Most spas would prefer to hire people as independent contractors. The added cost of making people employees can be staggering. Employers are assessed payroll tax on their employees and they are required to purchase worker’s compensation insurance. Checks must be issued to each employee with the appropriate deductions taken out, which could lead to hiring a payroll processing firm, especially if there is more than one person on payroll.
Employers must follow overtime rules for non-exempt employees. If a person is working overtime in a spa, the employer is required to pay time and a half. This is a reason why employers would rather contract out jobs, so that they do not have to meet this requirement.
With the added burden of paperwork and headaches, more costs, and strict employee laws, why wouldn’t business owners choose to keep all people on as independent contractors? Most states and the IRS will not allow that to occur. There was a court case in California in 2018 that tightened guidelines for independent contractors, making it much more difficult to uphold independent contractor status. Other states have varying interpretations as to an employee versus independent contractor. Suffice it to say, all employers need to take this matter seriously and know that there could be repercussions if they don’t follow IRS and state laws.
It is important an employer get a legal opinion on the job category to seek to uphold independent contractor status.
In almost every state, employees must be covered by worker’s compensation insurance. Independent contractors are often not covered by the same policy. When an independent contractor gets injured on the job, they may not be eligible for worker’s compensation insurance. If they don’t have adequate health insurance, they might be prone to sue their employer, stating they were doing the work of an employee. If the employer cannot prove otherwise, they are likely going to be assessed a fine and perhaps lose a lawsuit for injury, back pay, and other liabilities. Settlements for not providing benefits could cost the employer many thousands of dollars. It would be a good idea to check with the worker’s compensation carrier to see if independent contractors can be added to the policy.
Employee and independent contractor injury claims are not covered by business liability insurance policies. It is a standard insurance industry exclusion on virtually all general and professional liability policies.
Liability issues might not extend to acts of the independent contractor. Every spa should have professional liability for all professional employees and for the business. The business should also have general liability. If the spa’s policy does not cover independent contractors, the spa should require each professional carry their own coverage and list the business as additional insured.
Some professional insurance programs will allow the business to cover independent contractors on the policy. Whether or not this would give the appearance of the independents acting as employees is a matter to be taken up with an attorney.
If there is a contract outlining the role of the independent contractor, it should spell out what is being provided by the business and what is not included. If worker’s compensation or professional liability is not included, this should be spelled out in the contract. To uphold independent contractor status, it might be good to state that the person is free to take on other clients and that the business is exercising no control except for the terms outlined in the contract. And, these terms should be reviewed by an attorney to be sure the strongest possible case is being presented for independent contractor status.
Actions against the business for failing to uphold employee laws could come from a disgruntled contractor, a state authority, or the IRS. The action is very likely going to lead to financial loss for the business unless the independent contractor program is within the laws of the state. Fines for failing to provide worker’s compensation insurance are huge. I have heard of fines in the thousands of dollars each day that worker’s compensation is not purchased.
Every business using independent contractors should be looking very closely at how the relationship is set up. The IRS and state agencies are getting more aggressive all the time in requiring employee status, so it is best to have legal review of any proposed or ongoing contractual relationship.
Susan Preston has been at the forefront of insurance program innovation since 1993 when she founded Professional Program Insurance Brokerage (PPIB) in Novato, California. Preston is also the co-founder of a nonprofit association setting standards for the permanent makeup industry, Society of Permanent Cosmetic Professionals (SPCP). With industry involvement, Preston and PPIB have been leaders in insurance programs for emerging markets and for the spa industry. Due to the national reputation of PPIB, in 2016 and 2017, Insurance Business America Magazine named Preston one of the 144 Elite Women in Insurance. ppibcorp.com