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Insurance and the independent contractor.

It seemed a simple matter. A handyman was needed one or two days a week for a few months to make minor repairs. You decided that it would be easiest to hire an "independent contractor." That's when the trouble started:

The "independent contractor" you hired was seriously injured while working for you, and his attorney claims you were his employer. You sent the claim to your workers' compensation carrier who rejected it due to your contractual relationship with the independent contractor. When the workers' compensation claim was denied, the "independent contractors" attorney filed a lawsuit and you asked your general liability carrier to respond. The general liability carrier refused to cover insisting this was an employer/employee relationship? and coverage for employee injury is excluded.

Who is correct and who do you get to figure it out? What kind of legal nightmare have you created? Exactly what is or is not an independent contractor? Could you have avoided this "catch 22" situation?

First, examine why an independent was hired. There appeared to be many reasons to consider one. In the U.S. Attorney General hearings some months ago, we were reminded that it can be easier and less expensive to let an independent contractor be responsible for their own withholding, Social Security, and unemployment taxes. There is also a savings in not having to pay for workers' compensation and medical or does the contractor? Are there employees hired by the contractor and does he withhold taxes for them? Additionally, how you pay the independent contractor can be important. An hourly wage may be evidence of an employer relationship. Someone who is paid by the job is more likely to be considered an independent contractor. Another strong indicator is the "employed at will" stams. Can you terminate this individual at any time with or without cause, or is termination a breach of contract?

The suit described earlier could have been mitigated by understanding the potential risk. Knowing the rules and preparing procedures to deal with hiring practices can help. Risk management should be used when considering or entering into an arrangement with an independent contractor. You should have a workers compensation policy even if you have no employees of your own. Remember however, if your policy has to respond, the uninsured independent contractor can severely affect loss history and a poor loss history can affect your premiums.

Make sure you have minimized your risk. The following will help:

1) Insist on certificates of insurance

2) Set up internal procedures which do not allow hiring or paying independent contractors without proof of insurance. Review the appropriate requirements for minimum standards of policies and coverage. The coverage should include at least workers' compensation, general liability and automobile liability as a minimum.

3) Make sure the certificates are maintained in your files.

4) Review your definition of an employee versus an independent contractor. Pay attention to the control issues.

Of course, following these rules will eliminate the inexpensive but uninsured, casual worker. But after careful consideration, is the risk of an uninsured bodily injury Lawsuit worth the upfront small savings in time and money and wouldn't you wish after the fact, that you had spent it?
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Title Annotation:includes legal analysis of liability insurance
Author:Powers, Todd
Publication:Real Estate Weekly
Date:Apr 7, 1993
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