether a worker is indeed an employee ((i) selection and engagement of the employee; (2) payment of wages; (3) power of dismissal; and (4) power of control of the employee’s action). While the Commission looks at all 4 factors, the power of control is the most important consideration. Plain and simple, if you are directing the worker, they will likely be considered an employee.

Think you will set up multiple separate entities with fewer than 3 employees in each to avoid procuring workers’ compensation insurance. Be careful. This will certainly not work unless the entities are totally separate with no employees of one entity performing services for another.

Think you can escape procuring insurance by using “subcontractors”? Nope. Not so fast. For purposes of the coverage requirement, the Commission will count of all your employees and the number of subcontractors you use. See Smith v. Weber, 3 Va. App. 379 (1986).

Think you won’t count in total of 3 because you are merely an owner? Be careful. Not so fast. This also may not work. This can be a tricky analysis. The Act provides that a sole proprietor, sole shareholder of a stock corporation, member of a single-member LLC and all partners of a business are considered employees only if they “elect” coverage with an insurance carrier. This analysis is not always straight-forward and suffice it to say that if you are an active owner you may be counted in the total of 3 or more.

So you’ve received this advice too late, have 3 or more employees and one of them is hurt at work. What’s the worst that can happen? First, you may be hit with a civil penalty of up to $50,0000 pursuant to Va. Code Section 65.2 805 like the employer mentioned above, and second any payments awarded to the injured worker (these include by way of example, medical bills, lost wage benefits and payments for permanent loss of use) could now be recovered against your company pursuant to Va. Code Section 65.2-1204. This could pale in comparison to the insurance premiums you may have saved in taking this risk. Also, if your failure to maintain insurance is considered “knowing and intentional” you could find yourself subject to criminal penalties. Va. Code 65.2-806 makes a knowing and intentional failure to maintain insurance a Class 2 Misdemeanor punishable by up to six months in jail plus a $1,000.00 fine.

If you find yourself in this position, this is what you need do now:

  1. Engage competent legal counsel to help you navigate through the Virginia Workers’ Compensation Commission. If you have defenses to compensability, you most certainly want to assert them. Do not show up at a hearing without legal counsel. You are only asking for more trouble.
  2. If you should have had coverage, get it in place before you go to a hearing. It may lessen or avoid an assessment of a civil penalty.

Scott Ford is partner and co-founder of Ford Richardson, P.C. The firm is headquartered in Richmond with satellite locations in Northern Virginia, Southwest Virginia and Hampton Roads.

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