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All You Need to Know about Employee Misclassification

Are They Contractors or Employees?

Independent contractors and subcontractors are a major part of the construction industry. They are the lifeblood of many companies because they allow you to function with the workforce you need, tailored for every specific job. Because they cover their own licensing, tools and insurance, they cut down on overhead and allow you to function smoothly. It is important, however, to make sure that your independent contractors are not actually employees who are misclassified. Here’s what you need to know about avoiding employee misclassification in the construction industry.

Employee Misclassification

Employee misclassification is a major concern these days. It is all too common, and as a result the IRS is beginning to come down hard on those who engage in this practice. Most misclassification issues are simple errors on the part of employers who don’t understand what constitutes an employee versus an independent contractor. Nonetheless, the penalties can still be harsh and can result in serious liability problems to the tune of at least thousands of dollars in tax payments.

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Determining Self-Employment

A true independent contractor is self-employed. They control how and where they do their work, and the scope of the work. If you control the worker’s duties and how they are performed, if you determine how they are paid and who supplies tools and equipment, and if the worker performs a key role in your business on an ongoing basis, they are likely an employee and not an independent contractor.

Incorporated Workers

One of the best ways to avoid misclassification problems is to make sure you’re hiring workers who have already incorporated their own business. This provides a solid paper trail that you’re working with another business and not your own employees. When you work with a corporation, you pay the company, who then pays the worker. You are shielded from allegations that you have a relationship with the worker directly.

If you are audited by the IRS, you can use the paperwork to back up your claims that you are working with true contractors. The proof will be there that someone else is paying taxes, benefits and the like, and controlling the scope of work of the employee.

Employee Leasing

Another option is to hire workers from an employee leasing company. Such employees are temp workers, casual or contingent workers, or contract employees. The term and scope of their employment is set with the company through which you lease them. They, in turn, are paid and get their benefits from that company. They are, in essence, doing work for you while employed by someone else.

The danger of using this kind of worker is that if you supervise them and define the nature and scope of work, you can be seen as a joint employer, meaning they are still misclassified. It is essential when using independent contractors that you do not exercise control over them or their duties.

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Understanding Different Types of Construction Contracts

Contracts are the core, the heart and soul, of the construction industry. As a contractor, you know that these written agreements not only define the scope of services you will provide, but they allow you vital protections against lawsuits and liability issues should anything go wrong during the course of work. Construction law is difficult and complex and, it seems, ever changing. Here’s an overview of what you need to know about the different types of construction contracts.

Fixed Price and Lump Sum

There are three types of construction contracts that are most commonly used, and of these the most common is the lump sum or fixed price form of contract. With this type of contract, the property owner seeks bids from several contractors to get the best deal they can. Since with this system the entire scope of a project is presented up front, this contract is able to clearly outline the scheduling, deadlines, costs, budget and other crucial aspects of the project.

types of construction contracts

Cost Plus

Cost plus contracts are more open and freeform. They are best applied when the costs and timeframe for the project are somewhat unclear. They allow the payment to be negotiated rather than defining it as a fixed cost. It essentially agrees that the contractor will be paid for the costs of the job plus labor fees, which can be set or a percentage and may include a bonus for quick completion of the job.

Time and Material

When the overall scope and details of the project are largely or completely unknown, a time and material contract can be implemented. Whatever the variables are, if the project is nebulous, this kind of contract is an option, though it is generally the least favorable of the three types. It agrees on an hourly rate for the contractor and materials paid for by the property owner. Separate fees are negotiated for contractor profit and overhead issues.

Union Issues

If your company is a union shop, there are other considerations and guidelines you will need to follow to ensure that the job contract is in line with union requirements. There are expectations that the union will have to see fulfilled before work can commence, including conditions of employment, discrimination issues, grievance procedures and the like.


These types of construction contracts will also address the kinds of workers you will be using. Most common are subcontractors who use their own equipment and are licensed on their own. They have to be specifically accounted for within your job contract, or you could end up with liability and lawsuit issues if things go wrong.

Direct hire employees, on the other hand, work for you and your company. These employees carry fewer but different liability issues. You will have to account for payment practices, the type of work performed and working conditions when dealing with direct hires. Don’t forget to keep your company and your employees protected with workers compensation insurance.

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Finding and Hiring Qualified Subcontractors

Very few people in the modern construction industry are a jack-of-all-trades. Those that are tend to perform work deliberately and often at a slower pace than the schedule demands. The typical solution for this problem is hiring a subcontracting crew. Whether your crew is a massive team or a one-man army, you will want them to perform the work relatively quickly but with a high enough quality that you can stake your reputation on it.

These requirements mean that finding the right type of subcontractor is never easy. Teams that look good on paper can often disappoint. Others may do excellent work on one job and muck up the project on another. To help you locate and hire the best teams possible, here are some strategies you can use: Read more

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How an Indemnity Policy Can Make You Stronger Than Your Weakest Link

When you hire a subcontractor to complete a job, typically you hire someone you know. Someone who has a reputation for getting the job done well and on time. Still, there may be moments over the course of your career as a general contractor where you have to hire subcontractors that you are not familiar with. In those instances, you will need to be especially careful because, without the proper coverage, you could be found liable for the actions of your subcontractors. Here’s what you need to know about an indemnity policy.

What is an Indemnity Policy?

Contractors indemnity insurance was designed back in the 1990’s to combat certain limitations in liability insurance that left contractors exposed to unnecessary risk. Granted this risk was a little out of the ordinary as contractors began to take on more design build projects. Subjectivity, frustrated consumers and poor work by subcontractors all contributed to the creation of contractors indemnity insurance.

An indemnity policy will protect you, the general contractor, from liability that stems from an action or omission taken by your subcontractor. Long story short, if your subcontractor doesn’t follow through on their contractual obligations, you will not be held financially accountable. These policies aren’t entirely infallible and still have certain limitations that you will want to be aware of. Policy limitations are typically a result of negligence or failure to provide time notice of a claim but, such restrictions are usually dependent on your provider.

Who Needs an Indemnity Policy?

If you work as a General Contractor you will likely need some sort of contractors indemnity insurance. Construction jobs are very rarely a one man effort. It takes a team to get your project completed but, there is that saying that a team is only as strong as its’ weakest link. And your weakest link could ultimately end up costing you much more than just a game. An indemnity policy will keep you from having to bear the financial burden of your subcontractors when they manage to get into trouble.

If you have any further questions about an indemnity policy or if you would like to schedule a consultation please feel free to give us a call at 1-800-649-9094. We look forward to hearing from you!

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Contractual Liability Coverage – What it is and What it is Not

Your insurance agent told you that your Commercial General Liability Policy (CGL) provides “blanket contractual liability coverage.”  What exactly does that mean?

Contractual Liability Coverage

To start, although many use this phrase, it is a misnomer.  “Blanket” suggests that all contractual liability situations are covered by the policy, and this isn’t the case.  The CGL policy protects the insured who has assumed liability for bodily injury and property damage in certain contracts called “insured contracts.” Examples of specifically named “insured contracts” are lease agreements and elevator maintenance agreements.  Also included are hold harmless and indemnification agreements wherein the insured has assumed the tort liability of a third party for bodily injury and property damage.  There are exceptions; there is no coverage, for example, for indemnifying railroads for certain types of work and for indemnifying architects and engineers for professional liability.

What Does a Standard CGL Policy Cover?

Assuming that a subcontractor indemnifies a general contractor for any and all damages, what kinds of claims might be covered and not covered under the subcontractor’s standard CGL policy?  Here are some examples:


  • An employee of a subcontractor is injured on the site. He files a Workers’ Compensation claim with his employer, but then sues the general contractor.  The general contractor goes to sub to enforce the indemnification clause in the contract.
  • Five years after a new subdivision is built, the foundations of some homes are beginning to crack because the site work was improperly done. The builder goes to the sub he’d hired to do the site work to enforce the indemnification clause in the contract.

Not Covered

  • A subcontractor fails to perform the terms of the contract, and the general contractor sues for breach of contract. The sub’s CGL won’t respond because this isn’t a bodily injury or property damage claim.
  • The subcontractor brings diesel fuel onto the jobsite and there is a spill, contaminating the land. The sub’s CGL won’t respond because this type of pollution claim isn’t covered by the CGL.

The CGL’s contractual liability coverage is broad, but certainly doesn’t apply to every situation.  It’s also important to make sure that the contractual liability coverage in the policy hasn’t been modified by an endorsement.  Many insurers try to restrict or even eliminate much of the coverage in the CGL.

Be sure to make your attorney aware of the coverage you have.  An attorney should always be consulted before a contract is signed, and he will be better able to advise you if he understands the limitations of your insurance policy.  Lastly, be sure to make your insurance advisor aware of any liabilities you’ve assumed under contract.  While he can’t offer legal advice, he can let you know how your coverage compares to the coverage you’ve agreed to provide.

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