Workers' Comp - A Benefit for Employees, Not Contractors

July 23, 2015 7:39 AM Comment(s) By Gabriel

Back in 2012, around Wash Cycle Laundry's second birthday, I received the phone call that I was hoping never to receive: one of our cyclists heading eastbound on the Spruce Street bike lane in West Philadelphia was hit in broad daylight by an absent-minded right-turning vehicle at 38th Street.  The driver sped off.  Our cyclist insisted he was fine and wanted to continue on his delivery route as if nothing had happened, but as I drove him to the ER to get checked out and the adrenaline wore off, it became apparent that things were worse than he was letting on. After the cyclist was admitted, I called our workers' compensation insurance provider -- the first time I had really dealt with them -- and was pleasantly surprised by the response.  They gave me a claim number to give to the hospital.  They asked if I had reason to doubt the employee's account of the accident, and I said that I didn't, so they sent me a 1-page form to fill out and return.  And from then on, neither the employee nor the company ever had to pay a medical bill.  Fortunately, the cyclist had no fractures or other serious injuries -- just a scrape and some bruises -- so he was back at work in a day or two, but if it had been longer, he would have been paid for lost wages as well. This account might not seem that extraordinary -- the first modern workers' compensation law in the United States recently turned 100 years old -- and so in reality, it's the triumph of a 20th-century victory for good jobs. In Pennsylvania, carrying workers' comp coverage is a bottom-line legal requirement for every employer in the state.

That said, in the name of innovation and satisfying consumer demands, a 21st century set of companies that seek to provide "on-demand" services is challenging some of these basic legal rights.  By classifying the people who clean houses, ship packages, ferry passengers around town, and deliver food as independent contractors instead of employees, these companies are skirting the basic protections that separate our labor market today (problematic though it is) from that of 100 years ago.

As Wash Cycle Laundry has grown and raised capital, a number of potential investors have asked why we classify our cyclists as employees instead of contractors, and in doing so, take on the burden of having to pay for:

  • employer payroll taxes (about 7% of wages)
  • workers' comp (another 8%)
  • unemployment insurance (about 3.5%)
  • compliance with the Affordable Care Act (around 15-20% of wages for qualifying employees)
  • the requirement to pay overtime for people who work over 40 hours per week (50% of wages)
  • an increased scope of compliance for HR-related rules (e.g., EEOC record-keeping, etc.)
Why incur all the extra cost and take on all the compliance headaches to hire employees when you could, in the name of innovation, just call everyone an independent contractor and transfer all those costs to them?  What if the employees/independent contractors themselves say that they "prefer" to be contractors instead of employees?

For me, there are a few reasons.

  • First and foremost is the knowledge that if any of Wash Cycle Laundry's employees are hurt on the job, neither they nor the company has to worry about medical bills.  I'm no insurance expert, but I don't believe that there's any other type of insurance that accomplishes this goal -- just because a company is "insured" with a general liability policy doesn't mean that its contractors have a right to seek emergency care at the cost of the company without a contested claims process.
  • With employees, we are able to train our staff -- a part of Wash Cycle Laundry's fabric that enables us to work with adults who may have been off the job market for some time, and teach them new skills. This keeps our team with us longer, empowers us to promote from within our front line team, and leads to growth of the company. When working with independent contractors, a company simply cannot provide training.
  • Finally, the notion of everybody as an independent contractor is currently being challenged in court.  Early indications are that many states may begin clamping down on the misclassification of workers as independent contractors.  Seems that this whole trend may remembered as another excess of a tech bubble.
Gabriel Mandujano founded Wash Cycle Laundry in 2010, a laundry and linen company that now numbers nearly 50 employees. In 2013, he was appointed by Mayor Michael A. Nutter to the board of Philadelphia Works, the agency that administers $50 million of State and Federal WIA and TANF funding on behalf of the City of Philadelphia.Learn more about our social impact  
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