As a business owner in Virginia, you have the option of hiring contract or permanent employees – and many more businesses are using contract workers while sorting out the uncertainty in the economy. A contract employee is essentially a freelancer who has agreed to work for you for a mutually-agreed upon period of time, which may be extended if you see fit. A permanent employee has been hired with the understanding that he or she will go on working for you until a termination or a resignation. Both types of employees have their advantages and disadvantages. Some of the advantages of contract employees, however, are illusory.
Some business owners favor contract employees for insurance reasons. They believe they will not be liable if the contract employee causes any injury or damage while doing work for the business. They may also believe that they will not be responsible for providing workers' compensation (where applicable) insurance in the event that a contract worker is hurt on the job. In fact, both of these assumptions are incorrect. Contract employees can end up costing business owners just as much as permanent ones when they cause injuries or damage to people or property, or sustain injuries of their own.
In some instances, insurance auditors can actually categorize a contract employee as a permanent one. They use several criteria to determine whether an employee is truly an independent contractor or may be considered a permanent employee. Some of these criteria may surprise you.
In the event of a claim, a contract employee may be categorized as a permanent employee if:
- He or she provides services on an ongoing basis
- The business owner provides the materials, tools, and equipment that the employee uses
- The business owner pays the employee by the hour, week, or month
- The employee is dependent on the business owner for economic survival
- The contract employee works the same time of that permanent employees do for the business owner
Conversely, a contract employee may retain his or her status as an independent contractor in the event of a claim if:
- The business owner does not provide the employee's materials, tools, and equipment
- The business owner pays the employee a fee established in a contract bid proposal
- The employee is free to choose his or her own helpers
- The employee has his or her own business
- The employee determines the hours and pace of his or her work
Keep these criteria in mind when you hire contract employees to work for your business, because they may become relevant in the event of an injury or property damage, and you may be held liable in situations when you thought that wasn't possible. Insurance auditors can verify these criteria using a variety of methods, including written contracts, invoices, other written records, and interviews. If the line between your contract employees and permanent employees is blurred, and they are more or less indistinguishable from each other in terms of what they do and how and when they do it, be careful. There might not be much benefit from a liability standpoint in hiring the contract employees. In addition, you may be saddled with a hefty tax fine if the IRS discovers that your "contract employees" better fit the definition of permanent ones.
For any insurance question, call or contact Wilson, Timmons & Wallerstein, Inc. today.