What Nonprofit Organizations Need to Know About Hiring Independent Contractors

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Managers of nonprofit organizations are well aware that they require various insurance policies to protect them and their organization against a wide range of claims and lawsuits. Some of the most common policies nonprofit’s purchase are general liability insurance, directors & officers liability, and workers’ compensation insurance. Many people don’t realize that these policies do not apply to independent contractors.

General Liability Insurance
Insurance is often viewed as protecting employees and assets by both for-profit and nonprofit businesses. An organization’s overall protection can be compromised if it fails to recognize the risks associated with independent contractors. If an employee causes injury or property damage while doing their job, the general liability policy of the organization would cover any lawsuits or claims.

Independent contractors are not covered by most, if any, general liability policies. The nonprofit’s insurance company may deny coverage if the contractor causes injury. To avoid gaps in coverage, it is important to discuss exclusions and risk management with your broker.

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Contractors have cost advantages. These benefits include lower payroll taxes and a lower worker’s compensation premium. However, these savings might not be enough to offset the increased risk the organization faces.

Workers’ Compensation Insurance
Independent contractors that meet federal and state requirements are not required to be included in your workers’ comp company’s payroll. Organizations often declare employees as contractors. While this move can save money on workers’ comp, it is possible that workers may not be meeting the guidelines during the final audit, which is performed annually on all worker’s comp policies. The income received from the independent contractor will be classified as payroll and an additional premium could be due.

Also, just because a worker is an independent contractor doesn’t mean they can’t make a claim under your workers compensation coverage. A contract might be injured and claim that they are an employee. In this case, worker comp benefits may be required. If the company does not have workers compensation coverage, they could be responsible for paying the costs associated with the injury. The organization will likely face a costly legal headache.

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Employers still have legal risks, even if contractors meet the legal definition. The worker’s compensation laws limit the employee’s ability to sue their employer after an injury. The law provides benefits to the employee, and the employee gives up their right to sue the employer. For contractors, no such limitation exists. A general liability policy will protect a company against lawsuits from independent contractors who are injured on the job, provided that the injury was not caused by negligence by the company. The contractor may still be entitled to damages from the court.

Employers must ensure that their employees are correctly classified. General liability claims are limited to $1 million. However, a personal injury suit brought by an independent contractor may exceed this limit. The organization would be responsible for the rest of the costs. This example illustrates why companies must carefully weigh the risks before classifying workers either as employees or independent contractors.

Definition of Independent Contractor
It was simple to tell the difference between an employee and an independent contractor in decades past. While paychecks of employees had withholdings, checks from independent contractors did not. The problem is complex. Here are some general guidelines for defining employees and independent contractors.

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Employee

  • Maintains a relationship with the employer
  • One of the core operations is the organization
  • The employer will provide significant amounts of tools and materials. The worker can do his/her job.
  • Can be resigned at any time, without triggering liability
  • Follow instructions on when, where and how to work
  • Gets training from the employer

Independent Contractor

  • Performs the same job for multiple businesses and non-profits
  • Owns and uses his or her own tools, materials, etc. The ability to hire, supervise, and pay assistants
  • You can make a profit by quitting your job
  • You can create your own work schedule and hours
  • Contribute to the payment of his/her own expenses
  • A business license may be required