By law, most states require businesses to have a workers’ comp policy if they have one or more employees. But what about workers’ comp for contractors? If a contractor hires other subcontractors for a job, do they all need to be protected by a policy? And what can go wrong when hiring a contractor without workers’ comp insurance?
We’ll answer all that and more. Before we do, let’s make sure we’re all on the same page when it comes to workers’ comp insurance in general.
What is workers’ compensation insurance?
Workers’ compensation insurance is a type of policy that pays for expenses related to a workplace injury incurred by an employee. From medical expenses to lost wages, it helps cover the medical bills and “downtime” associated with a workplace incident.
Once a small business hires its first employee, almost every state (except Texas) requires that the company purchase a workers’ compensation policy. And, when an employee decides to receive the benefits of workers’ comp, it’s (typically) within the agreement that they won’t sue the company.
Thus, it’s mutually beneficial for both parties.
Do contractors need workers’ compensation insurance?
A self-employed contractor (who either does or doesn’t hire other subcontractors), is only mandated to have a workers’ comp policy if the state demands it. In most cases, this is a grey area. Technically, subcontractors are not employees and if a contractor is the only employee of their Sole Proprietorship, they aren’t legally required to have a policy in place.
With that being said, contractors purchase workers’ compensation insurance for multiple reasons:
1. To protect themselves and their subcontractors – Handymen and contractors work in a risky industry. Given the labor, materials, and craft, accidents can and do happen. A contractor might take out insurance coverage just to ensure that they and their crew are covered.
2. Laws demand it – If a state has a specific law for contractors, they might be required to have a workers’ comp policy in place (especially for bigger jobs).
3. The contract demands it – A homeowner might want to avoid liability should a worker suffer an injury on their property. Thus, they’d then require the contractor to purchase workers’ comp as part of their overall contract.
Additionally, contractors typically incorporate a few other insurance coverage policies too. These include but are not limited to:
At the end of the day, a contractor might take out workers’ compensation just to act in good faith for their 1099 employees.
Avoiding a lawsuit: If a 1099 employee suffered an injury and was able to prove that it was due to the contractor’s negligence, they could file a hefty claim. Although somewhat rare, contractors might instate a workers’ compensation policy just to avoid the chance of this happening.
Hiring a contractor without workers’ comp insurance
In the same way that a contractor faces risks, so does the person that hires them. Sometimes, the appeal of hiring a contractor who doesn’t pay workers’ comp premiums is in the bid size—typically, they’re cheaper.
Yet, if a “workplace injury” occurs at your residence or property (and it’s directly related to your negligence), then either the contractor or the workers can file a lawsuit. This is where it gets complicated. Even if it’s not required by the state, the absence of a policy can create a host of other problems.
For instance, say a worker is injured. Who’s at fault? The contractor that was responsible for the worker? Or the client (property owner) that hired the contractor? This is why many property owners ensure there’s a workers’ comp policy in place.
Important note: Contractors vs. employees
Depending on the state you live or work in, there are certain criteria that need to be met if someone is a 1099 contractor. The takeaway? If you’re a contractor, be sure that those you’re employing don’t fall within the “employee” bucket, or else you might find yourself liable should you not have workers’ comp (because the subcontractor could prove that their duties mirrored that of an employee).
For instance, the IRS explains the Common Law Rules as follows.1 Evidence that supports a degree of control or independence is broken into three different categories:
• Behavioral: Does the company control what the worker does (while at work) and how they do their job (the way they provide their services)?
• Financial: Does the company control the business facets of the worker’s job?
• Type of relationship: Are the company and worker bound by written contracts? Is the work rendered a key part of the business?
As a contractor, it’s important that your subcontractors don’t fall into the “employee” criteria, or else you must legally take out a workers’ compensation policy.
Protect your business: Contractor liability insurance
While workers’ comp covers employees in the case of a workplace injury, is your business protected if the injury occurs to a third party? How about property damage? Advertising injury?
Workers’ comp doesn’t protect you in the above scenarios. To fully protect your general contracting business, it’s recommended you also have contractor insurance. This type of general liability insurance protects contractors in the case of third-party claims of:
• Bodily injury
• Personal injury
• Advertising injury
• Property damage
At Thimble, we understand that you work on a project-to-project basis, so we’ve designed our insurance to work when you do. Choose a policy that goes by the hour, day, or month, and never pay for insurance when you don’t need to. Additionally, you can generate as many Certificates of Insurance and add as many Additional Insureds as you’d like (at no additional charge). You can go from zero protection against liability to being covered in less than 60 seconds.
While you’re constantly protecting your workers, is anyone looking out for you? Being your own boss is part of being a contractor. Raise the roof with Thimble’s Contractor Insurance to protect your business from liability.
Workers comp for contractors: Do you need it?
• Whether you’re legally required to obtain it, or if you’re hiring a contractor that doesn’t have a policy in place, every construction project involves a degree of risk. Ensuring your workers are protected and liability is accounted for is paramount. (You want your risk protection to be concrete, not putty.)