What Nonprofit Organizations Need to Know About Hiring Independent Contractors

Most well informed nonprofit managers know they need various insurance policies to protect themselves and their organization from a variety of lawsuits and claims. Some of the most common policies nonprofit's purchase are general liability insurance, directors & officers liability, and workers' compensation insurance. Yet many fail to realize how these do and do not apply to independent contractors.

General Liability Insurance
Nonprofit and for-profit businesses alike often view insurance through the lens of protecting their employees and their assets. However, failing to address the limitations of insurance in regards to independent contractors can leave gaping holes in an organization's overall protection. For example, if an employee accidentally injures someone or does damage to someone's property while performing his or her job, that organization's general liability policy would respond to any resulting claim or lawsuit.

Most, if not all, general liability policies exclude coverage for independent contractors. If the contractor causes injury or damage, the nonprofit's insurance company will likely deny the claim. That is why it is vital to discuss policy exclusions as well as risk management with your broker to avoid coverage gaps.

From a cost standpoint, hiring contractors has advantages. These advantages include less payroll taxes, less workers compensation premium, and less expensive employee benefits. However, the savings may not adequately offset the increased risk to the organization.

Workers' Compensation Insurance
If an independent contractor meets the state and federal definitions then it is not a requirement to include them in the payroll reported to your workers comp company. As a result, many organizations try to declare various employees as contractors. This move can save an organization money on workers' comp, however, in the final audit (performed annually on all workers comp policies) it may be determined that these workers do not meet the established guidelines. As a result, the income paid to the independent contractor is classified as payroll, and the organization could have a sizeable additional premium due.

Additionally, just defining a worker as an independent contractor does not preclude them for making a claim on your workers comp coverage. Further, a contract may become injured and claim they are actually an employee and demand worker comp benefits. In this case, if the organization does not have workers comp coverage, then they may have to pay for the medical and related costs of the injury. At the very least, the organization likely to have a costly legal headache on their hands.

Even if contractors do fit the legal definition, employers still face legal risks. Workers' compensation laws restrict the ability of an employee to sue their company following an injury. The employee receives benefits under the law and gives up the right to sue their employer. For contractors, no such limitation exists. While a general liability policy can protect a company from lawsuits issued by independent contractors injured on the job provided the injury was caused by the negligence of the organization. However, it does not limit the amount of damages the contractor can receive from the court.

This is why it is vital employers ensure they classify their employees correctly. Most general liability claims cap at $ 1 million, but a personal injury lawsuit by an independent contractor could exceed that limit. This means the organization would have to foot the remainder of the bill. This scenario exemplifies why companies need to weigh their risks carefully before classifying workers as employees or independent contractors.

Defining an Independent Contractor
In decades past, it was easy to distinguish an employee from an independent contractor. Employees 'paychecks displayed withholdings whereas independent contractors' checks did not. Now, the matter is multifaceted. The following are general guidelines for classifying employees and independent contractors.

Employee

  • Has a continuous relationship with an employer
  • Part of the core operations of the organization
  • The employer provides a significant degree of tools, materials, etc. for the worker to do his or her job
  • Can quit at any time without suffering liability
  • Must follow instructions regarding when, where, and how to work
  • Receives training from his or her employer

Independent Contractor

  • Performs the same work for multiple businesses or nonprofits
  • Furnishes his or her own tools, materials, etc. and can employ, oversee, and pay assistants
  • Can incur a profit or loss by quitting a job
  • Creates his or her own work schedule and work hours
  • Pays for his or her own expenses
  • May have a business license