Publications

Employee vs. independent contractor

Published April 12, 2003 as
Drawing line between employee, volunteer and all roles in between

Frequently, a board of directors will wrestle with the issue of hiring one of its own to provide services. This will then generate a parallel discussion about the need for maintaining worker’s compensation insurance.

Without elaborating on the issue of conflict of interest (there must be a full disclosure to all of the members of the association if the director or his immediate family has an economic interest, etc.), the real issue concerns the differences between a mere volunteer, an employee or agent of the association or a true independent contractor for liability purposes.

Because of the current scarcity of insurance for associations and the tightening up of Internal Revenue restrictions, coupled with ever-increasing exposure for liability makes this a difficult question, requiring a careful analysis. For example, if a director volunteers for no compensation to change light bulbs, are they a pure volunteer? What if they are reimbursed for expenses? If a painter pays his employees in cash, does the association take withholding; send a W-9? Are the employees really subcontractors?

These questions frequently arise and merely create more questions.

First, a board of directors must be clear on its relationships with the various parties that provide services.

Second, there should be written agreements with all third parties, spelling out the details of the relationship.

Third, if the person performing services is deemed an employee, then all aspects of state and federal employment law would apply.

Sometimes associations try to cut corners and save money and do not diligently establish these relationships. This could result in an association defending a liability claim out of its own pocket because of a lack of insurance. If there is a severe injury, this could cause a financial catastrophe.

Before authorizing any person to provide services for an Association, the Board should look at the following:

Who will file the federal employment tax returns (form 1099 or W-2), the Association or the contractor?
Has the association treated any other worker holding a substantially similar position as an employee or independent contractor?
Who does the worker(s) take direction from and who provides the training?
Who is responsible for hiring, paying or supervising subordinates?
Are the subordinates assistants or subcontractors?
Who outlines the specific duties, monitors quality control and reprimands or withholds payment for sub-standard performance?
Are oral or written progress reports required?
Is there a written contract or job specifications?
Is compensation based upon salary, flat fees or hourly payment?
Is there reimbursement for travel expenses such as gasoline and mileage?
Who furnishes the tools and equipment for the job?
In the event of property damage or injury to a third party, who bears the risk of loss?
Is the worker employed by more than one “employer?”
Are these services available to the general public or just the Association?
Who can terminate the relationship without liability?

These are just some of the tests for distinguishing between the volunteer, the employee or the independent contractor.

The pure independent contractor will have worker’s compensation coverage for his employees; the board member/volunteer providing a service for the association for no compensation should be covered by liability insurance and the pure employee must be covered by law. It is when a penny-wise, dollar-foolish board or manager tries to save a few dollars on the insurance premium that causes a break down in these types of situations.

The best general rule to follow is to always have worker’s compensation insurance as part of the entire insurance package, even though there are no pure employees. The board president falling off a ladder while cleaning gutters might need it.

The next general rule is to have a written employment manual for all employees and a written contract with all contractors which clearly states who has a risk of loss in the event of a claim.

Lastly, try and avoid having board or owner volunteers providing physical labor for the association. No matter how pure the motive, if someone is injured, the spirit of “volunteerism” may put the members of the association unnecessarily at risk.

One of the jobs of an association attorney is to advise clients of their potential risks of liability. To ignore this advice or cut corners makes this exposure real and the worst case scenario financial exposure becomes enormous and would jeopardize everyone’s financial stake in the association. This could also be viewed as a serious breach of fiduciary duty.

Insurance is like religion, either you believe in it or you do not, but a board of directors of an association should be practicing orthodoxy.