Independent Contractors and Subcontractors – Are You Covered?

Independent Contractors and Subcontractors – Are You Covered?


Within any area of business, employers must determine how to classify individuals which they are paying for services. Generally speaking, these individuals fall into one of two categories: employees and independent contractors. Employers typically have strong preferences regarding these different classifications due to their perceived advantages. Some businesses hire employees for a sense of stability and reliability, and others rely on contractors for flexibility and affordability. Let’s take a look at some of the realities of independent contractors and whether or not companies are properly covered for these kinds of hires.


Is it more affordable to use independent contractors?

The numbers certainly suggest that companies pay more for contracted employees than those hired as independent contractors. In fact, the Bureau of Labor Statistics determined that the average hourly cost for an employee was just shy of $30, and BusinessWeek magazine found that employers can save nearly 30% by opting for independent contractors instead. This stark contrast in affordability is in large part due to the taxes that employers can avoid by giving work to contractors.

Many employers operate under the impression that working with independent contractors is more affordable than hiring employees. While the numbers support this idea, there is some nuance that shouldn’t be ignored. The IRS charges high penalties for employers who wrongly hire workers as independent contractors instead of employees. Ironically, it’s possible for an employer to end up paying more in fees than was saved by temporarily dodging the cost of an employee. There are also legal and insurance costs that must be taken into account for a more accurate picture of the affordability of independent contractors versus employees.


Is it safer from a legal standpoint to hire independent contractors?

Legal security is another motivation for some employers to work with independent contractors in lieu of traditional employees. As companies are able to avoid the extra costs of taxes and benefits with an independent contractor, many assume that there’s also a greater legal separation and, therefore, more protection. Again, there is some truth to this assumption, but a more detailed look will reveal greater complexity.

There are some instances in which the work or behavior of an independent contractor can legally impact an employer. Without proper insurance coverage, employers can be held liable for accidents, illegal activity, and botched work done by their contractors. In addition, this lack of coverage may result in a lawsuit as some industries and states require companies to have insurance coverage for their 1099 employees. Even though an independent contractor offers some benefits in terms of affordability, there are still considerable legal ties that employers shouldn’t ignore.


Can you cover them under your insurance policy?

If independent contractors don’t have their own insurance coverage and you’re not held liable, there can still be an adverse effect on the relationship between your company and contracted workers. When the details are spelled out, 1099 workers will be less likely to work for an employer who doesn’t offer any form of insurance coverage. Without this protection, they’re susceptible to paying lawyer and court fees out of pocket should something arise.

As an employer, you should check to see if your current insurance policy extends to independent contractors. If not, speak with your insurance provider to see if it’s possible to add them or make some changes to provide this coverage. General liability, workers compensation, and errors and omissions insurance are important policies that can help protect your company when working with independent contractors.


What happens if your 1099ers should actually be employees?

There IRS knows that businesses throughout the country take advantage of the independent contractor-employer relationship and end up misclassifying their workers on purpose. There have been sweeps in the past where select businesses undergo an evaluation to determine if their relationship with independent contractors meets the legal requirement. If it’s determined by a regulating agency that your 1099 workers should actually be employees, you’re subject to a considerable amount of legal action and fees.

When you’re adding independent contractors to your insurance policy, make sure to check with a professional to ensure that these extra benefits aren’t putting you in jeopardy of treating them like an actual employee. As benefits are a prime indicator of an employee, giving too many to a contractor can bring your payment practices into question. Avoid this storm of legal trouble by letting an experienced agent handle the finer details of this insurance coverage.


ABI Insurance is your one-stop provider for all insurance policies and expert advice, even when it comes to covering independent contractors. ABI is also a proud sponsor of the OMPA Master Summit. Whatever you create, wherever your storytelling takes you, ABI Insurance can help make your creative vision a reality. Call us today for a no-obligation quote!