Like many of the freelancers who contact me, Francisco was referred by his accountant. He had been served with a penalty notice from the New York State Workers Compensation Board because he did not respond to an insurance inquiry notice. He meant to respond, but when he received the notice, he had just gotten home. His young daughter was hungry, and his wife needed to run an errand. The notice went in the mail pile. He forgot about it, not knowing the chain of events his failure to respond would put in motion.
The WCB’s computer system automatically sent a penalty notice within a few days after his response to the insurance inquiry was due. His failure to respond was deemed an admission of non-compliance. The WCB assumed he had no workers compensation, disability, or Paid Family Leave insurance for his employees. The insurance is mandatory in NYS, so he was automatically penalized $2,000.00 for each 10-day period from the date he incorporated the business.
The penalty was already more than $20,000.00. Francisco was shocked and scared. His business had only generated about $80,000.00 in sales last year, and the pandemic has not helped its recovery. His wife’s earnings were barely more than $20,000.00. They were already living very modestly and were as frugal as possible. If the penalty stood, they might have nowhere to live and be unable to care for their little girl.
Would he go to jail, if he couldn’t pay?
Would the state take their daughter from them?
How could this have happened? Francisco had no employees!
Define the Conflict(s)
The NYS WCB (the Board) and Francisco disagreed about his need for WC, DB, and PFL insurance.
Identify the Interests
The Board wanted to ensure compliance, confirm coverage, and avoid uninsured injuries to employees working in NYS. Francisco also wanted to be compliant and avoid uninsured injuries. He didn’t even know to think about insurance coverage.
Play with the Possibilities
If the Board could have this conflict resolve in any way possible, Francisco would pay the penalties owed and maintain all required coverage. Likewise, if Francisco could resolve the conflict in any way possible, he would be given ample opportunity to get in compliance, and he would pay a small or no penalty. As I explained to Francisco, we were off to a good start. There were compatible interests we could build on.
Create the Future
First, I provided Francisco with a free 30-minute telephone conversation to review his workforce structure and the correspondence he had with the Board before contacting me. Knowing the Board would need to see NYS-45 payroll tax returns, W-2 forms, and a list of all payments made to vendors or independent contractors, I had him send me these and other documents.
Second, I gave him access to my online course, “Self-Auditing Worker Classifications”, so he would better understand the issues that might arise during the appeal process. It also gave him a better understanding of the legal distinctions between an employee and independent contractor. We soon discovered it was the large “Outside Services” deduction on his income tax returns that had triggered the Board’s inquiry. In an effort to reduce Francisco’s tax liability, his accountant had deducted a relatively large amount for independent contractors. Instead of saving Francisco money, the accountant caused a penalty far larger than any amount his saved in taxes.
Third, I filed an Application for Review of Penalties with the Board and answered the examining attorney’s follow-up question. Within two weeks, we received an Offer of Reduction in the penalties. As long as Francisco secured WC, DB, and PFL coverage for any work-related injuries on his jobs, his penalties would be resolved for $2,500.00.* This was based on the non-employee compensation he paid workers who lived in NYS.
We still didn’t agree that his contractors were employees, but we decided it was less expensive for him to purchase the insurance than to the costs of an uninsured claim and more penalties if someone gets hurt. The insurance cost a couple thousand dollars. An uninsured claim could be $50,000.00 or more, depending on the type and severity of injury.
Stay on PARR.
Plan, act, revise, and repeat. That’s what Francisco is doing now. He is learning to keep better records of every payment to an independent contractor. He is careful not to subcontract work to individuals who have not formed businesses and who don’t have their own WC, DB, and PFL insurance policies, as well as general liability (or business) insurance. He is continuously improving his entrepreneurial skills and looking forward to growing from a freelancer to an entrepreneur–gradually, without missing his daughter’s big moments.