Most states require all businesses to have workers’ compensation insurance of some sort. But does the same rule apply to 1099 workers?

1099 workers, also known as independent contractors, are usually put in their own separate category from typical W2 employees. With that said, it’s important to address the question of—do business owners who have 1099 employees need workers’ comp? Read on to find out!

Understanding Workers’ Compensation Insurance 

Workers’ compensation coverage protects employers and employees when there is an injury or illness that takes place in the workplace. If an employee gets hurt on the job, this insurance covers their medical costs and pays them a portion of their wages. Additionally, workers’ comp is important for business owners because it protects against lawsuits brought on by employees.

In terms of legal requirements, it’s important to take a look at the guidelines for the specific state you’re operating out of. Generally speaking though, in most states workers’ compensation is a requirement for businesses of all sizes. Some other states allow businesses with a small number of employees to not obtain this coverage. For example, in Florida, companies with 4 or less employees in non-construction industries are exempt from workers compensation requirements.

W-2 vs. 1099 Employees

A W-2 employee, also referred to as a traditional employee, is a formally employed individual working for a company or organization in the United States. These employees work directly under the control of their employer and in turn, their employer withholds taxes from their wages.  W-2 employees make up the majority of America’s workforce. As mentioned above, almost all employers have to provide this type of employee with worker’s compensation insurance. 

On the other hand, 1099 workers actually aren’t considered employees. They are independent or self-employed contractors. Unlike W-2 workers, 1099 workers manage themselves and are responsible for their own taxes. Since they are freelancers and not employees, it’s often believed that workers’ compensation coverage is not required. While this is usually true, it’s not always that straightforward.

Do 1099 Contractors Need Workers Compensation Insurance? 

The simple answer is no. There is no law stating that businesses must provide workers compensation insurance to 1099 workers. Since 1099 workers are self-employed, they’re generally expected to have their own insurance for things like healthcare and liability coverage. With all this said, in certain scenarios businesses are still held liable for injuries sustained by a 1099 contractor. 

One situation that’s more common than you’d think is the misclassification of contractors. For example, if a company classifies someone as a 1099 contractor who isn’t, they will be held liable if there is a workers’ comp claim. This is not to mention the many other penalties that come along with employee misclassification. Another example where a business could be held liable is when the work agreement lacks a proper contract. In this case, since there isn’t a clear definition of the work agreement, the 1099 contractor may argue that they are effectively working as an employee. While these scenarios are usually few and far between, it’s important to always have work agreements in writing.  Also be sure to look into your state’s and industry’s specific requirements. 

Protecting Your Business and Contractors 

So we learned that workers compensation insurance usually isn’t required for 1099 contractors. With that said, there are some things that you should do to avoid the risks associated these workers:

1. Make sure they have their own insurance coverage: As briefly mentioned, since 1099 workers are employed by themselves, they should have their own insurance. Liability coverage is the most important thing to look for.. Many business owners require their 1099 contractors to have liability coverage. If this is the case for your operation, be sure to let them know ahead of time.
2. Explore contractor-specific coverage options: For an extra layer of protection, you might consider exploring insurance plans that are designed specifically with 1099 contractors in mind. While the best practice is for these workers to have their own coverage, providing contractor-specialized coverage goes the extra mile in protecting yourself and the worker. 
3. Have a clear definition of the relationship between yourself and your contractor(s): Before the rubber hits the road, it’s crucial to define the workers’ relationship to you. It’s a good idea to have this in writing in case anyone ever tries to deny your claim. Additionally, make sure that you state that the contractor is not eligible for the same benefits as a W-2 worker and that they must provide their own insurance coverage. 

The Main Takeaway 

Mistakes in the workplace can be costly, especially if you don’t have the proper insurance policy in place. While most businesses have to provide their employees with workers’ compensation coverage, we’ve learned that 1099 contractors are completely different. With that said, even if it’s not a requirement to provide these people with workers’ comp, it’s crucial to understand the risk and to take the proper precautions. 

When it’s all said and done, issues involving 1099 contractors and claims are usually avoidable with clear communication, and accurate record keeping. Additionally, we suggest that you always require any 1099 worker to show proof of their own insurance coverage before starting a job. If you’re ever even a little bit unsure about coverage details, reach out to an insurance professional, like the experts we have at EZ.Insure. 

If you’d like to learn more about workers compensation, or other essential business coverages, EZ.Insure is the place for you. Our simple platform lays out all the best local insurance options, making it EZ to choose the best coverage.

Our blog also has a ton of informational articles aimed at helping business owners and individuals stay protected. To learn more, just enter your ZIP code at the top of the page, or call us at 888-694-0047.