May 11, 2011
- Jack Martone, The American Equity Underwriters, Inc.
I think that the expression “independent contractor” is used too often in different contexts to mean different things. This results in confusion regarding the term. I would like to contribute to the confusion with a few short comments.
First, some general principles: The Longshore Act imposes an insurance requirement on “employers” for the benefit of “employees”. “Self employed” individuals are not employees. Depending on the circumstances, “subcontractor” is not the equivalent of “independent contractor”. A so called “sole proprietor” may be a self employed individual, a subcontractor, or an independent contractor. There are no exclusions in the Longshore Act for corporate officers, sole proprietors, business owners (if they are also employees), or small businesses. The terms “independent contractor”, “subcontractor”, “sole proprietor”, and “self-employed” should not be used interchangeably.
Now for the different contexts in which the term “independent contractor” is used. There is the term “independent contractor” that may mean a self-employed individual rather than an employee. Then there is the term “independent contractor” that may be and should be used in contradistinction to the term “subcontractor”. Then there is the term “independent contractor” that may be used in the sense of sole proprietor. These different usages all have relevance to issues such as statutory employer under section 904(a), section 905(a) exclusivity, and whether or not there is even an employer-employee relationship for liability and insurance purposes.
Section 904(a) – “Every employer shall be liable for and shall secure the payment to his employees of the compensation payable under sections 7, 8, and 9. In the case of an employer who is a subcontractor, only if such subcontractor fails to secure the payment of compensation shall the contractor be liable for and be required to secure the payment of compensation …. “
In order for the contractor to become the “statutory employer” of the subcontractor’s employees under section 904(a), you need a contractor – subcontractor relationship. That is, there are two contracts involved; the contractor’s obligation to the business owner in one direction, and in the other direction, the contractor passing on part of the obligation to one or more subcontractors. If there is only one contract, between the owner and the contractor, in this sense the contractor is an “independent contractor”. This relationship does not create the “statutory employer” obligation for the owner imposed by section 904(a). This is one usage of the term independent contractor. Basically, it means not a subcontractor, and no “statutory employer” obligation arises if the independent contractor is uninsured.
Section 904(a) – “Every employer shall be liable for and shall secure the payment (of compensation) to his employees ….” In other words, there must be an employer – employee relationship for the insurance requirement to attach. A self-employed individual is not an employee. I’ve seen the term “independent contractor” used to denote a self-employed individual, hired for his special expertise, usually for less than the duration of the complete project, who performs work not usually performed by employees of the contractor, and who controls his own piece of the operation. In this usage, the self-employed individual, or independent contractor if you insist, is not an employee and is not covered by workers’ compensation insurance.
Sole Proprietor – This one is tricky. The sole proprietor is the owner of a business, and if it is incorporated he may be the owner of the business and also its only employee. Technically, he meets the definition of “employee” of the incorporated entity, especially when he is performing typical “employee” duties. This situation provides still another usage of the term “independent contractor”. It gets a bit surreal when you begin to consider the employer – employee relationship in this context, and what the implications might be for a general contractor under section 904(a) if the subcontractor in the role of sole proprietor fails to secure the payment of compensation to the business’ only employee, himself.
Here’s my suggestion. Limit the use of the term “independent contractor”. It should only be used in the context of section 904(a) to denote the direct relationship to the business owner that does not create the statutory employer situation. This usage will make clear that you are not referring to a subcontractor.
“Independent contractor” should not be used interchangeably with either “self-employed” contractor or “sole proprietor”.
Of course, my suggestion doesn’t help much if the facts are such that you are not sure whether you have an independent contractor, one contract type of situation, or if your self-employed contractor is, in fact, self-employed. But I think that we’ll still be better off if we agree to use the term “independent contractor” only in the context of section 904(a) to mean not a subcontractor.
ABOUT THE AUTHOR
John A. (Jack) Martone served for 27 years in the U.S. Department of Labor, Office of Workers’ Compensation Programs, as the Chief, Branch of Insurance, Financial Management, and Assessments and Acting Director, Division of Longshore and Harbor Workers’ Compensation. Jack joined The American Equity Underwriters, Inc. (AEU) in 2006, where he serves as Senior Vice President, AEU Advisory Services and is the moderator of AEU's Longshore Insider.