In a perfect world, people would do their jobs as promised and always be honest and fair. But in the real world, sometimes employees steal from their employers and customers, or they walk away from jobs without completing them. Employers can safeguard their companies' finances and reputations by bonding their employees, that is, purchasing a special type of insurance from a bonding company.
A bonding company protects the employer from losses sustained from unscrupulous or irresponsible employees. Most often used when employees handle funds, are exposed to valuables or work in homes rather than offices, bonded employees can be found in a number of industries, including banking, contracting, personnel agencies, janitorial services and government contracts.
Bonding is sometimes confused with insurance, since both provide a guarantee of sorts, but unlike an insurance company, a bonding company requires collateral. Claims are paid to the customer, not the employer; the business owner is ultimately the one who pays any claims.
Advertisement Article continues below this adWhile in many cases, insurance may simply be purchased by contacting an agent, getting bonded is more involved. An underwriter will need details about your finances and your previous contract history. Employers also need to submit collateral, in the form of an irrevocable letter of credit, certificate of deposit, cashier's check or real property of similar value to the desired coverage.
The Small Business Administration (SBA) guarantees contract bonds offered by certain surety companies. These bonds make it easier for small businesses to win contracts, since the surety company guarantees to the customer that the contracted work will be completed. To be eligible, businesses must qualify according to SBA standards, have a small contract (up to $10 million for federal contracts and up to $6.5 million for non-federal contracts), and meet the surety company's requirements.
Advertisement Article continues below this adThere are several types of surety bonds. A bid bond ensures that the contract bidder will honor the contract if selected. A payment bond guarantees payments to suppliers and subcontractors. A performance bond guarantees a contract will be completed as specified, and an ancillary bond ensures that requirements outside of payment or performance are complete. The SBA collects a fee of 0.6 percent of the contract price to guarantee performance and payment bonds, but charges no fee for bid bonds.
While the SBA guarantees contract bonds, it does not guarantee commercial bonds, which may be required to protect the public from fraud. One example of this is a contractor's license bond, which ensures that a contractor complies with any applicable laws. Another is a bonded car title, which is needed to register a car when the title has been lost or stolen.
Fidelity bonds provide insurance against theft. U.S. law requires that all bank and federal savings association officers and employees be bonded; directors that fail to acquire sufficient coverage may be liable for any losses sustained. Banks often purchase blanket bond insurance. This not only includes fidelity coverage, but also covers losses due to theft from non-employees (on-premises or in transit), forgery and counterfeit currency.
Advertisement Article continues below this adThe Federal Bonding Program is a government program designed to remove barriers to employment for "at-risk job seekers," who otherwise would not be bondable, including ex-offenders (those with an arrest record), ex-addicts, those with bad credit, those who have been dishonorably discharged from the military and low-income individuals who lack job history.
Self-employed individuals are not eligible. Unlike other fidelity bonds, these bonds are free of charge and provide $5,000 worth of coverage for six months. After this period, employees may be bonded through typical commercial insurers. This type of bond only covers loss from theft, forgery, larceny or embezzlement. State Bonding Coordinators may approve a larger bond amount, depending on circumstances.