Liability Considerations for Owner Builders to Consider When Hiring
Owner builders thinking of tackling their own new home should be very careful when hiring workers. Whether the worker is considered a contractor or an employee has major ramifications for the owner. If the worker is considered to be an employee by law, the owner builder will be required to withhold payroll taxes, carry workman’s compensation and general liability insurance, and comply with other employer requirements. A recent article, Officials Warn Owner-Builders of Liability Issues, makes some very good points that all owner builders should consider prior to starting a major building project. Here are some of the major issues the owner should consider relating to hiring labor.
The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done or how it will be done. So if an owner builder is hiring a painting contractor, they are allowed to give scopes of work and specifications describing how the job should look when completed, but the owner builder doesn’t want to get too involved in the actual work processes. This should be the case anyway as good money is being paid for work to be completed by a professional, so it’s important to let them use their own expertise which should make them more accountable for the outcome.
A worker is an employee when the business has the right to direct and control the worker. Some typical direction given to employees include the following…
- Directing where materials and supplies must be purchased.
- Telling the person what tools to use to complete the work.
- Telling the employee what people to hire.
- Directing the employee on what time to show up on the job.
Keep it Simple
Most owner builders want their role in the building process to be as simple as possible. After all, the owner builder has plenty to do when it comes to scheduling, quality control, and budgeting. So when it comes to hiring, the easiest way to approach the labor portion of the project is to stay away from creating an employee/employer relationship. It may sound like a good idea to hire the kid next door…but it can get owner builders in major trouble with the IRS and/or with injuries on the job site.
State and Local Laws
The laws in the state where the project is being built will dictate exactly what is required when building a home as an owner builder. Anyone thinking of taking on the general contractor role should contact the local building department as well as review state requirements. Some states require owner builders to hire only licensed contractors (i.e. plumbers, electricians…etc.) to prevent problems.
It’s also a good idea to contact an accountant and attorney prior to starting any building projects. A couple key discussion points should include…how to make sure everyone hired for the project is a contractor (not employee) as well as the specific requirements for each of the contractors including the need to carry general liability and workman’s compensation insurance.