Business owners have a lot at stake when it comes to determining whether persons connected with their ventures are employees or independent contractors. The largest issue with making this determination involves taxes and insurance.
A business has specific responsibilities for employees, having the legal obligations to withhold and pay certain taxes (Medicare, Social Security) and pay other taxes (unemployment). If a business makes a mistake with classifying employees, it faces the financial burden of paying additional taxes and could well be punished with substantial fines. However, there are issues that are just as critical regarding determining a service provider’s status and insurance.
Many forms of both property and liability business insurance define the persons who qualify for protection under a given insurance policy. Property coverage is written for the direct benefit of the first party, the party who owns (or in other cases, has control or custody of) either real or business personal property. Liability coverage is written on behalf of persons defined as insureds, protecting them against harm they may cause to others or for damage they cause to property that belongs to others.
Employees are commonly granted coverage status in a variety of instances. However, coverage typically is not available to independent contractors who are considered unrelated third parties. FYI, under insurance contracts, the second party is the insurance company. Therefore, in many instances, if persons suffer losses under either property or liability policies, it is critical to be certain whether an individual is an employee or is independent.
Because of the position held by policyholder/insureds and insurance companies, the classification of workers is often in conflict as insureds desire liberal coverage and insurers wish to restrict protection to qualified persons. However, both parties are best served when worker classifications are clear. Premiums charged to policyholders are based on correctly recognizing the parties eligible for coverage. Proper classification keeps coverage affordable and makes the insurance process more efficient. Coverage involving employees should be connected to an applicable business that employs them. Coverage involving independent contractors should be connected to the contractors. In other words, they should secure their own, separate coverage.
In part two, we will discuss methods to determine worker status.