Every day, more and more employers are turning to independent contractors. The construction industry used to be the most common type of business where independent contractors were found. However, in today’s gig economy, nearly any aspect of one’s business can be outsourced.From marketing to management, the growth of the internet has allowed high-level activities, which used to require an onsite presence, to be performed remotely. It is now even possible to hire your own assistant, virtually. The question becomes if any of your outsourced partners are employees, and therefore covered under your workers compensation, or independent contractors responsible for their own coverage.The benefits of hiring independent contractors are numerous. From a financial perspective, companies who utilize independent contractors avoid state and federal employee taxes and of course the cost of workers compensation insurance. Use of independent contractors exploded for these reasons only, and the IRS took notice.Learning they were losing billions of dollars a year, the IRS began auditing how employees classified their employees. Now, in addition to potential legal liability, businesses who improperly class employees as independent contractors face the risk of penalties or fines.
Employee versus Independent ContractorsIt is important that business owners know the legal distinction between employees and independent contractors. If an error is made and an employee is classified as an independent contractor, the business owner can face state and federal fines and penalties, and could be held liable for the actions of the independent contractors. Most states have passed legislation to strictly define the term “independent contractor.” In general, an employee:
- Has an ongoing relationship with the employer.
- The employer provides the individual the tools, materials, and equipment necessary to perform their job.
- Can quit their job without incurring any liability.
- Must comply with their employer’s instructions, including when, where, and how to work.
- Is trained by their employer.
- Has expenses covered by the
Overall, employees are individuals who have a direct employee / supervisory relationship with their employer. Independent contractors, as stated in the term itself, are independent. In addition to only perform activities and job as specifically outlined in a contract, independent contractors also share the following characteristics:
- They maintain a separate work facility, truck, equipment, materials, etc., and can decide for whom they perform work.
- They have a federal employer identification number (although these are not required for sole proprietorships).
- They agree to perform specific work or services for specific amounts of money within a specific period of time.
- They control the way the work or service is performed.
- They incur the principal expenses related to the service or work (such as expense for gasoline, tool or equipment rental, business insurance, etc.).
- They have recurring or continuing business liabilities or obligations (such as payroll, business debt, taxes, premises leases, etc.).
- They can be held liable for failure to satisfactorily complete the work or services.
- They could realize a profit or suffer a loss from their normal operations.
On the surface, it may seem easy to determine if an individual is an employee or independent contractor. When first working with an individual, this may be entirely true, but it is important to review your employee classifications as an independent contractor may become an employee over time. Your annual insurance review with your
insurance agent is the perfect time to evaluate your employee roster and independent contractors.
The Gig Is UpImagine your organization is looking for some assistance creating a brochure. Using online business resources, you find a graphic artist name Mary. After a quick interview, you find she’s perfect and agrees to a contract for her to create your company brochure.Mary’s work is excellent, and you solicit her services for more marketing pieces. As the weeks and months pass, Mary becomes an integral part of your organization’s success. So much so that your business purchase Mary a new computer to assist in building your website. Begins to pay for supplies and travel expenses. And before anyone realizes it, Mary is working more than 40 hours a week just for your company.One day, while visiting the office, Mary trips and falls while walking up stairs and severely injures her left arm and wrist. Mary sues for medical costs and lost wages. During the course of the lawsuit, Mary awarded for her damages. Unfortunately, you find out, your general liability policy declines to cover the claim. They have determined Mary to be an employee who is specifically excluded from general liability policies.Then, your business is heavily fined by the IRS. They too agree Mary was an employee, not an independent contractor. In addition to the fine, the IRS seeks back taxes, and the State is threatening to pull your business license.But this doesn’t have to be your story.
Workers Compensation for AllThere are three easy steps in providing peace of mind when considering those individuals you hire. First, even if you don’t have employees, purchase a workers compensation policy. Together with your general liability, you will have protection from either employee or independent contractor injuries.Second, make certain the independent contractors you hire have their own workers compensation insurance. Mark your calendar to request an updated certificate of insurance each year. Further, make sure the contract you sign releases you from any liability.
Lastly, to learn more about workers compensation and our other personal and commercial risk management solutions, contact our office at (850) 942-7760 and speak with one of our licensed agents.The Demont Insurance Agency, Inc. The Insurance You Need. The Assurance You Deserve.
