Workers Compensation with Subcontractors

Subcontractors

Best Practices for Workers’ Compensation Insurance if you have a subcontractor

Do I Need to Provide Workers’ Compensation Insurance for My Subcontractors?

Someone needs to have Workers’ Compensation coverage.

Either your subcontractor carries their own policy, or you may be responsible for including them under yours.

If a subcontractor does not have their own Workers’ Compensation policy or proper exemption documentation, their cost may be added to your Workers’ Compensation audit.

Why This Matters

Workers’ Compensation coverage helps protect your business when work-related injuries happen.

It can also help you avoid:

Unexpected audit charges
Legal or financial penalties
Coverage issues after a claim
Problems caused by missing or incomplete records

The best approach is to collect the right documentation before any subcontractor starts work.

Best Practice: Collect Proof Before Work Begins

Before hiring any subcontractor, ask for one of the following:

A Certificate of Workers’ Compensation Insurance
Proper exemption documentation, if they are not required to carry Workers’ Compensation

Keep these documents on file and make sure they cover the dates the subcontractor worked for you.

A 1099 Does Not Automatically Mean Someone Is a Subcontractor

Issuing a 1099 form does not automatically make someone a subcontractor.

For Workers’ Compensation purposes, insurance companies may look at how the person works for your business, not just how they are paid.

Understanding the difference between an employee and a subcontractor can help you avoid misclassification issues and unexpected charges during your Workers’ Compensation audit.

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Employee

A worker may be considered an employee if they:

Receive regular wages or ongoing pay
Follow a schedule set by your business
Have regular or ongoing work available
Work under your direction or instruction
Use tools or equipment provided by your business

Subcontractor

A worker may be considered a subcontractor if they:

Are paid per project or task
Work under a contract or service agreement
Set their own schedule within project deadlines
Work independently and control how the job is performed
Provide their own tools and equipment

What If My Subcontractor Says They Are Exempt?

If a subcontractor says they are exempt from Workers’ Compensation:

Be careful and do not rely on a verbal explanation
Ask for documentation showing why they are exempt
Keep the documentation on file for your audit
Make sure the documentation applies to the dates they worked for you
Confirm state-specific requirements, since exemption rules can vary

Without proper documentation, you may be responsible for their Workers’ Compensation exposure during your audit.

Pennsylvania Guidance

In Pennsylvania, the documentation you collect may depend on how the subcontractor’s business is structured.

LLCs with No Employees

Many carriers will accept a signed letter on the subcontractor’s letterhead stating that they have no employees and are not required to carry Workers’ Compensation insurance.

The letter should include the dates they worked for you or the dates of your insurance policy period.
Sole Proprietors with No Employees

Many carriers will accept a signed letter on company letterhead stating that the LLC has no employees and is not required to carry Workers’ Compensation insurance.

The letter should include the dates they worked for you or the dates of your insurance policy period.
Corporations

Corporations are generally treated differently.

If a corporation is claiming an exemption, they may need formal exemption approval or documentation from the appropriate state authority.

This documentation should be requested before work begins, because exemption documentation may not be able to be backdated.

What Subs may not need Workers Compensation?

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Preparing for a Smooth Workers’ Compensation Audit

Good records can help prevent surprise charges during your audit.

Keep the following on file:

Subcontractor agreements or contracts
Certificates of Workers’ Compensation Insurance
Exemption documentation, if applicable
Payment records for subcontractors
Payroll records by job type or class code, when applicable

If your business has different types of work- keep payroll records separated by job class, since different types of work may be rated differently on your Workers’ Compensation policy.

For more information, visit our Workers’ Compensation Audit Page to see common documents and records that may be requested during an audit.