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The Risks Of Hiring An Independent Contractor

19 May 2009 No Comment

officeIn 2007, a 23 year-old woman hailed a Greater Houston Transportation cab and asked the driver to take her home. He began to drive toward Kingwood, a suburb outside of Houston where she lived, but ignored her request to make the exit. When the woman threatened to call the police, the driver grabbed her phone and threatened to rape her. She escaped by jumping out of the moving cab. The driver was an ex-convict who had served several prison terms for a number of felonies, including assault. Although the woman survived, she claimed that she suffered from post-traumatic stress syndrome and filed a lawsuit against Yellow Cab, the regional taxi company that employed the driver. During litigation, Yellow Cab asserted that it was not responsible for the driver’s actions because the driver was hired as an independent contractor, not employer. Nevertheless, a jury found the cab company liable for negligent hiring of an independent contractor, the failure to conduct a criminal background check on the driver before hiring him. The jury ordered Yellow Cab to pay the woman $300,000.

The decision to hire an independent contractor has always been attractive to small business owners seeking to rein in overhead costs. According to the Census Bureau, the number of self-employed individuals rose from 15.4 million in 1997 to 20.8 million in 2006. In the wake of the recent economic downturn, the number continues to grow as companies of all sizes scrutinize their operating expenses and question the cost of human capital. Hiring an independent contractor is an appealing option because it allows a business owner to avoid the paying for the raft of expenses associated with hiring salaried workers, including taxes, worker’s compensation payments, Social Security, Medicare, unemployment payments and health insurance costs. Since the per-worker cost of hiring an independent contractor is relatively low, companies that employ independent contractors can increase productivity by hiring more workers.

Companies are also inclined to hire independent contractors because of the notion that they operate as free agents who carry out business without incurring risk on behalf of the company. Under the legal principle of respondeat superior, an employer may be held vicariously liable for the negligent acts or omissions of an employee even if the employer is not directly responsible for the injury. If the act or omission is committed in the course of employment, an employer can be held liable for the employee’s negligence since the employer is deemed to be in control of the employee. On the other hand, a company contracts with an independent to have work performed on behalf of the company, but lacks control of the contractor as well as the ability to supervise the contractor’s methods of performing the work. The doctrine of respondeat superior does not apply to independent contractors, as the hiring company is not deemed to be in control of the contractor.

However, it is a misconception that the principle of vicarious liability never applies to independent contractors. The reality is hiring an independent contractor is not a risk-free proposition. An independent contractor may incur liability on behalf of the hiring company in several ways.

  • Risky business. A company that employs an independent contractor to perform abnormally dangerous work, such as road blasting, can be sued for a contractor’s negligent acts or omissions. When hazardous work is carried out by independent contractors, companies may be held liable not only for the failure to take special precautions, but also for the contractor’s failure to exercise reasonable care. Courts determine whether work is hazardous by asking whether the work is inherently risky and whether a reasonable person would recognize a need for safety measures.
  • Outsourcing risk. A company that hires an independent contractor remains responsible for maintaining a safe workplace and providing warnings about hazardous conditions. If the company knows or should know about a dangerous condition, like a malfunctioning elevator, the company will be liable for injuries caused by the condition. This legal principle, the non-delegable duty doctrine, is intended to prevent companies from outsourcing dangerous tasks in order to sidestep liability. Likewise, a company may be liable to the public for injuries that result from the failure to take appropriate security measures.
  • Blind hiring. A company can be liable for the failure to properly screen employees and independent contractors. A company owes a duty of reasonable care to the public in hiring employees and independent contractors. If a person is injured by an independent contractor, the hiring company may be liable for failing to anticipate and prevent injury by conducting screening procedures such as background checks. For example, the Houston woman who was threatened and nearly abducted by a cab driver was able to win a negligent hiring claim against the hiring company, even though the cab driver was an independent contractor.
  • Independent contractor as agent. A company may also be held liable for the actions of an independent contractor if the contractor is considered an agent of the company. Under the rules of agency law, an agency relationship may be formed if the company’s actions or words give the contractor or a third-party reason to believe that the contractor is an agent of the company. A contractor has not been paid or agrees to work without compensation for a particular project can still be deemed an agent. If an agency relationship exists or if a third-party believes that the contractor is an agent of the company, then the company will be liable for injuries caused by the contractor in the course of carrying out its work.
  • Misclassifying a contractor. Many companies incur tax liability for back taxes, interest and penalties by misclassifying employees as independent contractors. There is a common misconception that a worker who signs an independent contractor agreement is indeed a contractor. However, independent contractor status actually depends on the extent of control that the company exercises over how the work is performed or the means of performing the work. The misclassification of a contractor not only has tax consequences, but also potential ramifications on a company’s liability since a company may be vicariously liable for injuries caused by an employee in the course of work.

Hiring an independent contractor can be a cost-effective alternative to hiring an employee, but it is important for companies to recognize the risks associated with contract work. It may be advisable to have a legal professional draft the contractor agreement and outline the measures that can be taken to minimize the liabilities.

- By Dava Casoni, Annie Lin

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