Many businesses use subcontractors and independent contractors to handle overflow work, specialty tasks or seasonal demand. It is a normal way to run a contracting, trucking or service business. But it creates a workers' compensation question that catches employers off guard, usually at audit time: if a subcontractor doesn't have its own workers' comp, who covers its workers?
In many cases, the answer can be you. This page explains why, what insurers look for at audit, and the practical steps that help keep uninsured subcontractor costs off your policy.
Workers' compensation laws in many states can make a hiring contractor responsible for injuries to an uninsured subcontractor's workers. Insurers price for that risk. When your policy is audited, the auditor typically asks for a list of subcontractors you paid and proof that each one carried its own workers' comp during the time it worked for you.
If you can't show that proof, the auditor may treat the amount you paid that subcontractor, or a portion of it, as payroll on your policy, rated under the class code for the work performed. For a business that relies on subcontractors, that can mean a significant additional premium bill after the policy term ends.
Rules differ by state and by insurer, so the details matter. But the basic pattern of "no certificate, so it counts as payroll" is common.
A separate issue is worker classification. Calling someone a 1099 independent contractor doesn't make them one under workers' compensation law. States apply their own tests, which often look at who controls how the work is done, whether the work is part of your regular business, and whether the worker runs an independent business. California, for example, applies the "ABC test" in many situations.
If a worker is legally your employee, they generally need to be covered by your workers' comp, whatever the paperwork says. Misclassification can lead to audit charges, penalties and uncovered claims. If you're unsure how a worker should be classified, talk with an employment attorney or your state's labor agency. We can help with the insurance side.
1. Collect a certificate of insurance before work starts. Ask every subcontractor for a current certificate showing workers' compensation coverage, and general liability if your contracts require it. Make sure the certificate covers the dates the subcontractor works for you.
2. Track expiration dates. A certificate that expired halfway through the job may leave a gap. Request renewal certificates as policies roll over.
3. Use written subcontract agreements. Agreements should require the subcontractor to carry workers' comp and other coverages, and to provide certificates. Many contractors also ask to be named as additional insured on the subcontractor's liability policy and to receive a waiver of subrogation.
4. Keep records organized for audit. For each subcontractor, keep the contract, certificates, invoices and amounts paid in one place. Auditors usually ask for all of it.
5. Be careful with "ghost" or owner-only policies. Some subcontractors carry a minimum workers' comp policy that excludes the owner and covers no employees. Whether that's acceptable depends on your state, your insurer and the subcontractor's actual workforce. Ask your agent before you rely on one.
6. Review your estimated payroll at renewal. If you expect to use uninsured labor, or to bring work in house, tell your agent so your estimate reflects it and the audit is less of a surprise.
In many states, a hiring contractor can be responsible for injuries to an uninsured subcontractor's workers. Requiring subcontractors to carry their own workers' comp, and keeping their certificates, is the usual way to manage that.
The auditor may count what you paid that subcontractor, or part of it, as payroll on your policy and charge premium for it under the applicable class code.
No. States use their own tests for workers' comp purposes. A worker paid on a 1099 can still be considered an employee.
It should show active workers' compensation coverage for the dates the subcontractor worked for you, with the insurer, policy number and policy period. Your contract may require more, such as GL limits and additional insured status.
Subcontractors can request their own workers' comp quote from WCFL Insurance Services. Availability depends on the state, the type of work and insurer underwriting. In some states, coverage is provided through the state fund.
Use subcontractors or 1099 workers? Let's review how your policy and payroll estimate handle them before your next audit.
WCFL Insurance Services is an independent insurance agency (CA License #6002332), not an insurance company. Quotes and coverage are subject to insurer underwriting, and requirements vary by state. This page is general information, not legal advice; the policy governs coverage.