Thursday, June 2, 2011

Contractors versus Employees

We get many questions in our practice about the difference between contractors and employees. Here is a great article on the topic. Call Saggio Management Group to get more specific information about your particular situation. Call today 302-659-6560.


Know the Liability Hazards….Whether You Are One or Hire One
By Ronda Jones
Forrest T. Jones & Company

Independent contracting for accounting services is a popular way to handle work overflow. However, if the contracting relationship is not handled correctly, it can create significant liability exposure for both sides. It is becoming more common for businesses to hire independent contract accounting or tax professionals to help with seasonal workforce needs or special projects. Whether you are the contractor, or are doing the hiring, be informed about liability exposure differences between independent contractors and employees. Minimize disputes by utilizing a suitable contractor agreement, making sure that insurance policies are in place and confirming the policies contain adequate language to appropriately defend either party in the event of an error or injury. (This article doesn’t particularly address the various IRS-determining criteria factors in these relationships).

Contractual Agreement

The old adage “An ounce of prevention is worth a pound of cure” certainly applies to the decision to utilize a written agreement in an independent contractor relationship, even when involving good friends. Of course, the IRS views a written agreement as one of the determining factors of a true contractor relationship, but here are some considerations about liability.

An employer should consult an attorney about the language of its basic agreement(s) for each category of contractor and for length of hire, in particular as to hold harmless, non-compete and insurance clauses, and whether a “common-law” employment status could be imposed in your particular jurisdiction or situation. Certain language, such as to non-compete clauses, could impact the way the IRS categorizes the employer-independent contractor status, and sample agreements from “forms” books usually don’t address unique jurisdictional issues. Also, you should expect the need to occasionally modify the basic agreement language for certain hiring circumstances.

A contractor may wish to consult an attorney before signing a services contract, particularly with respect to any hold-harmless or indemnification agreements to ensure the contractor isn’t being held fully liable for all mistakes, but only those resulting from gross negligence or willful misconduct on their part. Consideration should also be given to insertion of a liability limitation cap for damages clause for errors or omissions you may cause. Confidentiality and non-compete language may need to be modified if it is unrealistic for your future earning potential or tailored to give you adequate protection if you are engaged in a lawsuit.


Here are some insurance concerns to consider, and an attorney may suggest that in some circumstances the contractual agreement also address maintenance of insurance policies.

If you’re the employer, you may require that the contractor provide evidence of certain types of insurance in the event the contractor causes or contributes to a claim. For example, in the case of an accounting firm hiring an independent contractor to prepare and sign off on tax returns for third parties, the employer might require the contractor maintain professional/errors & omissions liability to cover claims arising from errors or omissions.

If the contractor is meeting your clients at the clients’ home or business, or the contractor’s own home or business, the employer’s commercial general liability insurance likely protects the employer for the contractor’s actions, such as an injury to a client or damage to a client’s property, as long as the independent contractor is performing services within the scope of the engagement; however, it is best to notify your agent anyway (because your initial application may have required such disclosure) and get written confirmation of coverage, especially if you can’t find the applicable policy language. Since there is the possibility of a finding against the employer for joint liability with the contractor, the contractor should be required to provide the employer with evidence of homeowners or general liability to cover injuries like slip and fall or damage to the client’s property, if meeting clients off your premises. If the contractor drives your clients or staff, there are auto liability concerns, both as to the contractor and to your clients/staff. You should also consult your insurance carrier when hiring contract labor to ascertain you are covered under your office general liability policy for the exposure of bodily injury of the contractor, since they aren’t covered by your workers compensation plan for job-related injury and the independent contractor could institute a liability suit against you, just like a business client or visitor might.

If you’re the contractor, verify that the employer has the above-mentioned insurance policies in place, and discuss your own, additional liability exposures with your agent, whether you meet clients on your own premises, or that of the client or your employer.

When the employer hiring you for contracting work provides professional services to others (for example, an accounting or tax preparation firm, management consultant, etc., rather than a manufacturer or retail store) and your duties are not performed solely for the employer’s internal accounting functions, it may be appropriate for the employer’s professional/E&O liability insurance policy (if they have one) to cover you as an “additional insured” for errors or omissions involving your services. Here are some examples of appropriate circumstances for you to request “additional insured” protection under an employer’s professional/E&O coverage: you’re hired to prepare tax returns which the employer signs off on; you’re hired to perform bookkeeping or payroll processing under the employer’s general direction; or you support a review or audit process. In these circumstances, many professional liability/errors & omissions policies cover independent contractors as additional insureds already, because the insurance company would want you to readily engage with them in defense of a claim made against your employer involving your services. The employer’s insurance broker can supply you with a certificate of insurance and may agree to notify you in the event of non-renewal or cancellation of coverage.

General Guidelines

The employer should request and retain invoices from the contractor. You should consider doing a background check of someone you don’t know and check with state boards for disciplinary actions. Many court records are now online so it is easy to check for criminal or civil actions. You may be found liable for not knowing or disclosing a contractor’s criminal history—if a client suffers a theft by your contractor, for example.

The contractor would be wise to keep a log of what projects you work on, in case your involvement in a matter is ever called into question. In the case of the employer being a provider of professional services for others (such as an accounting firm), this would need to be accomplished without violating the privacy of the employer’s clients and with the employer’s approval, perhaps by logging only a client’s last name, service date and brief description of your duties, with no specifications about the client.

No comments:

Post a Comment