| Updated
February 2007
Employee
or Independent Contractor? The $1,000,000 question
Event
organizers are often tempted to find ways to either lower
workers' compensation costs or avoid the purchase of workers'
compensation insurance entirely. Although it’s always
a good idea to be sure you are getting the most for your money,
beware of apparently easy paths that ultimately might lead
to big trouble.
One
of these shortsighted moves is an event organizer’s
decision to declare certain (or all) employees are independent
contractors and thus exempt from the employer’s workers'
compensation requirements. They
have discovered that by hiring "independent contractors"
rather than "employees", they can save on workers'
compensation insurance as well as state and federal taxes.
However,
you risk considerably tax fines, other penalties, and a serious
gap in insurance coverage if your "independent contractors"
are later determined to actually fit an "employee"
definition.
In
the old days, it use to be easy to distinguish an employee
from an independent contractor; the employee had withholdings
taken out of their check, the independent contractor didn't.
Then
the IRS realized they were losing $30 billion dollars a year
in tax revenue where employees were misclassified as independent
contractors. Now every IRS audit will look into whether workers
are being classified correctly.
But
it's not just the IRS penalties and back taxes you have to
worry about on this issue. You risk serious financial loss
if an injured independent contractor is determined to actually
be an employee and you failed to carry workers' compensation
insurance. While most standard general liability policies
will protect you from lawsuits for injuries to independent
contractors, none will provide you protection for injuries
to employees. Only a workers' compensation policy will do
that.
One
of the key advantages of workers' compensation laws for an
employer is the limitation on the right of the injured employee
to sue the employer. In effect, the employer makes a trade
with the employee – the employee automatically receives
benefits for being injured on the job, even if the injury
was partially or entirely the employee’s fault, and
the employee gives up the right to sue to recover damages
for those injuries in court, even if the employer was at fault.
In today’s litigious society any protection against
the open-ended damages that a court might award is a valuable
benefit.
Yet,
if the injured person is an independent contractor, no workers'
compensation benefits are received, which means that there’s
no limitation on their ability to sue the business for whatever
damages the court will award. In effect, when you elect to
use an independent contractor instead of an employee, you
might be trading immediate and limited savings on your workers'
compensation premium for exposure to legal damages which could
easily exceed the normal general liability policy limit of
$1,000,000.
The
key issue in determining whether an individual is a contractor
or an employee is the degree of control the company exercises
over how the person does a job.
The
following are some of the criteria used to determine employee
vs independent contractor. Remember, if even one of the independent
contractor criteria is not met, the worker could be considered
an employee.
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