Can An Independent Contractor Collect from Your Auto Policy?

In the ground transportation industry, including limo services, determining the difference between an employee and an independent contractor can be confusing. Sometimes, instead of hiring an employee full-time, you will enlist the services of an independent contractor to work for you as an alternative. However, when dealing with independent contractors, many questions abound, including whether or not they are included on your livery insurance policy.

Many companies simply designate chauffeurs as independent contractors, believing that so long as they don’t deduct taxes from the chauffeur’s earnings, they are protected from the liabilities that typically come with a standard employment relationship. The reason limo services use independent contractors is so they can avoid federal and state taxes, disability coverage, and Social Security and Medicare taxes. By failing to properly identify an independent contractor or a full-time employee, you risk government sanctions and fines being applied to your business. There are two critical factors the IRS takes into account in deciding what the difference is between an independent contractor and an employee:

1. Significant investment: According to the IRS, when the driver has title, physical possession, and equity in the vehicle, the driver is found to have an investment in the vehicle and is typically considered an independent contractor. In order for the investment to be considered legitimate, the driver must have purchased or leased the vehicle in some form.

2. Risk of profit and loss: When an employee is paid for services on a time basis and does not have an opportunity for profit or loss within the company, they are considered to be full-time workers under your business. According to IRS guidelines, when there is a chance that a profit or loss could be incurred, the employee is considered to be an independent contractor. Factors that can lead to profit and loss include insurance, maintenance, repairs, and fuel.

So are independent contractors covered by your company’s insurance? The answer: No. The IRS identifies independent contractors as self-employed individuals, meaning that it is up to them to obtain their own insurance policies apart from your company’s.

At Wolpert Insurance & Risk Management we want limo companies to understand the importance of designating independent contractors from employees so they can avoid any legal issues. For more information on this topic or on your limo insurance, contact our Massachusetts agency today.

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