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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’ comp insurance?
A self-employed contractor (who either does or doesn’t hire other subcontractors), typically does not need to carry workers’ compensation. With that being said, contractors purchase workers’ compensation insurance for multiple reasons:
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.
For a job that requires employees – If a job becomes bigger than one contractor to manage, they might need to hire employees. In this case (dependent on the state), it’s likely that they’ll be legally required to purchase workers’ compensation. Additionally, the client is probably going to want to ensure that their contractor and crew are covered, being that it’s a great risk management tool and accidents do happen on the job.
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).
Additionally, contractors typically opt for a few other insurance coverage policies too. These include but are not limited to:
General liability insurance
Professional liability insurance
Commercial property insurance
Avoiding a lawsuit: If a contractor’s employees (temporary or full-time) sustain a workplace injury, then workers’ compensation typically mitigates any chance of a lawsuit and protects the contractor from having to pay hefty costs associated with the accident.
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.
A note to contractors when hiring
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?
While the above is a federal rule and not used in all cases, it’s something to note if you plan to continue working with other contractors and not taking out workers’ compensation insurance. As a good rule of thumb:
If the person is a W-2 employee, depending on your state, you might be legally required to take out a workers’ compensation insurance policy
If the person is a 1099 employee, a workplace injury claim would typically be covered by a commercial general liability policy… but (dependent on the state) if they’re classified the same as a W2 employee, you might need workers’ comp.
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:
Personal and advertising injury
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. Getting Thimble’s Contractor Insurance to protect your business from liability is part of being a true boss.
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.)