San Antonio, Texas Commercial Real Estate: April 2011

Is he an employee or an independent contractor?

Is he an employee or an independent contractor?

Is he an employee or an independent contractor?

I am a generalist in the sense that I write insurance for all types of industries.  Some agents focus on one group and some attack like a scatter gun.  I enjoy dealing with different types of business operations.  There is a universal theme though...How can I save money?  Good business people should ask this question.  One way to do this is by the classification of your employee.  There are legitimate operations that use independent contractors so they don't have to pay for taxes and insurance on the employees.  Makes sense if that is truly what is going on.  I am going to talk about a few different scenarios I have come across in insurance.



I have a great friend who is a General Contractor in Austin, Tx.  He does finish out work for retail and office occupancy.  New tenant moves into a shopping center and needs to remodel the inside space, this is your guy.  He is a one man shop.  He sub contracts all his labor.  He has a bunch of different contractors he uses when he works a job.  All these contactors are insured.  So they are truly independent contractors.  His insurance requires that all his sub contractors carry insurance and they do SO his insurance costs are significantly less.  This is a perfectly acceptable way to operate.



I am working with a commercial janitorial company.  They do $800,000 in sales a year and state their payroll is $12,000 annually.  This will raise a plethora of red flags at audit.  So right now they pay next to nothing for General Liability and Workers Compensation.  Both the GL and work comp base a portion of the exposure/premium on annual payroll.  The company has $350,000 in "independent contractor" costs.  These employees work for them and can be hired/fired by them.  They do not carry their own insurance and have to answer to the company.  They only work for this company.  Does this sound like an employee or independent contractor? 


Here is the risk.  If you try and do what the commercial janitorial company is doing then you are setting yourself up for a huge audit.  Along with the audit you will be misleading your clients when you submit a Certificate of Insurance that states you carry GL and work comp because the reality is that the people working for you are not insured.  You are not classifying them as an employee so they do not fall under your policy but they do not carry their own insurance policy either.  There may be exceptions but let me tell you a real life audit nightmare.


A plastering company classifies all their workers as independent contractors.  They pay $1,500 in work comp premium annually.  That is a great price!!  Their premium is based on their payroll which is next to nothing since they "1099" all their workers.  At the end of the year the Insurance Company does their annual audit.  They determine that all contractor cost $400,000 should actually be classified as payroll.  This company was hit with an $18,000 audit at the end of the year that they owed to the insurance company.  What makes it worse is that once the insurance company notifies you of additional premium owed they usually give you 60 days to pay.  For a lot of companies they don't have that kind of cash flow to write that check.  If this was done appropriately then they premium payment would have been spread through out the year. 


I think most business know how to best classify their workers but I have come across this issue more frequently in the last year so I thought I would share my two cents.  Make sure to consult your CPA or insurance agent about these concerns and as always please contact me with any questions.


Eric Cervantes
Commercial Insurance Agent
 210-979-9000 Office
210-421-0968 Cell
210-298-6420 Fax




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Comment balloon 4 commentsLink LeGrand • April 29 2011 08:56AM
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