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Who is Responsible for Subcontractor Insurance?

As a sole proprietor or the owner of a small business, you may find you need additional help from time to time. IT staffing agencies are a great place to turn for temporary or contract workers, but those workers bring with them additional risks you should consider.

Insurance for IT subcontractors can get complicated because so many parties are involved…

  • The subcontractor.
  • You, the business that hires them.
  • The IT staffing firm that connects the contractor to their employer.
  • The client(s) whose projects the subcontractor will be working on.

In some cases, your business insurance may cover independent contractors you hire. For instance, your E&O Coverage may insure any professional mistakes independent contractors make, or your Workers' Comp may cover any workplace injuries involving them. But in most cases independent contractors don't have direct coverage under your policies. They can still be sued and be held responsible for their own defense.

Other times, the staffing firm you use to hire contractors may offer partial coverage. But most often, they won't provide coverage, either.

This brings up an important question: are you responsible for an independent contractor's insurance?

To make this clearer, let's go over the basic underlying question: How is an independent contractor different than an employee? You probably know the basic answers to this question. Businesses don't have to offer independent contractors the same benefits they offer full-time employees. Generally speaking, independent contractors don't get health insurance and other benefits, and are only hired for a particular task or body of work, after which the company has no responsibility to keep the contractor. The other benefit you get by using independent contractors is that you don't have to pay payroll taxes on their wages.

In order for businesses to qualify for the benefits of using independent contractors (i.e., not having to offer health insurance or pay certain taxes), they can't treat them as employees. We said before that your insurance may cover contractors, but if you give them too much coverage, you actually run the risk of treating them too much like employees. This can have huge tax ramifications. If you extend too many benefits to an independent contractor, the IRS or other government agency may reclassify the independent contractor as an employee and force you to pay additional benefits and taxes.

In other words, if you hire an independent contractor and cover them under your insurance, you could accidentally end up having to pay thousands more in taxes. This puts you in a sticky situation. On the one hand, you want your contractors to be covered. If they make a mistake, you could be liable for it. On the other hand, you can't cover them without exposing your business to financial / tax risk.

So what does this mean for you, insurance-wise? Here are your options…

  • Require contractors to purchase their own insurance.
  • Talk with your insurance agent about adding a contractor as an "additional insured" to your policy. Your agent should be able to advise you about whether you could face a "reclassification" risk if you offer this coverage to a contractor.
  • Only hire independent contractors from staffing firms that provide insurance coverage.

As we said earlier, the situation is complicated because there are so many parties involved. When you sign a contract with another business, they often require a certain amount of insurance coverage (as we saw in the previous section). That makes things tricky. If the other business requires $1,000,000 in E&O coverage, you'll have to have that much coverage for yourself, but you'll also need to make sure that your independent contractors meet those requirements. They'll have to show you their proof of insurance demonstrating $1,000,000 in E&O Insurance.

One way to simplify this is to only hire from IT staffing firms that carry insurance coverage for their contractors. You may not have that luxury, but if it's available, you should use it.

Going forward, remember that you can be held liable for the work done by independent contractors you hire.

Next: When Should You Purchase Insurance?

70% of businesses raise prices or cut hiring when sued