Imagine this, a part-time server at a small restaurant complains to her manager that one of the cooks continually makes sexually suggestive remarks about her body and clothing.  In fact, the server is so upset by the commentary that she would often switch shifts to avoid working during the same time as the cook.  She complains to her manager about the harrassment, but since the restaurant is short-handed, he is reluctant to terminate the cook.

The server quits and files a charge with the Equal Employment Opportunity Commission (EEOC). In this type of situation, it’s likely the EEOC would provide the server with a right-to-sue letter after their initial investigation. 

Most likely the restaurant owner doesn’t have Employment Practices Liability Insurance (EPLI) because it either was never offered to him/her or it was and it was too expensive for him/her to afford. 

Unfortunately this has been the case with many small businesses, that EPL insurance was never offered or was too expensive.  A case like the one above has a potential settlement of $40,000 with legal fees in excess of $10,000.

The scary thing about these types of lawsuits is that over 75% of the claims are groundless and the burden of proof is on the employer.  Once a claim is filed the claimant can just sit back and watch the company rack up legal fees to defend their claim. 

Now this is the type of claim that most people relate to large corporations, but 52% of the charges filed with the EEOC we against small businesses with 200 employees or less. 

EPL insurance not only protects employers against harrassment charges, but also provides coverage for discrimination and wrongful termination claims.  An employer can purchase optional coverage to cover any lawsuits that may be brought against them by their clients as well. 

Since there have been over 100,000 claims filed with the EEOC and over $376 million awarded, insurance companies have been taking note.  Erie Insurance has decided to provide coverage by endorsment to their business insurance policy to the small business owner at an affordable cost to help protect them against potential claims. 

Erie’s coverage is rated based on the number of employees and the amount of coverage selected.  The nice thing about Erie’s coverage is that if you have less than 50 employees and select $250,000 of coverage or less that there is no additional underwriting required.  The important point to remember about this coverage is that it covers the cost of your legal defense even if the claim is frivolous. 

Employers should be asking their insurance agent/company for a price on this coverage.  As careful as you run your business, you never know when someone could allege discrimination, wrongful termination or harrassement charges against your Company.

According to the National Burea of Labor Statistics, 3 out of 10 homeowners operate a business out of the home.  More than 66% of the estimated 20.7 million people who work at home are self-employed and run a home based business.  It’s estimated that more than half of the homebased businesses are underinsured.  40% of those survey by the Independent Insurance Agents of America say they were uninsured because they believed that their homeowners insurance covered the business.

When you started your business out of your home, getting insurance to protect you probably wasn’t at the top of your to do list or you were one of the 40% above and thought that your homeowners insurance would cover you.  It is important to get insurance coverage for your home based business to protect you when the unexpected happens and it will!  Your homeowners policy specifically excludes any claims resulting from business pursuits and provides a minimal amount of coverage for any business property (usually less than $2,000). 

The least costly way to cover your business is to add an endorsement to extend your personal liability coverage on your homeowners policy to cover your business pursuits.  This is extremely important coverage to have, especially if you are going to have client meetings at your home, customers coming to you home to drop-off or pick-up merchandise, or have any other members of the public enter your home.  The liability coverage will protect you in case anyone is injured while they are on your property.  You can usually add business liability coverage to you homeowners insurance policy for less than $100/year.  If you wanted to get a separate business liability policy the premium would start at $300-$500/year.

Now most homeowners policies will limit the amount of coverage that they will provide for property related to the business, so you will have to purchase extra coverage to cover your business property.  So be sure to ask what the business property limits are to make sure that you are adequately covered.  You don’t want to find out at the time of a fire that your $10,000 of inventory that was destroyed was only insured for $2,000.  Now some insurance companies will automatically increase the amount of coverage for your business property when you extend your liability coverage.  The company will allow you to allocate up to 10% of the insurance that you carry on your personal belongings to cover your business property. 

Other types of insurance that a home based business might want to take into considerations are: workers compensation (if you have employees), product liabililiy (if you make a product and it doesn’t work correctly or causes injury to someone), errors and ommission (if you provide a service like accounting, insurance or attorney), malpractice (for doctors that have offices out of their home)

I was reading an article in the Insurance Journal over the weekend and the article was about what happens when fun ‘n games at work take a bad turn.  The article was in reference to a lawsuit where an employee sued their employer because they were injured during a company picnic while participating in one of he activities. 

The employee and her partner had already won the hula-hoop contest and balloon toss.  The last event for them to win was the 3-legged sack race to clinch first place and the $50 prize.  Unfortunately the employee fell during the sack race and injured her shoulder. 

The employee thought that her injury should have been covered by workers compensation insurance, but coverage was denied because they deemed the activity voluntary.  The employer sponsored the picnic, approved the activities and had an award for 1st place, but did not force anyone to participate. 

This case hinged on whether the court felt that the activities were voluntary or if people were being forced to participate. 

There is a great opportunity for team-building when employees participate on employer sponsored teams and in company activities.  It’s an opportunity to get to know your colleagues outside of work and possibly showcase some talent that you might have outside of the workplace.  As an employer the important thing to remember is to keep the activities voluntary.  If someone is injured while participating on one of your employer sponsored teams or in one of your employer sponsored events, your workers compensation insurance is going to determine whether the activity was voluntary or not to determine if a payment should be made. 

Larson’s Worker’s Compensation Law is often used as a general guide to determine if recreational and social activities are within the course of employment and should be covered under workers’ compensation.  The “Larson Test” considers the following when an injury occurs:

• Did the injury occur on the premises during a lunch or recreational period (I’ve seen a number of warehouses that have basketball hoops for the employees to use on their breaks)
• Did the employer expressly or impliedly require participation (join the volleyball team or you’re fired!)
• Is the activity considered a requirement of your employment?  (i.e. all employees are required to volunteer for habitat for humanity)
• Does the employer derive substantial direct benefit from the activity beyond the intangible value of improvement in employee health and morale. 

As an employer it is great to sponsor sports teams and have company picnics with games to foster team building, but the important thing to remember is to keep participation voluntary.

I insure a number of contractors and businesses that claim that they don’t have any employees.  They say that anyone that performs work for them is an independent contractor and they report what they pay them at the end of the year on the federal form 1099 for independent contractors. 

Now I know why businesses prefer to pay people as independent contractors because it can be costly to hire someone as an employee.  When you have employees you are subject to pay employment taxes (13.85% above the workers wages earned owed to the government), workers compensation insurance, and NYS statutory short-term disability insurance.  Some businesses hear all of these additional expenses associated with hiring an employee and are quick to classify anyone that performs work for them as an independent contractor. 

Independent contractors are responsible to pay their own self-employment taxes on their annual tax return and carry their own business and disability insurance. 

Most businesses would be in for a rude awakening if they are audited by the IRS.  The IRS may decide to classify that independent contractor as an employee.  If the IRS changes your business’ classification of an independent contractor to an employee you can face stiff penalties and owe back taxes. 

Even if you have a contract that states that the worker is an independent contractor, this is not sufficient to determine the worker’s status.  The IRS is not required to follow a contract stating that the worker is an independent contractor.  How the parties work together determines whether the worker is an employee or an independent contractor. 

There are three characteristics used by the IRS to determine the relationship between businesses and workers:

1. Behavioral control – covers the facts that show whether the business has a right to control how the work is done through instructions, training, or other means.
2. Financial control – covers the facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
3. Type of relationship – relates to how the workers and the business owner perceive their relationship

Behavioral control refers to facts that show whether there is a right to direct or control how the worker does the work.  An employee is generally subject to the business’s instructions about when, where, and how to work.  All of the following are examples of types of instructions about how to do work:

• When and where to do the work
• What tools or equipment to use
• What workers to hire or assist with the work
• Where to purchase supplies and services
• What work must be performed by a specified individual 
• What order or sequence to follow when performing the work

Financial control refers to facts that show whether or not the business has the right to control the economic aspects of the worker’s job.  The financial control factors fall into the categories of:

• Significant investment – an independent contractor often has a significant investment in the equipment he uses in working for someone else.
• Unreimbursed expenses – independent contractors are more likely to have unreimbursed expenses than are employees.
• Opportunity for Profit or loss – having the possibility of incurring a loss indicates that the worker is an independent contractor.
• Services available to the market – an independent contractor is generally free to seek out business opportunities.
• Method of payment – an employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time.  An independent contractor is usually paid by a flat fee for the job.

Type of relationship refers to facts that show how the worker and business perceive their relationship to each other.  The factors for the type of relationship between two parties generally fall in the categories of:

• Written contracts
• Employee benefits
• Permanency of relationship – if you hire a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
• Services provided as key activity of the business – for example, if a law firm hires an attorney, it is likely that it will present the attorney’s work as its own and would have the right to control or direct that work.  This would indicate an employer-employee relationship. 

If after reading this summary of employee vs. independent contractor that I summarized from the IRS.gov website, you still aren’t sure how to classify your worker, you can ask for the governments help.  You can file form SS-8 – “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding”.  This way you can be sure that you won’t be surprised by an IRS audit that changes your classification of independent contractor to employee.

Has your business changed in the last year?  Maybe over the past 2 or 3 years it has changed?  If it has it is important to notify your insurance agent.  If you are thinking of adding more services, you should consult with your agent. 

When I sit with a business owner, I’m basing his/her insurance coverage at that point in time.  I recently had a client that when we originally met he was doing primarily siding and window installation, a year later I find out that he is doing roofing.  Well that is a big difference, his policy covers him for siding and window installation, not roofing.  If he was to have a claim when he was performing a roofing job, he would find that his policy would most likely not cover the loss.  This is a serious exposure for a business owner.

Insurance is there to protect your business, to help you weather large claims.  If your business has changed or is in the process of changing, notify your agent.  You don’t want to find yourself not covered for a loss.