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Are you hiring?

Help_wanted_2Whether you need a full-time employee, part-time employee or someone to work on a special project or two … there’s more to know about hiring than you may think.

One of the most important things a business owner needs to know is the difference between an employee and an independent contractor … especially as it pertains to your insurance coverage.

This is how the IRS defines it:

The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Consider this example from the IRS:

Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies that she obtained through advertisements. Vera is an independent contractor.
How can this affect your insurance?

It can affect your insurance in several ways:

  • Risk classification.  Most General Liability policies for contractors are classified on a payroll basis as well as the percentage (%) of sales paid to subcontractors.
  • Workers Compensation premiums. Since premiums are payroll based, if you are using Independent Contractors (i.e. subcontractors), they are not eligible for Workers Compensation benefits.
  • Certificates of Insurance.  Many insurance companies require the general contractor to obtain copies of the Certificate of Insurance from the subcontractor. They often require the same limits of liability and the General Contractor must be listed as an additional insured. This is probably the most important step that is overlooked when it comes to protecting the business owner from liability.
  • Audits. Insurance companies typically conduct annual audits to check for proper classifications and review certificates of insurance. If this information is not accurate, you may be subject to pay a substantial amount of back premium.

So what is happening in the industry?

Well according to inc.com’s recent article, Governor Culver has recently created a task force to gauge the extent of employee misclassification and report back with recommendations within 60 days. Iowa lawmakers are cracking down on employers who misclassify workers as independent contractors to avoid payroll taxes and benefits.

So if you are a business owner who makes it a practice to use independent contractors, make sure you educate yourself on this definition and review your policies for proper classification.

It is typically less expensive to make any necessary adjustments now rather than later and be subject to any additional fees or fines.


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