Are Subcontractors Covered under Work Comp?

One of the most common questions asked by employers and independent contractors is: 

Are subcontractors covered under workers' compensation?

The answer to this question isn’t as straightforward as it sounds, because factors like state requirements for workers' comp coverage and the nature of a subcontractor’s work need to be taken into account for a clear, decisive answer. 

Having a broad understanding of what type of coverage your subcontractors carry, and other relevant information, can help you avoid lawsuits and penalties for non-compliance during your annual workers’ compensation audit.

Table of Contents

In this article, will look at the most common questions asked about workers' comp insurance and subcontractors, including:

Are subcontractors covered under workers' compensation?
Why do employers need to have workers’ compensation insurance?
When is having workers' compensation insurance not required?
If workers’ compensation does not cover subcontractors, what will?

For those who hire subcontractors or work in that capacity, speaking with an independent insurance agent is a smart decision. Independent insurance agents can offer unbiased advice on the most comprehensive policies, state limits and requirements, and more. Best of all, their expert guidance can apply to the nature of your specific business, not a one-size-fits-all solution offered by an insurer’s agents. 

Are subcontractors covered under workers' compensation?

In most cases, subcontractors are not required to be covered by workers’ compensation insurance by employers. Subcontractors are classified as business entities independent of your company/organization, which means that they are not your employees. Because of this, employers typically do not need to carry workers' compensation insurance for subcontractors.

Instead, subcontractors may be required to carry workers’ compensation by contractual obligations for those who employ them with the intent to reduce possible liability issues and potential lawsuits. Employers can verify a subcontractor's workers' compensation insurance by having them provide a certificate of insurance. This certificate of insurance lists important information, such as:

• Policy numbers
• Coverage amounts
• Coverage periods

Furthermore, if an independent contractor does hire their own employees, they might be responsible for carrying workers' compensation insurance depending on the state, nature of the work, and other factors. 

Determining Whether a Subcontractor Is Considered an Employee

Because workers' compensation programs are mandated and managed at the state level across the US, the defined rules differ in regard to when coverage is applicable to subcontractors and what defines a subcontractor vs. an employee. One notable exception to requiring subcontractors or employers to maintain workers' compensation coverage for on-the-job injuries  is Texas. 

Other states have requirements related to the number of employees at your company, how they’re defined as subcontractors by the nature of their work, and other criteria. Also, bear in mind that your state and the IRS may have different criteria for establishing whether a subcontractor can be considered an independent contractor vs. an employee. Even if subcontractors qualify as independent contractors for tax purposes, they might still be considered employees by state standards.

Why do employers need to have workers’ compensation insurance?

The reasoning behind having workers' compensation insurance is to reduce the potential economic factors that may affect a worker's livelihood and for the company. Without workers' compensation insurance, businesses can be at great risk ofbeing sued for large sums of money, with large legal fees and settlement amounts that can result in bankruptcy or significant financial burdens. 

Penalties for failure to adhere to state guidelines for workers’ compensation can be steep and vary according to where the offense occurred. Here are a few state examples:

• In California, failure to have workers' comp is a misdemeanor, and is punishable by imprisonment of up to one year in county jail and/or fines of not less than $10,000.
• In Georgia, failure to have workers' comp is a misdemeanor, with civil penalties that could be $500 to $5,000 per occurrence of a violation. 
• In Colorado, failure to carry workers’ compensation insurance involves a penalty of up to $250 for every day that the employer fails or has failed to keep the insurance, with a maximum of $500 per day for subsequent violations. 

If you need more information about how your state defines its requirements for workers’ compensation insurance, contact an independent insurance agent. These agents can help you decide whether to participate in state programs , work with private insurers, or whether you are required to carry workers' comp coverage at all. 

When is having workers' compensation insurance not required?

State laws vary widely, but you may not be required to provide or carry workers' comp insurance under several circumstances:

• Sole proprietorship: Many states require businesses that have two or more employees to participate in the state’s workers' comp program. For sole proprietors, this means that they can operate without paying workers' comp through state programs.
• Independent contractors: Because independent contractors work for themselves as a type of separate business entity, employers are usually only obligated to provide workers' comp insurance under contractual obligations. In general, most businesses write a workers' compensation insurance requirement into the contract. This means all subcontractors must maintain their own valid workers' compensation insurance. For employers, this means that they are responsible for ensuring that each subcontractor carries workers' compensation insurance within state minimums. 
• Federal employees: Those who work in most federal jobs are not covered by state-based workers' compensation insurance. Instead, the Federal Employees' Compensation Act, or FECA, is responsible for providing federal workers with a specific type of coverage that mirrors most kinds of state-based workers' comp programs. Furthermore, there are occupation-specific workers' compensation programs, such as the Division of Coal Mine Workers' Compensation (or Federal Black Lung Program), which is designed to administer injured workers' claims filed under the Black Lung Benefits Act.
• State-specific laws: Depending on which state you do business in, there may be several alternatives to participating in that state’s workers' comp program. Some states require workers' comp only above a certain number of employees. 

For example, Alabama requires workers' comp insurance when five or more employees work at a business. Colorado doesn’t require workers' compensation for realtors and construction work under $2,000 per calendar year. By contrast, Texas does not require employers to offer workers' compensation through the state’s workers' comp programs. However, employers that opt out are required to follow other guidelines, such as registering with the state as a non-participant, self-insuring, and so forth. 

However, it is still recommended that these types of individuals have some form of insurance coverage for their workers. An independent insurance agent can help familiarize you with available policies that can provide for employees if they are injured or acquire a work-related illness, or for their loved ones if they become deceased. 

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If workers’ compensation does not cover subcontractors, what will?

If you’re worried about having sufficient insurance in the event that you are injured as a subcontractor, speak with an independent insurance agent today. These agents can take into account your unique situation, including estate planning, retirement, and investment strategies — all designed to optimize your financial future. 

A subcontractor can have disability insurance in place to reimburse them if they suffer a work-related accident. Or an agent can recommend an annuity with a death benefit to gain tax-deferment and regular income for your loved ones should you pass away. 

Subcontractors should also have all types of insurance that affect job-related risks. A commercial automobile insurance policy can protect you in the event that you become disabled in an accident during working hours. Other types of insurance include liability coverage, umbrella insurance, property insurance, and more.