Workers' Comp Exemptions for Independent Contractors

Injured construction worker wrapped up in a ladder and holding his head
••• Stewart Cohen/Getty Images

Workers' 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 workers' compensation insurance, but some small businesses that have been classified as employers can exempt themselves from having to pay these costs for workers who are considered non-employees, like contract workers.

Workers' Compensation Exemption

In all states, businesses hiring employees must pay for state workers' compensation insurance coverage to protect both the workers and the business in the event that an employee becomes injured or ill due to a workplace accident.

Workers exchange their right to sue their employer for negligence in the event of an accident when they agree to accept employment and be covered by the workers’ compensation benefit, as required by state law. Some states use a Workers' Compensation Waiver or Exemption form to allow certain individuals such as independent contractors to be exempt from workers' compensation payments.

Exempting Independent Contractors

Each state has different regulations that exempt certain types of workers from being covered by workers' compensation insurance. The most common type of excluded worker is the independent contractor. Independent contractors are not employees; an independent contractor is a self-employed individual.

As self-employed business owners, independent contractors can attempt to exempt themselves from being covered by workers' compensation insurance in their 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.

Does Your Small Business Qualify as Exempt?

Some states exempt sole proprietors, LLC owners, and partners in partnerships from workers' compensation payments. The US Department of Labor has a list of all the state workers' compensation offices. To find information about whether you might be exempt, you need to do some searching on the state website. This type of exemption is most common in the construction industry.

Applying For Exemption

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.

Employees vs. Independent Contractors

The IRS has specific criteria for determining whether workers qualify as an independent contractor or employee. However, each state also has its own established guidelines for workers’ comp purposes, and these can differ from the IRS guidelines.

If a business classifies its workers as independent contractors and exempts them from workers’ comp coverage, the company leaves itself open to potential fines if the state decides the workers have been classified incorrectly. Each state’s labor code describes and defines the criteria for employees and independent contractors with regard to workers’ comp insurance.