Am I required to carry workers’ compensation insurance?

QUESTION: I have a small real estate brokerage firm. I have one salaried employee and there are four affiliated agents in addition to myself. Do I need to carry workers’ compensation insurance?

ANSWER: The North Carolina Workers’ Compensation Act requires that all businesses that employ three or more “employees” must either obtain workers’ compensation insurance or qualify as self-insured employers for the purposes of paying workers’ compensation benefits to their employees.

Many real estate firms with multiple affiliated brokers but less than three salaried or hourly employees elect not to provide workers’ compensation coverage for their brokers on the basis that those individuals are independent contractors, not employees. It is true that real estate brokers may be treated as independent contractors; however, firms taking this approach should take certain steps to ensure that their agents will not be classified as employees if a dispute about workers’ compensation arises.

NAR has published an FAQ article that discusses independent contractor status. It notes that for legal purposes, the key distinction between an employee and an independent contractor is the degree of control that the business exerts over the worker. The more control the business exerts, the more likely the worker will be considered an employee.

Federal and state laws must both be considered. At the federal level, the IRS has carved out a special statutory non-employee status for real estate professionals qualifying them as independent contractors if: (1) they are licensed; (2) substantially all of their payments are directly related to sales rather than hours worked; and (3) their services are performed pursuant to a written agreement stating that they will not be treated as employees for federal tax purposes. We wrote about this special status, and the importance of having a written independent contractor agreement, here.

The North Carolina’s Workers’ Compensation Act does not define independent contractors. Instead, independent contractor status is determined by applying a “right of control” test adopted by our courts. That test looks at multiple factors including whether the worker has independent use of their skill, knowledge and training, is free to hire assistants, has full control over those assistants, and selects their own hours. You can read more about this test here. To avoid having their agents treated as employees, firms should avoid: (1) requiring agents to work during set hours and at set locations, (2) making attendance at staff meetings mandatory; and (3) providing equipment or supplies to agents. Firms should also require brokers to pay their own license and membership fees.

If your firm has three or more salaried or hourly employees, or exerts control over a minimum of three affiliated agents sufficient for them to be considered employees under the “right of control” test, then your firm should definitely purchase a workers’ compensation policy. Without that coverage, your firm faces potential liability to an employee who is injured while doing on-the-job activities for the reasonable and necessary medical expenses related to the injury, and for disability benefits as long as the employee is totally incapacitated from work. A firm lacking coverage that otherwise would be required to have it could also be subject to substantial financial penalties.

Release Date: 1/30/2025

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