As a business owner, choosing between hiring full-time employees or engaging contractors is often about flexibility, cost, and access to specialist skills. Contractors can be a smart solution, but many businesses don’t realise that this decision can significantly impact their insurance cover, legal obligations, and risk exposure.
Before engaging contractors or external workers, it’s critical to understand how this affects your insurance and to have a conversation with your insurance adviser about your plans.
Why Businesses Use Contractors
Hiring individual contractors can:
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Be more cost-effective than employing full-time staff
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Fill short-term skill or knowledge gaps
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Allow flexibility for project-based work
However, contractors also introduce additional risks that must be managed properly.
What Is the Risk?
When you engage a contractor, you are delegating tasks and responsibilities, but not necessarily the risk.
In some Australian states and territories, contractors can be deemed to be employees for insurance and workers’ compensation purposes. This means:
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If a contractor is injured, you may be held responsible
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If a contractor causes loss, damage, or injury, your business may be liable
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Many insurance policies exclude injuries to contractors or damage caused by them unless specifically declared
Relying solely on a contractor to hold their own Professional Indemnity or Public Liability insurance is rarely sufficient. Their cover limits may be inadequate, or exclusions may apply – leaving your business exposed to significant uninsured losses.
Duty of Care Still Applies
If you engage contractors or external workers, you are likely to have a legal and statutory duty of care toward them.
This duty of care includes:
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Providing a safe working environment
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Ensuring contractors are competent for the work they perform
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Confirming appropriate insurances are in place
One of the best ways to manage this is by implementing a contractor management system.
Managing the Risk Properly
1. Contractor Management System
A contractor management system documents the procedures you follow when engaging contractors or external workers. It should include:
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Contractor selection criteria
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Induction and supervision processes
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Safety procedures and site requirements
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Compliance with legislative and industry standards
Free checklists, including inductions, toolbox talks, risk assessments, and competency requirements, are available from your State or Territory WorkCover authority.
2. Reviewing Your Insurance Cover
Engaging contractors often requires changes to your insurance program. This should always be discussed with your insurance adviser.
Depending on your situation, you may need to consider:
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Workers’ compensation cover for contractors
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Extending Professional Indemnity insurance to cover contractor errors
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Public Liability worker-to-worker extensions
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Management Liability insurance to protect directors, officers, and managers
Management Liability is particularly important, as it can provide personal protection for decision-makers if legal action, fines, or penalties arise from contractor-related incidents.
The Cost of Getting It Wrong
Failing to have the right workers’ compensation cover for contractors can be extremely costly.
A business may be liable for:
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Full medical expenses
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Lump sum compensation for permanent injury
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Legal costs
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Fines and penalties, with managers potentially personally liable
These outcomes are often completely preventable with the right advice and insurance structure in place.
Get the Right Advice Before You Engage Contractors
Most businesses use contractors at some point, but very few fully understand the insurance implications.
Your insurance adviser can:
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Help you assess the risks of engaging contractors
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Identify gaps in your current cover
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Recommend updates or additional policies
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Work with other professionals to strengthen your contractor management systems
Talk to Arbor Insurance
At Arbor Insurance, we work with business owners every day to make sure growth decisions, like engaging contractors, don’t unintentionally create uninsured risk.
Contact us today to review your contractor arrangements and ensure your business, your people, and your decision-makers are properly protected.