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October 2016 -- Workers’ Compensation Insurance for the New York Sole Proprietor

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            October 2016
Volume 28, Number 10

Workers’ Compensation Insurance for the New York Sole Proprietor

Over the years, we have seen numerous errors and omissions claims and lawsuits filed against New York insurance agents and brokers when sole proprietors of businesses they insured had problems because no workers’ compensation insurance was in effect. In this issue of The E&O Report, we review how those problems often arise and what the agency or brokerage can do to help protect itself against a potential E&O claim or lawsuit.

​​​On a Related Note
Please also feel free to let us know about any issues or topics that you may want us to address in future issues of The E&O Report. Many of the topics we write about in The E&O Report originate from issues agents and brokers bring to our attention through telephone calls and emails. If you have any ideas in this regard, please reach out to Jim Keidel​ and let him know what you have in mind. From our experience, an issue that one New York insurance agent or broker is facing may actually be much larger and affect many other producers across the state.

As an example, assume a plumber walks into your agency and asks for assistance procuring insurance for his or her business. During the discussion, the plumber tells you the business is not incorporated but rather is operated as a sole proprietorship. The plumber further advises that while he or she generally handles all jobs for which the business is hired, one or two people are occasionally engaged on a part-time basis to help meet heavy workload conditions or to afford some vacation time. The plumber has heard from a friend that, given those circumstances, New York law might not require the purchase of workers’ compensation insurance. Given that every penny is important to his or her small plumbing operation, the plumber wants to know if money can be saved by foregoing the purchase of workers’ compensation coverage. Is that right? How should you handle this customer and those who may be similarly situated?

The short, and admittedly frustrating, answer is: it depends. Codified in Chapter 67 of the Consolidated Laws of New York is the Workers’ Compensation Law. The WCL allows sole proprietors with no employees to forego the purchase of workers’ compensation coverage. However, where the sole proprietor has at least one employee, he or she is legally required to purchase workers’ compensation insurance. Thus, the question is: what does it mean for a sole proprietor to have an “employee” for WCL purposes?

Appellate courts throughout New York have long remarked that the WCL must be construed broadly and liberally in favor of coverage because it serves a remedial, economic and even humanitarian purpose. For example, in the case of Johannesen v. New York City Dept. of Housing Preservation and Development, 84 N.Y.2d 129 (1994), the New York Court of Appeals described the WCL as a “socioeconomic” measure designed “as a means of protecting work[ers] and their dependents” from the hardship or financial strife attendant to a worker-related injury. In fact, New York’s public policy is so far in favor of protecting the injured worker that the WCL affords workers’ compensation benefits to employees on a “no fault” basis. That is to say, absent extremely limited circumstances, an employee who sustains a work-related injury in New York is eligible for workers’ compensation coverage even where that employee was completely and solely responsible for the injury.

Against this backdrop, it should surprise no one that under the WCL most individuals providing services to a for-profit business (including a sole proprietorship) will be deemed an employee of that business and, therefore, must be covered by the employer for workers' compensation insurance. For WCL purposes, the term employee generally includes day laborers, leased employees, borrowed employees, part-time employees, unpaid volunteers (including family members) and most subcontractors. In other words, the substantial majority of workers are viewed as employees under the WCL such that even sole proprietor-employers are required to maintain workers’ compensation coverage.

That being said, not all workers are employees under the WCL. Rather, some are independent contractors, who are not considered employees for WCL purposes. Rather than following a bright-line “all-workers-are-employees” rule, New York courts generally look to the following factors when determining whether a laborer retained by a sole proprietor was an employee or an independent contractor at the time of his or her injury:

  1. The degree of direction or control that the sole proprietor retains over the laborer, such as the time, manner and/or method by which the laborer performs the work. The more control exercised by the sole proprietor over the laborer, the more likely the laborer will be considered a WCL employee.
  2. Whether the work performed by the laborer is consistent or inconsistent with the sole proprietor’s regular business operations. For example, where our plumber engages another plumber to perform some of his business’ work, that laborer is more likely to be deemed an employee.
  3. The method of payment, i.e., whether the laborer is being paid on a weekly/hourly/monthly basis or is being paid on a task-by-task basis. Contrary to conventional wisdom, the sole proprietor’s use of a W-2 or 1099 form when compensating the laborer is irrelevant to the employee/independent contractor question. Rather, a worker paid in temporal intervals is more likely an employee, while someone remunerated on a “per job” basis is more likely an independent contractor.
  4. Whether the sole proprietor furnishes materials to the laborer to perform the work versus the laborer using his or her own materials to perform the work. In the former scenario, the laborer is more likely an employee, whereas in the latter, he or she is more likely an independent contractor.
  5. Whether the sole proprietor retains the right to fire the laborer at will versus the laborer performing the work at his or her discretion pursuant to a contract. A worker hired pursuant to a contract generally controls his or her own means, times and methods of work (and thus, is more likely to be considered an independent contractor), whereas an at-will laborer generally relies more heavily on the sole proprietor on these points.

All said, the best practice for an insurance agent or broker to follow is to explain the potential problems their customers could face if they decide not to obtain workers compensation coverage. The prudent insurance agent or broker faced with a situation where a sole proprietor remains adamant about foregoing the purchase of workers’ compensation insurance coverage should document their file, preferably with a written acknowledgement signed by the customer. Handling the situation in this manner will help protect the agency or brokerage from a potential E&O claim or lawsuit if that business ultimately faces problems due to its lack of workers’ compensation insurance coverage.

Submitted by:
John J. Iacobucci, Esq.
James C. Keidel, Esq.
Keidel, Weldon & Cunningham, LLP

Keidel, Weldon & Cunningham, LLP concentrates its practice in the defense of insurance agents and broker’s errors and omissions claims and litigation, errors and omissions loss control counsel and education, insurance coverage analysis and litigation and insurance regulatory matters. Please direct any comments or questions to James C. Keidel, Esq. by mail to the main office of Keidel, Weldon & Cunningham, LLP, at 925 Westchester Avenue, Suite 400, White Plains, NY 10604, telephone at (914) 948-7000 or e-mail at The law firm also maintains offices in Syracuse, New York; New York City, New York; Wilton, Connecticut; Fair Lawn, New Jersey; Warwick, Rhode Island and Philadelphia, Pennsylvania.
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