If you run a small construction business, you probably don't do every job by yourself. You might hire someone for roofing, concrete, electrical work, cleanup, painting, or other parts of a project.
You may call these people subcontractors, independent contractors, or just "extra help."
But here's something important to know: Calling someone a subcontractor doesn't always make them one.
For workers' compensation insurance, the state and your insurance company may look at how the person actually works for you. In some cases, a person you thought was a subcontractor may be treated more like an employee.
That can affect both your workers' comp coverage and your insurance costs.
Why This Matters to a Small Contractor
Imagine you own a small remodeling company.
You have two regular employees on payroll. Then you get a big job and hire Joe to help for three weeks. You pay Joe by check and give him a 1099 instead of putting him on payroll.
Does that automatically mean Joe is an independent contractor?
Not necessarily.
If you tell Joe when to show up, tell him exactly what to do, provide most of his tools, and supervise his work every day, he may look more like an employee than an independent business owner.
If Joe gets hurt on the job, workers' compensation laws may treat him differently than you expected.
His pay could also be counted when your workers' comp policy is audited.
Employees vs. Independent Contractors
A regular employee is usually easy to identify.
You hire the person, put them on payroll, withhold taxes, give them a W-2, and direct their work. Workers' compensation insurance generally covers employees who are injured or become ill because of their work.
Independent contractors are different.
A true independent contractor usually operates their own business. They decide how to perform their work, provide their own equipment, work for other customers, send you an invoice, and handle their own business expenses and insurance.
But no single rule applies everywhere.
Workers' compensation laws are different from state to state. A 1099 alone does not prove someone is an independent contractor for workers' comp purposes.
What About Contract Labor?
This is where small contractors can get into trouble.
Suppose you hire someone as "contract labor," but that person works right beside your regular employees.
You tell them where to be each morning. You provide the equipment. You supervise them. They don't really operate their own business.
That person may be considered an employee for workers' compensation purposes, even if you pay them with a 1099.
If their pay wasn't included when your workers' comp policy started, you may have to add it during your insurance audit. That can mean an additional premium bill at the end of the policy year.
The important question isn't simply how you paid the worker.
The bigger question is what was your actual working relationship?
What Makes Someone an Independent Contractor?
The exact rules depend on your state, but several factors may show that someone is running a separate business.
For example, an independent contractor may:
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Control how they perform their work.
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Own their tools and equipment.
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Work for several different customers.
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Send invoices for completed jobs.
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Operate an established business.
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Carry their own business insurance.
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Hire and pay their own employees.
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Perform a specialized service instead of simply acting as another member of your crew.
No single item on this list settles the question in every state.
That's why you shouldn't rely only on whether someone receives a W-2 or 1099.
The Certificate of Insurance Matters
Here's one of the easiest habits a small contractor can develop:
Before a subcontractor starts working, ask for a current Certificate of Insurance.
The certificate should show the insurance company, policy information, and coverage dates. When workers' compensation coverage is required, make sure the certificate shows that coverage.
Don't wait until the end of the year to collect certificates.
Your insurance company may audit you after your workers' comp policy ends. The auditor will review payroll and may also review payments made to subcontractors and other workers.
If you paid a subcontractor $30,000 but can't show that the subcontractor carried the required workers' comp insurance, some or all of that payment may be considered when your final premium is calculated, depending on the circumstances and your state's rules.
That can turn into an expensive surprise.
What If My Subcontractor Has Employees?
This is especially important.
Let's say you hire a small roofing company. The owner brings three employees to your jobsite.
Make sure that roofing company has the workers' compensation coverage required for its employees.
Don't assume they're covered just because the company has an LLC, a business card, or a truck with its name on the side.
Ask for proof of insurance.
If a subcontractor doesn't carry required coverage, you could face insurance or legal problems if one of their workers gets hurt. How responsibility is handled depends on your state's workers' compensation laws and the facts of the situation.
What About Accountants, Cleaning Companies, and Other Services?
Not every company you hire is treated like one of your workers.
Your accountant, attorney, cleaning company, equipment repair shop, and other outside businesses generally operate as separate businesses and are responsible for their own employees and insurance.
That's different from hiring an individual who works beside your crew every day under your supervision.
Again, the actual relationship matters.
A Simple Rule for Small Contractors
Before someone starts working for you, figure out what they are.
Are they your employee?
Are they temporary or contract labor working under your direction?
Or are they a truly independent business you've hired to complete part of the job?
Then get the paperwork to back it up.
For subcontractors, keep contracts, invoices, and current Certificates of Insurance on file. If they have employees, verify that they have the workers' compensation coverage required in your state.
And don't wait until your annual insurance audit to sort everything out.
The Bottom Line
Hiring subcontractors can help a small construction company take on bigger jobs without adding permanent employees. But calling someone a "subcontractor" doesn't automatically make them an independent contractor.
Workers' compensation rules look at the real working relationship, and those rules vary by state.
Before hiring outside labor:
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Find out how your state defines an employee and an independent contractor.
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Decide whether the worker is truly operating an independent business.
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Get a Certificate of Insurance before work begins.
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Keep certificates, contracts, and invoices organized.
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Talk with your insurance agent if you're unsure how to handle a worker.
A few minutes spent checking the paperwork before the job starts can help prevent a much bigger headache when your workers' comp audit arrives.
Important: Workers' compensation laws vary by state. This information is meant as a general guide for small business owners and contractors. It is not legal advice. Talk with your insurance professional or attorney about the rules that apply to your business.