Household employees – people that you hire to work in your home – pose a unique risk. People that you hire to help you manage your personal life may expose you to legal liability. And your personal insurance isn’t going to protect you.
Defining Household Employees
Let’s make sure we’re on the same page here. When I say “household employees,” I’m referring to people that you hire directly to perform work on your behalf. This might mean a home health aide, a live-in nanny or Au Pair, a driver, a chef and/or service staff, or grounds maintenance staff. It’s also common to refer to these employees as “domestic employees.”
Most of the time, you’re paying these employees on a W-2 basis. However, there are occasions where paying these employees with a 1099 may still qualify them as employees.
What are Your Obligations?
Workers Comp
If you have an employee, almost every state requires that you obtain a Workers Compensation policy.
Workers Comp is a type of insurance policy that provides financial reimbursement for injuries or illnesses sustained by an employee, if the injury or illness is work-related. Workers Comp also provides the employer with liability protection in case the employee sues the employer for negligence in contributing to an injury or illness.
Personal Auto Insurance
If you have someone (whether an employee or not) who regularly drives any of your personal vehicles, they should be added to your car insurance and umbrella policies as a driver.
From an insurance perspective – these are the only things that are required. If you haven’t yet, it’s also important to discuss your employees with your accountant. You’ll want to make sure taxes are being set up correctly from the start.
What Other Risk Exposures do You Have?
Obtaining Workers Comp coverage and adding drivers to your car insurance policy are requirements, they also provide you with important liability coverage to protect your assets. While there is no legal requirement to obtain additional coverage, there are other risks that you have exposure to that could result in financial loss if left uncovered.
Excess Liability for Workers Compensation
There are two parts to Workers Compensation insurance: the Workers Comp part which pays for medical expenses a portion of an employee’s lost wages; and Employer’s Liability which is the liability protection for the employer in the case the employee sues the employer.
First, I recommend maintaining a liability limit of $1,000,000 on the Employer’s Liability section. It costs very little for this upgrade and provides a much better limit of coverage.
Second, if you have a personal umbrella policy, it may not provide coverage in excess of a Workers Comp policy. Explore your options to make sure you have the right coverage to keep your assets from being exposed in a lawsuit.
Employment Practices Liability
This is a different coverage from the Employer’s Liability we reviewed in the section above. Employment Practices Liability is a type of liability insurance that protects you from lawsuits that come from managing employees.
Common examples include sexual harassment, discrimination, or wrongful termination.
These are significant risks for a few reasons:
- If you have household employees, they’ll know that you have money and this makes you a more likely target of a law suit.
- Hiring household employees has the possibility to be a less formal arrangement – without the proper arrangements or contracts in place, courts are almost always going to land on the employee’s side if there’s a dispute.
- Defending a lawsuit – even one without merit – can be costly and time consuming.
There are a few ways you can manage the risks involved with having employees. These include:
- Background Checks on all employees
- MVRs annually on anyone who is driving a vehicle
- Having an Employee Manual, and having it signed off on by the employee
- Having formal job descriptions
- Employment contracts
You can also obtain an insurance policy specific to covering these risks.
Privacy Liability
If you have one or two household employees, there is limited exposure here. However, for a household with many employees this can be a significant exposure. As an employer, you have access to the personal information of your employees. If this information is stolen from you – whether from actual physical theft or a breach of your computer network – you may be liable for damages.
Cyber Insurance policies can protect you from this type of exposure. Additional protections include keeping these records in a locked and safe place and having good home network security.
Who Qualifies as an Employee?
If you are paying someone directly and they receive a W-2 from you, they are your employee. This one is pretty straight-forward and you probably already know it.
If you are paying someone and they receive a 1099 from you, it can become a little confusing. Every situation is different, but here’s a good way to look at it:
- If you are paying someone through a third party company (for example, if you pay a maid service to some clean your house weekly) there is no employer-employee relationship. There is still potential legal exposure here and I’d recommend reading this article.
- If you are paying an individual person with a 1099, it’s possible that they could be considered an employee. Here are some questions to ask:
- Does this person have a business entity formed?
- (note that it’s possible that it could be in their own personal name as a sole proprietorship)
- Does this person carry their own insurance?
- Look for both General Liability and Workers Compensation coverage
- Does this person have the ability to make their own schedule, use their own tools/equipment/supplies, and perform their work who they see fit?
- If so, they’re probably not going to be an employee.
- If not, they are probably going to be considered an employee.
- Does this person have a business entity formed?
Every Situation is Unique
If you have household employees, it’s important to talk about the risks you have. You may decide that the risks are minimal and you’re happy to self-insure or retain the risk yourself, or you may decide paying a relatively small premium is worth the peace of mind that comes with knowing you’re assets are protected.
The important thing is to talk about it – risk doesn’t fail to exist simply because we ignore it or are unaware of it.
