Contractor liabilities – legal aspects of hiring independent contractor – includes sample contractor agreement – Industry Trend or Event

Dennis M. Powers

Hiring Freelancers Reduces Overhead, But Not the Headaches

It’s no secret that hiring independent contractors has its pluses: You don’t have to shell out money for payroll taxes and you can skip the insurance benefits paperwork. But beware: If you directly hire someone as an independent contractor–whether it’s a freelance graphic artist to design your business brochures or a technology consultant to help you set up your Web site–your legal responsibilities aren’t completely lifted. You may be surprised to learn that hiring independent contractors can create liabilities for you.

Liability Loopholes Sure, business owners who use independent contractors aren’t as liable for worker negligence as when they hire full-time employees. Let’s say you hire Eddie, a full-time employee who makes pickups and deliveries for your publishing business. One day, while Eddie is driving work to the printer, he hits a pedestrian who sues both of you. If Eddie is proven to be at fault during the course of his employment, then you’d be liable–without regard to fault–just for being his boss. Called vicarious liability, this situation is not usually covered by basic homeowner’s or auto insurance. On the other hand, if Eddie was hired as an independent contractor (meaning he operated a service and had several clients, among other factors), then this participating liability wouldn’t exist for you. But you’re not off the legal hook yet. You may be held liable if you.

Negligently hire an independent contractor. Entrepreneurs can be held accountable for failing to exercise due care when selecting a competent contractor. If, for instance, it turned out that Eddie had a lousy driving record with a history of accidents, then you’d be on the line for not checking out his background (even if you wouldn’t have hired him had you known). When you hire independent contractors, it’s vital that you investigate all their references, qualifications, and background.

Hire a contractor who assaults someone. You aren’t generally liable for such acts by independent contractors. But if you hire a security guard or bouncer for your bar, for example, you might be found liable when the assault could be considered related to your business, even if too much force isn’t used. Of course, you might be found not liable. But if you’re wrapped up in such a suit, the legal fees will still hurt you.

Happen to be in a business that’s inherently dangerous, such as repairing electrical wires or fumigating buildings. In this case, independent contractors won’t insulate you from liabilities, so contact your insurance agent regarding liability coverage. In addition, insist that independent contractors sign a written contract (see the box, “Reduce Your Risk: Get It in Writing”), requiring them to carry their own coverage-especially when there’s risk of injury.

Create a hostile working environment. Let’s say you hire Joe, an independent contractor, to help set up your Web site. When he drops by your office to install graphics on your PC, he downloads sexually explicit material that another one of your workers is exposed to. This is a sexual harassment suit in the making. Under current law, you’re responsible for not checking out Joe’s background, for not monitoring his online activities, and other potential legal arguments. One way to avoid this problem is to closely observe the activities of your contractors.

Injure a worker. According to the law, you have a “right to contribution” for damages awarded due to your independent contractor’s negligence, but the flip side is that you’re also responsible if he or she is injured due to your negligence. Of course, an injury can also occur with full-time employees. But independent contractors aren’t covered under workers’ compensation insurance as employees are. Therefore, if you fail to warn, say, your new sales representative about the broken step leading to your office and she falls and injures herself, you can be liable for her injuries. Why? You failed to warn a business invitee about a known risk and were therefore negligent.

Are bound to a contract you can’t fulfill. Let’s say you hire Anne, an independent contractor, to work for your roof repair business. When you were out servicing clients, Anne picks up a call while in your office. It’s a homeowner with a leaky ceiling. Sympathetic to the caller’s cry for help, Anne says that you can fix the problem before the next rain. But when an unexpected storm ruins the client’s home before you arfive, you may be held liable for the damages under the doctrine of apparent authority. To remedy this situation, be clear in your instructions to contractors as to what they can do and cannot do at your office.

The bottom line: Although there’s less risk to your business assets when you hire independent contractors, you must still make an effort to avoid becoming another victim of our litigious society.

Attorney DENNIS M. POWERS has authored several books on small business and the law, including Legal Expense Defense (The Oasis Press/PSI Research) and Beating the Tough Times (Plenum Publishing). He’s also a professor of business law at the School of Business at Southern Oregon University.

Reduce Your Risk: Get It in Writing

The following independent contractor agreement includes the basic areas you should cover. But even with a written contract, you want to avoid the appearance of an employee relationship. Be sure contractors do not represent themselves as being employed by you–and make certain you don’t meddle excessively with their work–because this can create vicarious liability. Before using the following agreement; you may need to expand or change certain clauses for your specific business. Also be sure you get your attorney’s input.


Dear (contractor’s name)

Our independent contractor agreement is as follows:

1. A (describe your business) and you’re a (contractor’s business description) who performs these services for other clients. We have agreed you will do the following for me as an independent contractor: (describe contractor’s services and responsibilities to be performed).

2. This contract shall begin on (starting date) and end on (closing date), but either of us may cancel this agreement for (state reasons for canceling before the end date) by giving (time needed) days written notice to the other along with the reason.

3. You’ll be paid (describe compensation and terms). You are not entitled to any company benefits, such as medical insurance or retirement, other than this compensation, because you are not my employee.

4. You are responsible for all expenses, personnel, tools, and equipment–including any repairs–needed to fully perform these services. You are responsible for all payroll, income. and unemployment tax deductions/payments due to these services, because I am not your employer.

5. You shall carry at your cost during this contract all necessary workers’ compensation insurance covering you and your employees, as well as property, bodily injury, and errors and omissions (and/or general liability) insurance of at least $ (list minimum amounts to be carded), which policies shall also name me as an additional insured.

6. You shall fully comply with all applicable federal, state, and local laws and regulations during this time.

7. You shall keep all information about my business confidential, disclosing it to no one without my express written consent.

8. As an independent contractor, you agree that I retain the following rights to work product developed under this agreement:(describe your rights to specific work product).

9. You assume liability for all claims and liabilities arising out of your services performed, fully indemnifying me against all damages, attorney fees, and out-of-pocket costs I incur due to your work.

10. If you believe you are being discriminated against, sexually harassed, or exposed to any unlawful or unethical condition, you will report this situation to me immediately.

11. (Add other specific provisions for your agreement.)

12. In any lawsuit over this contract, the prevailing party shall be entitled to receive reasonable attorney fees and costs as set by the court. Given your acceptance of this agreement, please sign and date the enclosed copy, sending it directly to my attention.

Sincerely yours,

(your name)

I, (name and address of contractor), agree to the above provisions as of (date of contractor’s acceptance).

(contractor’s name)

COPYRIGHT 1997 Freedom Technology Media Group

COPYRIGHT 2004 Gale Group

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