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Outsourcing Tech Work? Make Sure You Know the Insurance Risks

Monday, March 24, 2014/Categories: business-liability-insurance

For many small and startup technology firms, outsourcing work to 1099 contractors is an early step toward growth. Outsourcing is often the stepping stone between doing everything yourself and bringing on your first full-time or part-time employee.

But as with any change to your business, outsourcing the work you do comes with distinct insurance risks. Here’s a look at which specific risks you’ll be exposed to when you hire a 1099 employee and how to protect your business assets and revenue.

Insurance Risks for Outsourced Work

First, let’s be clear about what we mean by outsourcing work: any task for which you hire a non-permanent employee classified as a 1099 (contractor) by the IRS, you are outsourcing. Small and micro tech businesses often outsource marketing, accounting, social media, and other time-intensive but essential activities.

Alternatively, you might bring on a temporary worker to help with an especially large or time-sensitive project. In any event, when you allow someone else to perform work on behalf of your business, you expose yourself to…

  • Risk of mistakes. Sure, you’re careful when you do your work, but you can’t be as meticulous for another person. If a contractor makes a mistake that leads to financial losses for your client, you could face a lawsuit because your business performed the faulty work. While Errors and Omissions Insurance offers you protection for your own mistakes, your policy may not cover 1099 workers. If you secured your E&O policy before outsourcing any work (or if you don’t currently have any E&O coverage), talk to an insurance agent about making sure your policy covers work your contractors do.
  • Risk of data breaches. Today, outsourcing tech work usually means working on the cloud or otherwise relying on the Internet for communication. The more information (and passwords, access codes, etc.) you share, the greater your risk of data breaches. This risk is compounded if your contractor is working from a coffee shop or anywhere else with unprotected wireless access. Mitigate your risk by outlining clear policies (e.g., that your contractors must use safe Internet connections) and ensuring that your Cyber Liability Insurance covers work done by 1099 workers.

Other Risks

In addition to the insurance risks that come with hiring contract workers, your business might face penalties or fines from the IRS if you misclassify your workers. The IRS outlines explicit criteria for what constitutes a contractor, and employers who violate payment and tax withholding guidelines (whether on purpose or inadvertently) could end up having to pay.

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