Workers Comp Independent Contractor or Employee

A past article in a National Business Aviation Association quarterly publication addressed whether flight departments should use independent contractors.  While the article’s focus was on IRS tax issues, it raised some very relevant issues that apply to workers compensation.  Namely, when is an independent contractor considered an employee, and how should a company treat that contract employee from a workers compensation standpoint?

Every state has its own litmus test, however a good start in understanding how to classify a worker can be found on the IRS website (www.irs.gov) under Tax Topics.  Topic 762 entitled “Independent Contractor vs. Employee” gives a general overview of how the IRS determines employee classification.  While each state’s workers compensation criteria may be somewhat different, the basic premise of this publication can be used as a good rule of thumb.  It categorizes the determining factors under three broad areas:  Behavioral Control, Financial Control, and Relationship of the Parties.  Under Behavioral Control it states that “a business/employer does not have to actually direct or control the way the work is done, as long as the employer has the right to direct and control the work.”  If an aircraft owner is telling a pilot when and where to report for duty, provides him or her with the airplane to fly and directs the pilot where to fly and who to transport, then it is a good bet that pilot will be considered an employee in both the eyes of the IRS and workers compensation laws.
Workers Compensation Insurance is driven by the independent statutory requirements of each state and should be a vital part of any aviation business’s insurance program.  For most states, workers compensation insurance is a mandatory requirement.  However, there are variations and exceptions.  For instance, in some states, a company with 3 or less employees is not required to carry workers compensation insurance.
In the aviation world, this is an important characteristic.  More than any other industry contract workers, contract pilots in particular, are an established part of the aviation employment picture.  In addition, there are a very large number of aviation operations with 3 or less employees.  Many companies who operated private aircraft for non commercial purposes have created limited liability corporations (i.e. ABC Aviation LLC) whose sole purpose is the ownership and operation of an aircraft for the pleasure and business of an individual or corporate owner.
Workers Compensation laws and insurance were created to provide a readily available remedy and compensation to employees that have been injured on the job.  In return, employers are usually insulated from liability lawsuits from their injured employees or their estates.  In the rare cases where employees are allowed to sue their employer, the employee liability provisions of a worker compensation insurance policy provide protection for the employer.
As regards to independent contractors, many aircraft owners frequently use a contract pilot to fly for them.  Some of them may be true independent contractors; working for their own company or for a larger pilot services company that provides workers compensation for pilots as part of their pricing model and compensation package.  Either way, they should be able and required to provide proof of insurance.  In most cases a contract pilot will likely fit the definition of an employee according to the IRS and the workers compensation classification rules.

Most types of businesses have a variety of insurance providers which voluntarily offer worker compensation insurance at regulated rates for each category of employee.  The availability of free market aviation workers comp is not as broad, but it’s getting better.  In 2006 there were only three companies in the United States that voluntarily provided workers compensation insurance for aviation related operations—and, they were very selective.  Several years of profitability combined with falling accident and claims rates have attracted other companies into the voluntary market.  Today there is a  larger variety of insurance companies offering workers compensation insurance for aviation and with them comes a variety of options to insure just the pilots or the entire business operation regardless of type.  Even so, compared to the rest of the world, the options is quite small and selective.

For most companies, flight crews can be the most expensive employee classification to insure.  For those businesses that cannot meet the qualifications of the voluntary insurance companies, there is what is known as the “assigned risk pool” where an insurance company is “assigned’ the business and is mandated to insure it at a mandatory rate which includes an “experience modification”, or multiplier, that reflects a particular business’s history of claims. Because this pool includes all business no matter what their loss history, the rates are understandably higher to cover the anticipated higher claims payout.  It is not uncommon for that cost difference between a voluntary company and the assigned risk pool to be 15 to 20 per cent or more.

This disparity has prompted many aviation operators to look for ways to avoid the additional cost of being in the assigned risk pool. Large companies that generate large insurance premiums for the aviation insurance companies don’t have a problem with access to the voluntary markets.  Likewise, safety minded companies with formal safety programs designed by organizations such as NATA and the NBAA can find their way into the “preferred” status.  However, for the small operator this is not guaranteed, even with a long history of no claims and a very favorable experience modification.  The bottom line is that many deserving aviation operators find themselves relegated to the assigned risk or state mandated pools with its associated higher costs along with the operator with a poor accident history or particularly hazardous business such as crop dusting, logging, or lifting.

The higher costs combined with the low profile of small aviation operations could offer an employer a very seductive temptation to avoid purchasing workers compensation insurance. Some operators have pointed to the liability provisions in their aircraft aviation insurance policy as an alternative remedy.  This could be described as a juicy rationalization with a tenuous guarantee of protection.

The liability provisions of an aircraft policy are intended to protect and defend the aircraft owner, operator, and its employees against third party claims, including claims by passengers.  While a passenger can be defined as “anyone who enters the aircraft to ride in or operate it,” there is usually language that expressly excludes those who are providing professional pilot services.  In addition there are usually specific exclusions which attempts to eliminate or drastically reduce the insurance company’s exposure to claims under a workers compensation, unemployment compensation, disability benefit, or similar law.  The intent is to exclude “employees” (who should have other remedies) from making third party liability claims against the liability provision of the policy.  Thus the classification of an “independent contractor” becomes important.  When there is a disagreement, the process of determining the answer is usually a court of law.
While a small aviation operation may not be required to purchase workers compensation insurance, it is important to note that this does not exclude the employer from the liability for an injured employee.  Forgoing workers compensation insurance exposes the employer to a lawsuit and a potential settlement far beyond the workers compensation limits and the premiums he would have paid.
The solution isn’t difficult.  First, a true independent contractor should be able and required to provide a certificate of insurance as proof carrying workers compensation insurance.  Otherwise, a full service aviation insurance broker will have access to all of the aviation workers compensation markets as well as the assigned risk pool.  They can help you put together a program that is easy to administer, track, and pay.  Since workers compensation is, in the end, paid on the actual payroll, providing it for a contract pilot may be easier and less expensive than it may appear and certainly better than the alternative.
About the Author.
Jim Gardner is a former US Air Force pilot and retired Captain for a major airline.  He is now an aviation specialty broker with The James A Gardner Company in Marietta, GA..
©Copyright 2008.  Jim Gardner.  All rights reserved.

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