There are Liabilities in Hiring an Independent Subcontractor

Do you assume that you’re financially insulated from the missteps of the independent subcontractors you hire? You may find that your subcontractors aren’t as independent as you think. In the eyes of the courts, they could, in fact, be employees.

Why your independent subcontractor may be considered an employee

A company classifying workers as subcontractors must answer the following questions:

  • Does it pay its regular employees to perform essentially the same duties as the worker being claimed as an independent contractor?
  • Did the company previously pay that worker as an employee to perform essentially the same task?

A “yes” to either of those questions means the worker is likely an employee in the eyes of the IRS. There are 20 factors the IRS takes into consideration to determine the worker’s classification.

What this means for you

If the IRS classifies a subcontractor as an employee, you could be required to pay for their Worker’s Compensation benefits. A work-related accident could result in large medical and legal expenses, such as lawyer fees, settlements and judgments. The injured party’s lawyer will surely search for deep pockets. This  is important to understand so you can take the proper risk management steps to protect your business.

To better determine if your subcontractors could be classified as an employee, I recommend that you read Cary Christian’s article “Employee vs. Subcontractor Issues.”

Concerns related to auto accidents

Under most state laws, the order of responsibility to pay when there is liability for a work-related auto accident is as follows:

  1. The owner of the vehicle (who may be uninsured or under-insured). 
  2. The driver of the vehicle (who may be uninsured or under-insured). 
  3. The organization or business responsible for the driver or owner of the vehicle at the time of the accident.

Risk management advice for hiring subcontractors

  1.  Require your subcontractors to carry at least a $1,000,000 minimum limit of liability on their auto policies. This is enough to satisfy the judgment in the event of a lawsuit. Have the sub provide you with a Certificate of Insurance as proof of coverage.
  2. Always carry Hired & Non-owned Auto Liability with a minimum $1,000,000 limit on your General Liability or Business Auto policy.  If your subcontractor is classified as an employee, Hired & Non-owned Auto Liability will provide the needed coverage to help your business survive.
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