Sole Proprietors Under the Wisconsin Worker's Compensation Act

1. What is a sole proprietorship?

A form of business organization that is unincorporated and has only one owner.

2. When is an employer required to have a worker's compensation policy under the Wisconsin Worker's Compensation Act?

You must have Worker's Compensation if any of your businesses:

Employ three or more full-time or part-time employees. You must get insurance on the day you employ the third person.
Employ one or more full-time or part-time employees to whom you have paid combined gross wages of $500 or more in any calendar quarter for work done at one or more locations in Wisconsin. You must have insurance by the 10th day of the first month of the next calendar quarter.
If you are a farmer who employs 6 or more workers on the same day for any 20 days during the calendar year. You must get insurance by the 10th day after the 20th day of employment. A calendar year is January through December.
Out-of-state employers must have worker's compensation insurance if they have employees working in Wisconsin. The policy must be with an insurance company licensed to write in Wisconsin and endorsed to name Wisconsin as a covered state in Section 3a of your policy.

3. Who is considered an employee and covered by the Act?

Nearly all private and public employees in Wisconsin are considered employees and covered under the Act, including family members (except for certain relatives of farmers), minors, part-time employees and corporate officers.

4. What about a sole-proprietor?

Sole proprietors, including owner-operators, are exempt from coverage under the Act, but may elect to cover themselves. The employees of sole proprietorships are covered by the Act.

All worker's compensation policies exclude sole proprietors unless specifically endorsed to include them. Sole proprietors may voluntarily purchase worker's compensation insurance to cover their own work-related injuries and illnesses. Employers who have an existing worker's compensation insurance policy may add themselves by endorsement to that policy by notifying their agent and paying the additional premiums. To be covered under the policy, the policy must be endorsed to name the sole proprietor as a covered employee.

5. What about independent contractors?

Under s. 102.07(8) of the Act, a person is required to meet a 9-part test before they are considered an independent contractor rather than an employee. A person is not an independent contractor for worker's compensation purposes just because the person says they are, or because the contractor over them says so, or because they both say so, or even if other regulators, including the federal government and other state agencies, say so. The 9-part statutory test set forth under s. 102.07(8) of the Act, must be met before a person working under another person is considered not to be an employee.

To be considered an independent contractor and not an employee, an individual must meet and maintain all 9 of the following requirements: 1) Maintain a separate business; 2) Obtain a Federal Employer Identification Number (FEIN) from the Federal Internal Revenue Service (IRS) or have filed business or self-employment income tax returns with the IRS based on the work or service in the previous year (A social security number cannot be substituted for a FEIN and does not meet the legal burden of s. 102.07(8), Wis. Stats.); 3) Operate under specific contracts; 4) Be responsible for operating expenses under the contracts; 5) Be responsible for satisfactory performance of the work under the contracts; 6) Be paid per contract, per job, by commission or by competitive bid; 7) Be subject to profit or loss in performing the work under the contracts; 8) Have recurring business liabilities and obligations; and 9) Be in a position to succeed or fail if business expense exceeds income.

Any sub-contractor or independent contractor who does not meet all 9 parts of the test and who is not an employer themselves, is an employee of the employer they are working under in Wisconsin.

6. What if a sole proprietor doesn't have any employees?

Under the Act, a sole proprietor who does not have any employees working in Wisconsin is not required to carry worker's compensation insurance.

7. Can a sole proprietor be required under a contract to have a worker's compensation policy even though they are not required to have a policy under the Act?

Yes, a contract may require a sole proprietor to a have worker's compensation insurance policy even though they are not required to have a policy under the Act. Contracts often stipulate that sub-contractors (sole proprietor) have worker's compensation insurance and require a Certificate of Insurance as proof that the coverage is in place. The Worker's Compensation Division has no jurisdiction over contract stipulations that require worker's compensation insurance.

8. What are the options available to a sole proprietor that is offered a contract that requires them to have a worker's compensation insurance policy?

There are 3 options available to a sole proprietor that is offered a contract that requires them to have a worker's compensation insurance policy.

The sole proprietor may voluntarily purchase a worker's compensation insurance policy to cover his or her own work-related injuries and illnesses. It is necessary to have the policy endorsed to name the sole proprietor as a covered employee. All worker's compensation policies exclude the sole proprietor unless specifically endorsed to include them. Premium is determined by using the payroll for individuals/partners given in the most recent rate revision circular.
The sole proprietor may purchase a “minimum-minimum premium policy”. A minimum-minimum premium policy covers any potential exposure (employees) a sole proprietor may have, but it does not cover the sole proprietor. The maximum cost of minimum-minimum premium policy is currently $900 (based on the type of business being insured, the cost may be less).

Under the Wisconsin Insurance Basic Manual Rules, if the designated minimum policy premium is greater than 20% of the earned payroll, the minimum premium is 20% of the earned payroll, but not less than the policy expense constant (the expense constant is the cost of producing and servicing the policy).

When a policy is audited, if there has been no earned payroll (no employees) during the policy year (since 20% of $0 is $0), the actual minimum charge for the policy is $220 (the expense constant). The sole proprietor will receive a refund of any premium amount paid in excess of the $220. Example: $900 (initial premium), minus $220 (expense constant) = $680 premium refund.
The policy protects the sole proprietor from most lawsuits brought by an employee or independent contractor because of a work-related illness or injury. The policy provides coverage for any person working under the sole proprietor if they are an employee.

9. Rather than purchasing a policy, can a sole proprietor simply waive their right to worker's compensation?

No. No agreement to waive the right to compensation is valid under s. 102.16(5), of the Act. Even if a sole proprietor signs a waiver, it is not valid and would have no effect on the validity of a worker's compensation claim.

10. What if a sole proprietor or owner-operator has a disability insurance policy?

Disability insurance is not worker's compensation insurance and does not meet the legal burden of a contract stipulating worker's compensation insurance. Disability insurance is a form of health insurance that pays the policyholder in place of their usual income if the policyholder cannot work because of illness or accident. Worker's compensation insurance is liability insurance that pays benefits for wage loss, reasonable and necessary medical costs, benefits for permanent disability, vocational rehabilitation benefits to employees for on-the-job injuries, and benefits to dependents of employees killed by occupational accidents.

11. Why would a contractor require sub-contractors to have a worker's compensation policy?

The principal reason a contractor requires a sole proprietor to provide proof of worker's compensation is to eliminate the potential for an audit premium dispute with the contractor's insurance carrier over the sole proprietor's earnings.

Worker's compensation policy premium costs are based on the employer's payroll during the policy period. Worker's compensation policies are audited by the insurance carrier to determine the employer's actual payroll during the policy period. When a contractor's policy is audited by their insurance carrier, the carrier will identify the monies being paid to the sole proprietor or independent contractor. When informed the monies were paid to a sole proprietor or independent contractor, the carrier requests evidence the sole proprietor or independent contractor meets the 9-part independent contractor test or proof of their worker's compensation insurance coverage. The proof requested is usually a Certificate of Insurance.

If the sole proprietor or independent contractor does not meet the 9-part independent contractor test or does not have a policy, the insurance carrier will charge audit premium on the monies paid to the sole proprietor or independent contractor while working for the contractor during the policy period.

To avoid any potential audit premium disputes, many contractors simply stipulate in the contract that a sole proprietor or independent contractor must have worker's compensation insurance and require them to provide a Certificate of Insurance as proof of coverage before doing any work specified in the contract.

12. Why are insurance carriers concerned about the status of a sole proprietor's worker's compensation insurance coverage?

If a sole proprietor or independent contractor is injured, they may file a worker's compensation claim against the contractor.

Although the contractor and insurance carrier would likely dispute any claim based on their belief the person is a sole proprietor or independent contractor and not an employee, and therefore not covered under the contractor's policy, the case would be determined according to the facts and circumstances at the time of injury. Any worker's compensation claim filed by an individual injured while performing services is determined on a case-by-case basis according to the facts and circumstances at the time of injury.

A valid worker's compensation policy held by a contractor in a case of this type, covers any person, including a sole proprietor or independent contractor, working under the contractor if the person is found to be an employee of the contractor at the time of an injury.

An insurance carrier must pay worker's compensation benefits to anyone found to be an employee of a contractor for whom the carrier is providing worker's compensation insurance. Premium is charged based on the money paid to any alleged sole proprietor or independent contractor who is found to be an employee.

Due to the insurance carrier's potential exposure when a sole proprietor or independent contractor does not have a policy, carriers, quite properly, want to have the policy premium identified and paid up-front. If an uninsured sole proprietor or independent contractor is injured while working for an insured contractor, there is a possibility the carrier will have to pay the claim. Insurance carriers want premium paid on all potential exposure.

13. How do I file a complaint with the Office of the Commissioner of Insurance?

The OCI regulates the insurance industry in Wisconsin and provides assistance to consumers in resolving problems with insurance companies and agents, including policy audit issues. If an employer believes their insurance company acted improperly, the employer may file a complaint with OCI and seek remedial action. Contact OCI to obtain an Insurance Complaint Form. The OCI is located at 101 E. Wilson St. Madison, WI 53703. Call these phone numbers for assistance: General Inquiries, (608) 266-3585 or the Complaint Line, (800) 236-8517. Find information online at: Office of the Commissioner of Insurance

When filing a complaint, an employer should describe the problem in detail, include copies of pertinent papers, letters, or other information related to the issue and indicate how the they think the problem should be resolved. OCI will investigate the complaint and notify the employer of its determination.

14. How can I get more information about coverage under the Act?

Wisconsin Department of Workforce Development - Worker's Compensation Division
201 E. Washington Ave
P.O. Box 7901
Madison, WI 53707
(608) 266-3046
dwddwc@dwd.wisconsin.gov