Workers' Compensation and Independent Contractors

Outside of general liability claims, lawsuits related to injured workers can bankrupt a nonprofit organization without adequate workers’ comp as well. This type of insurance protects employees who are injured while performing work duties. While the requirements for workers’ comp vary from state to state, most do not require it for 1099 independent contractors.

Most states do not require businesses to invest in workers’ compensation for independent contractors. As a result, many organizations try to declare various employees are independent contractors. This move not only saves them money on workers’ comp but it reduces state and federal taxes as well. However, businesses can wind up in financial and legal trouble if the IRS determines those independent contractors are actually employees by legal definition. If that happens, businesses can find themselves facing a significant gap in insurance coverage. A single claim by an independent contractor-turned-employee can bankrupt a company due to inadequate workers’ compensation insurance.

Even if independent contractors do fit the lawful 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 independent contractors, no such limitation exists. While a general liability policy can protect a company from lawsuits issued by independent contractors injured on the job, it does not limit the amount of damages the independent 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.

Employers do not need to accept significant gaps in coverage in order to hire independent contractors. The experts at SteelBridge can help your nonprofit navigate the hurdles and exclusions or various policies to guarantee appropriate coverage. Contact us today to learn more.

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