Workers compensation is established to ensure that employees injured or disabled while on the job are properly compensated, negating the need for related lawsuits. It also provides benefits for dependents of workers killed by work-related accidents or illness.

Some laws also protect employers by limiting the amount an injured employee can recover as well as co-workers by eliminating their liability in most accidents.

Here is an example: Joe Smith decides to open a tanning salon. He manages the business and has four people who work at the front desk checking clients in for tanning services and selling products. When he purchased his business insurance, Bob told his agent he didn’t need workers compensation coverage because his people are not employees but independent contractors.

Is there a problem in this scenario? Probably. Workers compensation laws vary by state, and most states have some form of statute regarding coverage. Businesses that meet certain requirements must provide workers compensation for all employees or face fines and consequences if they do not. The question comes in determining who qualifies as an employee.

According to law, an employee is someone hired to perform services under the direction and control of another person or company, known as the employer. Since each state has its own definition to explain what constitutes an employer, Bob must determine the exact relationship his business has with hired help. A rule of thumb is that an employer is any person or entity who gives direction to and exercises control over a worker.