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by Greenpoint Insurance Advisors, LLC
? 2012 Copyright Greenpoint Insurance Advisors, LLC
Understanding the difference and classifying an employee or independent contractor correctly is important for Colorado companies to avoid potential liability claims for workers compensation insurance, negligence or other statutory violations.? Determining who is an independent contractor versus an employee can be tricky and should be scrutinized carefully.? Willful misclassification of employees as independent contractors will make your problems even worse.
There are many situations when companies hire independent contractors.? It might be for a construction project, or the need to develop a company website, or even consulting project.? Most of the time these relationships have met the expectations of both parties without legal remedy. ? However, there are times when the relationship is tested and those companies who failed to do the obvious realize a problem has arisen.?
Roofing Company? Sued For The Injury of Subcontractor?s Employee
A roofing company hires a subcontractor to install a roof for a homeowner.? The subcontractor hired an employee and failed to secure workers compensation insurance as required by law.? His first day on the job, the employee falls off the roof and the roofing company was liable for bodily injury damages.? The liability flowed upstream in this case which meant the roofing company had to hire an attorney, prepare for trial, and settle out of court.? A real example meant to illustrate the severity, consequences and necessity by business owners to think carefully through their independent contractor relationships before any work is commenced.
This means having a valid, legal and authentic contract with the independent contractor your planning to hire.? A clear outline of the relationship between both parties to include financial, relationship, and behavioral factors. ? The significance of investing the time and money up front should not be understated.? The goal is to clearly minimize your liability.? Otherwise, the liability of the independent contractor and their employees could become the liability of the company that hired them.???
The Colorado Workers Compensation Act (?Act?)? and Internal Revenue Service? (IRS) provides guidance for Colorado companies who hire independent contractor
The Act is meant to inform Colorado businesses this is how the Centennial State views the components of an independent contractor under a microscope.? In other words, if your going to hire independent contractors your best chance of getting it right is to adopt these statutory provisions.? Your relationship with an independent contractor should look, feel, and smell like this.? If a company decides otherwise and adopts their own contractual framework, it could lead to penalties, litigation and unnecessary business expenses should it become tested. ? ? ?
What are key components of the contract according to the Act? ??
- The company must not require the independent contractor to work with them exclusively.? The independent contractor must
have the opportunity to retain and service other customer besides your business.? If you?ve implied or expressed to the independent contractor, they?re exclusive to your company, it might not pass the test. - The company must not mandate or establish certain quality standards for the work.? This means your company should not be telling the independent contractor how something should be done or how it should be performed.?? Your hiring an independent contractor for their expertise.? If you need to direct, mandate or require how something is to be performed?hire an employee.
- There should not be a set salary or hourly rate for the independent contractor.? The contract should focus on a contract rate.? For example, paying a website developer upon completion of your company website $X amount.?
- A termination clause should specify the contract will terminate when there? s a breach of contract or the work is not meeting certain specifications.??
- Any training to the independent contractor should be minimal.? If your company training is extensive, it could cross over to becoming an employer/employee relationship.
- Benefits or tools should be supplied by the independent contractor and not the company.? This doesn?t mean equipment or materials can?t be used by the independent contractor.
- What time or hours the independent contractor works should not be dictated by the company hiring them.? You may have a time-frame for completing the work by a certain deadline.?
- All checks or payment should be paid to the company of the independent contractor and not individually.?
- The two entities?company who hires the independent contractor?both should have separate and distinct operations.? Don?t commingle the operations in any way.
Contract example and for illustrative purposes :??
| Please Read Carefully:? ContractorXYZ is an INDEPENDENT CONTRACTORThe relationship between Company ABC and Independent ContractorXYZ is of an INDEPENDENT CONTRACTOR relationship.? This means Independent Contractor XYZ is not an employee of Company ABC.? Independent Contractor XYZ is required to provide their own benefits including health, business, and workers compensation insurance.? In addition, Independent Contractor XYZ is obligated to pay their own federal and, state income taxes, social security, payroll, and unemployment insurance. Under no uncertain terms express or implied is Independent ContractorXYZ an employee of Company ABC.? ? x______________________________??????????????????????????????????????????? x____________________________ Notarized? Company ABC????????????????????????????????????????????????????????????????????? Notarized Independent Contractor XYZ |
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Internal Revenue Service Guidelines For Defining Independent Contractors:
The Internal Revenue Service has identified three categories to help define the relationship between a company and independent contractor.? They are behavioral, financial, and type of relationship between the two parties.? Accordingly, there is no magic formula or ?weighting? used amongst the categories to provide a definitive answer, but is meant to provide guidance for those seeking the best way to structure the relationship to their satisfaction.
Behavioral Factors:
The influence over the independent contractor by the payer is an important factor.? Think of it as control and direction by the company who has engaged the independent contractor and providing a certain amount of direction.? Here are important considerations:
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Where to do the work or when is the work performed.
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Who provides the tools and equipment?
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Are workers hired by the independent contractor?
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Where to purchase supplies and services.
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What work must be performed by a specified individual.
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What order or sequence to follow when performing the work.
Financial Factors:
This includes how the payer as negotiated with the independent contractor to pay them.? Hourly or salary insinuates they?re an employee.? A fixed payment pursuant to the contract is indicative of an independent contractor.
Typically,? financial control factors fall into the categories of:
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Significant investment by the independent contractor versus the payer
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Unreimbursed expenses absorbed by the independent contractor
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Opportunity for profit or loss indicative of a self employed company
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Services available to the market.? The independent contractor is free to market their services to other companies.
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Method of payment?salary and hourly is not the preferred method of payment.? A fixed price with a specific outcome if favorable.
Type of Relationship Factors:?
Consider this category based on contractual obligations or benefits offered under a course of employment such as retirement, insurance, and vacation or sick pay.? The type of relationship between two?parties can generally fall into the categories of:
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Written contracts?documents between both parties clearly stating the obligations, promises, and conditions
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Employee benefits?does independent contractor pay for the benefits of their employees
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Permanency of the relationship
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Services provided as key activity of the business
According to the internal revenue service,? the wording of the contract is not the primary basis for classifying a payee as employee or independent contractor.? This category evaluates the relationship along with how the parties worked together.? This could mean everything outside of the written agreement could be subject to interpretation.? Company emails, verbal promises, or implied actions become relevant.
source:? IRS.gov Independent Contractor (Self-Employed) or Employee?
What?s Important To Know About Workers Compensation Insurance?
Colorado companies must remember independent contractors who fail to provide workers compensation insurance for their employees, it becomes the liability of the company who hired them.? The liability ?flows up? the ladder of hiring organizations.? Part 4, Contractors and Lesses of the Workers Compensation Act specifies a company that leases or contracts out any part of the work to a lessee, sublessee, contractor, or subcontractor?.shall be construed to be an employer and liable to pay compensation for injury or death.? In other words, your company became the employer regardless of the number of employees and subsequently liable.?
What would happen if the company at the top of the ladder doesn?t have their own workers compensation insurance policy?? The situation becomes even more precarious.? The roofing company discussed previously failed to have workers compensation insurance, which would have covered the injured employee.? The outcome of the lawsuit resulted in significant legal expense, loss of income, damage to the company reputation and settlement of over $25,000.
This means companies should consider clause in your contract stating workers compensation insurance is the responsibility of the independent contractor as required by law.? In addition, the company should obtain proof of coverage through a valid certificate of insurance and verify with the insurance carrier the policy is active.? This must be enforced before any work is commenced. ??
What Are The Penalties For Not Purchasing Workers Compensation Insurance?
Colorado will enforce the Workers Compensation Act vigorously and every Colorado company operating without workers compensation should take this warning seriously.?
The discovery for not having a workers compensation insurance policy is a $250/day initial fine for each day you don?t have an active insurance policy.? If you?ve been operating for 365 days without workers compensation the fine could be significant.? The Director may issue a cease and desist order to discontinue operating your business as an additional penalty, until the policy has been purchased.?
The second, third or more offense means the fine goes up to $500/day.?? In addition, in cases where workers compensation has been awarded to an injured worker, benefits will be increased by 50% when the employer failed to obtain workers compensation insurance.
There may be additional penalties for those who willfully classify employees as independent contractors.? Under House Bill 09-1310, the Colorado Department of Labor may impose fines up to $5,000 for the first offense and $25,o00 per employee for subsequent violations.
If your business needs workers compensation insurance immediately, please click here to complete our online application.
Additional Resources:
Informational Purposes Only.? Not meant as legal or professional insurance advice.
? 2012 Copyright? All Rights Reserved? Copyright Protected
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