11 JanThe Danger of “Going Bare”

 

With worker’s compensation premiums consuming a rising portion of their income, many businesses are tempted to buy ‘alternatives’ such as non-subscription agreements or limited-benefit health insurance. The fact is, there is no realistic alternative to worker’s compensation. The Texas Worker’s Compensation Act limits an employer’s liability only when the business has a formal worker’s compensation policy from a licensed insurance carrier or has been certified to ‘self insure’ by the Texas Worker’s Compensation Commission (part of TDI). There are no exceptions.

A business that drops worker’s compensation—sometimes referred to as ‘going bare’ – faces unlimited liability if an injured employee can prove the employer was negligent to any degree – no matter how slight or negligible. Employers that substitute ‘alternative’ accident and health policies, non-subscription plans, purchase worker’s compensation from unlicensed companies, or purchase excess employer’s indemnification insurance have far less protection than those with actual worker’s compensation coverage.  You should know that if you, as an employer, choose to opt-out of the worker’s compensation system and ‘go bare’, you face unlimited liability and business ruination.  It simply isn’t worth the risk.

What ‘GOING BARE’ Cost One Business

As a lesson from history, the owners of a Texas mortuary learned the high cost of operating without worker’s compensation insurance – ’going bare’ – when a federal bankruptcy judge ordered the immediate sale of their business.  The order climaxed a four-year legal battle with a former employee who received an electrical shock from an embalming machine.

Having chosen not to buy worker’s compensation insurance, the funeral-home owners faced unlimited financial liability. In addition, the employers were barred by law from raising defenses such as the worker’s own negligence, his acceptance of the risk, and the negligence of fellow employees.  Under the Texas Worker’s Compensation Act, if an employer’s negligence played any role in an injury (no matter how slight), the employer bears full legal responsibility.

A state district court ordered the mortuary owners to pay the injured worker $476,800. Unable to pay, the owners filed for bankruptcy but were ordered to sell their business to pay the judgment.

Worker’s Compensation Subscribers

When an employer is covered by a worker’s compensation policy, all financial responsibility for a job-related injury in transferred to the employer’s insurance company.  The injured worker is compensated according to the Texas Worker’s Compensation Commission’s schedule of benefits based on the type and severity of the injury.

The insurance carrier pays all reasonably required medical bills related to the injury, even if the need for some treatments doesn’t arise for several years.  Indemnity and disability payments are calculated as a percentage of the worker’s pre-injury salary – up to a limit.  In addition, the Texas Property and Casualty Guaranty Fund protects all licensed insurance companies and their customers should they become insolvent.

“Going Bare”

• Without a worker’s compensation policy from a licensed insurance company, the employer cannot use evidence to show that an employee’s own negligence or the negligence of a fellow employee contributed to the accident;

• The employer also cannot present evidence that an injured employee knew of the risk and voluntarily assumed it; and,

• The employee may be awarded a monetary judgment of non-economic losses, such as pain and suffering or punitive damages.

An employer who is found negligent in any way bears full financial responsibility for the loss, even if the employee’s own negligence played a great role in causing the injury.  With unlimited liability and no protection against awards for pain, suffering, and punitive damages, there is no ceiling on potential court judgments. Defense-related legal expenses are also the employer’s responsibility.

“Alternative” Coverage

Some Texas employers have elected to purchase life, accident, health, and disability policies as cheaper alternatives to worker’s compensation. Texas Department of Insurance rules prohibit these insurance companies from representing these coverages as substitutes for worker’s compensation. Typically, these policies have a ceiling on medical benefits and disability payment to replace the employees lost income are based on the employee’s salary and payments last a maximum of 52 weeks.

Assuming an employer’s ‘alternative’ policy has a $100,000 medical cap, a $400 weekly salary cap, and a 52 week payment period, the insurance company’s maximum payout would be $120,800 for a single accident. This would cover only a small fraction of the $476,800 judgment against the mortuary owner in the case previously described. Not only are benefits capped, but ‘alternative’ policies do not provide protection against judgments for pain and suffering, punitive damages, or legal fees.

‘1099’ versus W-2 Workers (Independent Subcontractors vs. Employees)

It is a common misconception that workers paid on a 1099 basis (as opposed to a W-2) are ‘independent contractors’ instead of actual employees and therefore the employer is not liable in the event of an injury. This is completely untrue and a dangerous falsehood for employers.

The fact is that in many cases, the only difference between workers paid on a 1099 (independent contractor) basis as opposed to a W-2 is simply an IRS status identifying which party is responsible for paying employer taxes. That’s it. From the standpoint of the Department of Labor, the general rule is that an individual is an independent contractor if the organization for which the services are performed has the right to control or direct only the result of the work, and not what will be done and how it will be done or method of accomplishing the result. However, whether an individual is an employee or independent contractor depends on the facts in each case.

• Behavioral Control – a worker is an employee when the business has the right to direct and control the worker (work and arrival times, drug testing, work standards, on-the-job behaviors, dress code, training, etc.) The business does not have to actually direct or control the way the work is done as long as it has the right to direct and control the work and/or the worker itself/himself.

• Financial Control - if the worker has a significant personal investment in the work (ie: purchased materials or other labor paid for by the worker) and his expenses are not reimbursed, he may be an independent contractor. He may also be considered an independent contractor if he can realize a profit or incur a loss.

• Relationship of the Parties – if you provide any benefits such as insurance, paid time off, etc. to a worker, it is an indication that he or she is an employee. A written contract may show what the parties intend if it the relationship is otherwise unclear.

Unlicensed Companies

The Texas Worker’s Compensation Act does not recognize policies issued by unlicensed companies, including those doing business on a surplus lines basis. Like employers who elect to ‘go bare’, those with policies from unlicensed companies forfeit contributory negligence protection and face unlimited liability. In addition, an employer who deals with these companies has nowhere to turn but the courts if a company cannot or will not pay a claim filed on behalf of the injured worker. In addition, the Texas Property and Casualty Guaranty Fund does not cover these companies.

Employee Leasing (PEO’s)

PEO’s, also known as staff leasing companies, are licensed by the Texas Department of Licensing and Registration (TDLR). Since worker’s compensation is not mandatory in Texas, not all PEO’s may provide worker’s compensation for their employees or the employees of the client companies. Under certain circumstances, a client company may be deemed liable for injuries sustained by leased employees if there is no worker’s compensation coverage in place.

Employer’s Risk Comparison Per Coverage Type

	Worker’s Compensation	“Alternative”    Policy	No Coverage   (Going Bare)	Unauthorized    Policy
Who Determines The Benefit Levels Paid?	Texas Law	Court	Court	Court
Who Pays Medical and Lost Income Costs?	Insurance Carrier	Insurance Carrier    (to policy limits) Employer Pays Balance	Employer	Insurance Carrier    (to policy limits) Employer Pays Balance
Who Pays Legal Fees?	Insurance Carrier	Governed By The Policy	Employer	Governed By The Policy
Are Benefits Protected by State Guaranty Assn?	YES	Limited At Best	NO	NO
Can Injured Worker Win Judgment For Pain,           Suffering, & Punitive         Damages?	NO	YES	YES	YES