Workers comp for subcontractors: who needs it and who pays

Do subcontractors need workers' comp?

A subcontractor is a business like any other. If it has employees, it usually needs its own workers' comp policy under the same state rules that apply to every employer. The number of employees that triggers the rule depends on the state, and many states set a lower number for construction.

A subcontractor who works alone with no employees is often not required to cover themselves. There are exceptions. In Florida construction, a business with even one employee needs coverage, and owners who are corporate officers or LLC members count unless they hold a valid exemption. California requires every licensed roofing (C-39) contractor to carry workers' comp, even with no employees. And even when the law does not require a policy, most general contractors will ask for one, because of the rules below.

Why the general contractor can end up paying

Many states have a statutory employer rule. If a subcontractor has no coverage and one of its workers is hurt on your job, the law can treat you, the hiring contractor, as that worker's employer. Your policy then pays the claim. If you have no policy, you may owe the benefits yourself. Most of these laws let you try to get the money back from the uninsured subcontractor, but that is often hard to collect.

This is why "they are a separate company" does not protect you on its own. What protects you is proof that the subcontractor had its own coverage on the day of the injury.

How states handle it

The basic idea is common, but each state words it differently. A few examples from state law:

• Florida: Statute 440.10 says a contractor must secure coverage for its subcontractors' employees unless the subcontractor already has coverage. The contractor must require the subcontractor to provide evidence of coverage, and a copy of any officer exemption.
• New York: Workers' Compensation Law Section 56 makes a contractor liable for injured employees of a subcontractor doing hazardous work, unless the subcontractor has secured coverage. The contractor can recover what it pays from the subcontractor.
• North Carolina: Under G.S. 97-19, a contractor who sublets work without first getting a certificate of coverage is liable for the subcontractor's injured employees, even if the subcontractor has fewer than three employees. Getting the certificate before the work is sublet protects the contractor for the policy term shown.
• Michigan: MCL 418.171 makes the hiring business liable as if it had employed the workers directly when a contractor has no coverage. The hiring business can sue the contractor to recover, and can require a written agreement to reimburse any loss.
• Massachusetts: Chapter 152, Section 18 has the hiring contractor's insurer pay an uninsured subcontractor's injured workers, and then recover what it paid from the uninsured subcontractor.
• Washington: RCW 51.12.070 makes the business that lets the contract primarily responsible for premiums on the work. A licensed contractor can avoid owing a subcontractor's premiums only if the subcontractor meets every condition in the law, including having an L&I account in good standing that the contractor checks before signing and at least once a year after that.
• Texas: Private employers can usually choose not to carry workers' comp. But a business that contracts with a government entity for a building or construction project must provide coverage for its employees on that project. A general contractor and a subcontractor can also sign DWC Form 081, which makes the general contractor the employer for workers' comp purposes only.
• California: Labor Code 2750.5 and court tests decide employee status in construction subcontracting. The Contractors State License Board suspends a contractor's license if its workers' comp lapses, and work done while suspended counts as unlicensed work.

Uninsured subcontractors at your premium audit

Your workers' comp policy charges premium on the pay of anyone your insurer could have to cover. That includes the workers of an uninsured subcontractor. At the end of the policy year, the auditor will ask for a list of every subcontractor you paid and a certificate of insurance for each one. If a certificate is missing, the auditor may treat part or all of what you paid that subcontractor as your payroll and bill you for it.

State agencies say this plainly. A joint bulletin from Arkansas's workers' comp, insurance, and contractor licensing agencies says premium may be added for any uninsured subcontractor you paid, that a set percentage of the contract payment will be treated as labor, and that you will be presumed to have known about your subcontractors' employees. Our premium audit guide explains how to prepare.

What to collect from every subcontractor

Collect proof before the subcontractor starts work, and again whenever their policy renews. Keep it with the contract and the payment records.

• A current certificate of insurance that lists workers' compensation, not just general liability, sent to you by the subcontractor's insurance agent.
• Policy dates that cover the whole job, and the state where the work happens.
• For a subcontractor with no employees, the state's official exemption or non-coverage document when the state has one. In Florida, a corporate subcontractor whose officer has an exemption must give you a copy of it.
• A check of the state's coverage lookup tool, when one exists. Each state guide on this site links to it under "Check a contractor's coverage."
• A signed contract that requires the subcontractor to keep coverage for the whole job and tell you if it ends.

Exemptions are not a free pass

Many states let a business owner exclude themselves from coverage. That choice covers only the owner. It does not cover anyone the owner hires. Arkansas's bulletin says its Certificate of Non-Coverage is not a waiver of workers' comp liability, and that a person can be an employee on one job even if they run their own business on another.

If a subcontractor shows up with an exemption and a helper, the helper is an employee of someone. If the subcontractor has no policy, that someone may be you.

Is your subcontractor really an independent contractor?

Calling someone a subcontractor or paying them on a 1099 does not decide whether they are your employee. States look at how the work is really done: who controls it, who supplies the tools, how the person is paid, and whether they run a real business of their own. California uses the ABC test for workers' comp for injuries on or after July 1, 2020. New York presumes many construction workers are employees unless strict tests are met. Michigan adds penalties for a business that pressures employees to pose as contractors to avoid coverage.

If a worker fails your state's test, they are your employee, and you need to cover them on your own policy. Our guide to employees and independent contractors covers the tests in more detail.

If you are the subcontractor

Having your own policy is usually cheaper than letting a general contractor's insurer charge you for it. If you work alone and your state allows it, file the official exemption and give a copy to each contractor you work for. Once you hire anyone, even part time, get a policy before they start.

In some states, the general contractor can provide your coverage under a written agreement and take the cost out of what it pays you. Texas uses DWC Form 081 for this. In Florida, a contractor who pays benefits for an uninsured subcontractor's workers can recover the cost from the subcontractor unless they agreed in writing that the contractor would provide coverage. In North Dakota, Ohio, Washington, and Wyoming, you buy coverage from the state fund, not a private insurer.

Quick checklist for general contractors

Before each job:

• Get a current workers' comp certificate or an official exemption from every subcontractor before work starts.
• Check coverage in the state's lookup tool when one exists, and check again when the policy renews.
• Put the coverage requirement in a written contract.
• Do not let uninsured crews start work while you wait for paperwork.
• Keep certificates, contracts, and payment records together for your premium audit.
• Ask your agent how your state treats uninsured subcontractors before you bid on work there.