By Dan Burden, content specialist, AgMRC, Iowa State University, djburden@iastate.edu.

Developed March 2009.
 

Whether it is hiring staff for a rural wedding, hiring helpers to staff your Halloween haunted forest or bringing in guides and bird dogs for your hunting preserve clients, you should be aware of the differences between employees and independent contractors. For farm or ranch bed and breakfast businesses, hunting preserves and nature tourism operations, this is an important question. Temporary employee status has important implications that raise several rather thorny issues. These include: taxes, workers compensation and workers-compensation insurance claims, general liability implications and general-liability insurance issues.

Let’s look at the basic issue. Who is an employee? A good way to define this and get a handle on what level of decision-making is implied by their employment status. Essentially, anyone who performs a service to you under your direction or supervision is viewed as an employee; this means that you control what they do and how they should execute the task. This will be carried over to the setting of their work hours, training and you as employer having immediate power to hire and fire them.

Good employees are an almost priceless asset, but bad employees are a drain on your time and monetary resources and a potential source of an almost unlimited number of problems. There is one undeniable disadvantage of having employees, good or bad, and this is that there are unavoidable expenses related to them. If you have employees, you must pay various taxes, and in some cases, provide clothing and equipment and perhaps medical and dental coverage. At the very least, this means that you must withhold and pay Social Security and Medicare taxes, withhold federal and perhaps state income taxes, and pay unemployment tax on all wages paid to the employee.

Some employers try to get around the expense of having employees by hiring key services and not-so-critical staff as independent contractors. This can be an efficient, cost-effective business strategy, but confusing an employee with a contractor can be a mistake that can create serious insurance coverage, liability and other problems. It pays to take some time to carefully consider the role played by these individuals, their overall contributions and importance to your business, and what and where real value is within your business to you and your customers. Consider how potential cost-saving strategies impact long-term business performance. It may not be in your best interest to unnecessarily pay taxes and expend money or other expenses on a person if they are comfortable with providing a service as an independent contractor. However, if you incorrectly classify an employee as an independent contractor, that mistake may make you liable for employment taxes and additional penalties later on down the road or potentially expose you to otherwise avoidable legal action.

So, it is best to figure out who can be classified as an independent contractor and who is clearly an employee. A really good test is to ask yourself to what extent you, the employer, have the means, methods and the right and ability to control or direct the outcome of the work undertaken by the individual. This is what the Internal Revenue Service, judges, lawyers or juries will look at to test the degree to which owner/management controls the individual. The key here is “control of worker process and schedule.” 

For example, let’s consider a rather simple situation where an individual on a ranch is tasked with taking hunters on horseback into the backcountry, guiding the hunt, taking care of their needs while in the bush and returning them safely to the ranch office on a specific date. This individual obviously is operating as an independent contractor. The contractor is in complete control of how tasks will be accomplished and the event timeline while in the field with the ranch’s clients. In contrast, a person coming onto the ranch to provide housekeeping and cooking services in the ranch-house guest facilities for paying guests who are hunting on the ranch would be classified as an employee. This individual is responding to the schedule, decision making and immediate needs and oversight of the owner/manager.

Keeping with our on-ranch hunting party example, it is not unusual for licensed and bonded professional outfitters to have their own logistics staff, as well as to subcontract housekeeping, camp support, wrangling and other services to part-time employees or other independent contractors. In their contractual arrangement with the owner/managers of the ranch, the primary outfitter may provide any number of services to the guests, including providing off-site lodging, transportation in the field or to air connections, wranglers for horse-back transportation and camp services, game care and trophy preparation and other duties.

The ranch ownership and personnel do not have to be involved with any of this. In this case, working with a qualified professional independent contractor is a convenient and cost-effective arrangement for the ranch, the contractor and their employees and subcontractors and the ranch’s guests. First and foremost, the outdoor business venture, like many other business models, hinges on the perception of quality and attention to detail experienced by the client (guest). Hiring a professional with which to consult and for delivery of key services may well be the best business strategy and most elegantly simplistic business choice for the ranch. The ranch need only respond to the preplanned and perhaps contractual needs of the contractor to ensure that the guest has a quality experience. Obviously, the independent contractor is performing more than one important function and is responsible for a great deal of planning and independent decision making. Also, the contractor is the most immediate, directly responsible party who sees to the needs and ensures the health and safety of the client.

However, it is important to remember that working with an independent contractor does not absolve a landowner of liability. In what the law calls “vicarious liability,” a landowner is responsible for his or her own actions and also for those of people acting on the landowner’s behalf. In other words, you are responsible for the actions of your employees and of independent contractors, like the pack guides in our example. This exposure risk usually is addressed through the contract with the guide service, a liability waiver signed by the visitor and the proper insurance coverage.

A written contract that details the arrangement and clearly addresses liability and tax issues should be in place and reviewed by the owner-manager’s and the independent contractor’s certified public accountants and perhaps their attorneys. The key element of any waiver is the “indemnity by user” clause. This usually is a very specific statement “that the user agrees to indemnify and hold harmless the landowner from any claims made by the user or third parties arising from the use of the land or activities.”

Although contracts and waivers do not absolve you of responsibility for your guest’s health and safety, they are legal documents valid in a court of law. With respect to liability waivers, each state treats them with different legal weight; have yours reviewed by your attorney or insurance provider as a part of your business’ “risk-management assessment” and be sure to include them in your business planning and written business plan.

Liability waivers are common to most “high-risk” outdoor activities (horse-back riding, hunting, canoeing, kayaking, scuba and skin-diving, climbing, sky diving and parasailing) and have an important, often overlooked value of being a “reality check” for your guest. Seeing some of the risks of their activity spelled out before them and defining some of their responsibility for the soundness of their actions should make them a bit more thoughtful and safety conscious. An example of a waiver is provided for your review below; others can be found elsewhere on AgMRC in some of the references noted at the end of this article.

Converse to our hunting-guide independent-contractor example, there are many other types of businesses where guests (clients) are visiting farms and ranches. In most of these businesses, they will be served by an employee acting under the specific instructions, scheduling and oversight provided of the owner-manager or a senior employee. Employer-employee relationships may also be delineated by a written contract for the service or services provided. This is of course a very different relationship than the independent contractor and owner-manager one, and the two should not be confused. Simply because there is a contractual agreement, does not automatically qualify the employee as an independent contractor.

So what are the liability implications? With respect to general liability and liability insurance, it is highly unlikely that your farm or ranch general liability insurance policy probably will not defend against or pay claims on behalf of your independent contractors. This means that if you are classifying your guide, horse wranglers or event staff as independent contractors, and they are deemed to be the cause of an accident and litigation ensues, your policy will not defend them. If they are found liable, they may be left to cover the legal cost of a defense, as well as any damages. The damages would, at the least, be life changing and catastrophic for their business. You too as the farm or ranch-owner may have some exposure. While it is unlikely, you could still end up in civil court and be forced to bear those costs.

It is wise and prudent to have clearly delineated contracts in place with your employees and independent contractors. Have these reviewed by outside reviewers. Your lawyer, certified public accountant and a representative from your insurance provider (probably not the same one who provides your general farm or ranch coverage, but one familiar with your type of agritourism enterprise) would be good to consider.

To minimize your exposure, you should always have a written contract with an indemnity provision in place with your independent contractor. An indemnity provision is roughly defined as a contractual agreement made between different parties to compensate for any damage or loss. It may include any or all of:

• Protection against future loss;
• Legal exemption from liability for damages (e.g., protection, as by insurance, from liabilities or penalties incurred by someone's actions;
• A sum of money paid in compensation for loss or injury (aka “damages”);
• Something paid by way of such compensation; and
• With respect to our greater society, the legal exemption from penalties attaching to unconstitutional or illegal actions, granted to public officers and other persons. For example, as commonly employed in the wording of most insurance policies, “the company will indemnify the policy holder for any losses for which they are insured.”

Also, require the independent contractor to maintain their own liability insurance if they are able to do so and have them submit written proof of this to you, as well as their statement that they are responsible for their worker’s compensation insurance.  Understandably, this is not always possible; in these situations, you need to have your liability policy endorsed to cover your hunting guides as additional “insureds.”
 
When you do this, it is best to consider a specialty insurance provider who understands outdoor and special-event coverage. This is far from some simple umbrella on an existing farm or ranch policy. Find a provider who understands your “exposures” (risks) and is not new to your type of venture. For example, one well-respected national company (hardly a recognized household-insurance ”name” in the business) provides a range of services to the sport-hunting and outdoor-adventure community, clearly states that they understand the risks and coverage needs associated with unique exposures, “like hunting dogs in your care, custody and control; live birds held as stock; outfitters and guides; use of elevated hunting platforms; use of ATVs, tractors and off-road vehicles; trap and skeet ranges; and hunting lease agreements.” 

These specialty insurance firms are usually very helpful in providing and will provide various risk self-assessment tools, sample independent contractor agreements and liability waivers free-of-charge, as part of their support and customer service packages. They also can prove those “special endorsements” so important for coverage for or contracts with independent contractors. For example, if injured while working on your behalf, an independent contractor can bring suit against you, unlike employees that must use workers compensation insurance to remedy their loss. This increases your potential overall liability exposure. Your specialty-coverage insurance firm will be aware of this and have an endorsement in their policy to cover this exposure, can suggest wording for a waver-of-liability provision for your contract with the independent contractor and may have other strategies to mitigate this and other risks.

Many resources are available to agritourism, special-activity and special-event operators. These include national and state tourism and similar trade associations. Sample forms and discussions of employment, insurance and liability issues are available elsewhere on the Internet. They also are available in the pages of many agritourism, small-business-management and risk-management publications, including workbooks, planning guides and document templates available from the Extension services of most major land-grant universities, state and federal agencies and business-support organizations.

How you classify your workers, delineate their employment status (contracts) and their relationship with your guests (waivers); and consider the issues of taxes, workers compensation and workers-compensation insurance claims, general liability implications and general-liability insurance issues may seem like a real headache today but can result in a lot of peace of mind a little later down the road.