Workers Compensation Insurance for 1099 Contractors?

If your 1099 contractor broke his arm on the job, would workers compensation insurance apply?

Yesterday I received an email from a prospect stating “I do not want workers comp coverage as all my employees are part time 1099 contractors only working 5-10 hours per week.”

His next email: “Ok, gotcha. Can you get workers comp quotes too?”

What did I say that changed his mind? And why should you consider workers compensation insurance for your 1099 contractors?

Workers Compensation: More Than Insurance

Worker compensation is more than insurance. Think of it as a mini-legal system with its own rules. Rules designed to protect workers.

Before workers compensation laws were passed, workers injured on the job had to sue employers under common law.

Common law required the injured employee to prove the employer was at fault for the injury.

And common law gave employers many ways to prove they weren’t at fault. A few defenses employers used:

  • The employee contributed to the accident / injury
  • The employee assumed risk of injury in accepting the job
  • Another employee, not the employer, was responsible for the accident

Many employers also had access to more financial resources than injured employees. Thus they were in a better position to “lawyer up” and mount successful legal defenses when sued by injured employees.

As a result, many injured employees received little or no compensation for injuries suffered on the job.

The Workers Compensation System

Since common law wasn’t adequately protecting workers, states began enacting workers compensation laws in the early 1900s.

All states now have workers compensation laws on the books. Laws vary from state to state but the gist is the same in each state.

Workers compensation laws involve a trade off with both employers and employees losing some rights while gaining others.

Workers Compensation Gains & Losses Chart

Workers compensation laws involve trade offs for both employer and employees.

From the employee’s perspective:

  • Gain – reasonable assurance of compensation for work-related injuries. Employees no longer have to prove the employer was at fault for the injuries. They are entitled to compensation regardless of fault.
  • Lose – the ability to sue for pain, suffering and punitive damages. So, in theory, employees can recover less than they could under common law. But injured employees are still entitled to medical and rehabilitation expenses, disability income and death benefits.

From the employers perspective:

  • Gain – limited liability. Meaning their liability is limited to medical and rehabilitation expenses, disability income and death benefits. You no longer have to worry about pain, suffering and punitive damages which are often the cause of very large legal settlements / verdicts.
  • Lose – common law defenses. You cannot argue that it wasn’t your fault (i.e. it was the injured employee’s fault, it was another employee’s fault, the employee assumed the risk when the took the job, etc). Determining fault isn’t the goal of workers compensation laws; it’s compensating injured employees. And it’s you who will be providing the compensation.

Important note: this blog post is intended to be a high level overview of workers compensation laws. There some exceptions.

For example if an employer intentionally or recklessly causes harm their liability may not be limited.

Similarly if an employee shows up to work high on drugs and is subsequently injured the employee might not be entitled to workers compensation benefits (or they might be) depending on your state’s laws.

If you have questions about the nuances of workers compensation laws it’s best to consult with a lawyer well versed in your state’s workers compensation statutes.

1099 Contractor or Employee… it’s Complicated?

Workers compensation laws protect employees. Contractors are protected under common law (i.e. they must prove fault but if they do they could be in for a much bigger payday as they can also sue for pain, suffering and punitive damages).

To determine whether you have employees or contractors, a great place to start is the IRS guidance on the topic. The IRS tells us that in theory the determination is based upon “the degree of control and independence” that exists in the relationship.

But in practice there is often great deal of ambiguity.

As the National Association of Insurance Commisisoners (NAIC) points out in their white paper An Overview of Workers’ Compensation Independent Contractor Regulatory Approaches:

“control is hard to measure and can be easily feigned” and “establishing criteria for an independent contractor vis-a-vis an employee has proven to be very challenging to jurisdictions.”

For the purposes of workers compensation insurance, state level administrative agencies, not the IRS, determine whether an injured worker is an employee or contractor.

And, while each state follows the general practice of determining the level of control exerted over the worker, the NAIC finds “in the review of state criteria and their administration, we find a wide range of approaches.”

In other words, it’s entirely possible for the IRS to determine a worker to be a 1099 contractor for tax and payroll purposes but a state workers compensation body find that same worker to be an employee.

Or for one state workers compensation board to classify a worker as a contractor and another state workers compensation board to classify the same worker as an employee.

Intent is to Protect Workers, Not Employers

Remember, workers compensation laws were designed to protect workers. So, if there’s ever doubt as to whether someone is a 1099 contractor or employee when a workplace injury occurs, the courts often side with the injured worker.

According to my trusty Chartered Property Casualty Underwriter textbook:

“The legislative mandate generally calls for the workers compensation law to be applied liberally. Therefore, the courts have interpreted the definition of an employee broadly to provide protection for those who seek it.”

According to the New York State Workers Compensation Board:

“Under the Workers’ Compensation Law, most individuals providing services to a for-profit business will be deemed an employee of that business and therefore must be covered by the employer for workers’ compensation insurance.”

The New York State Workers Compensation Board additionally states:

“Whether the labor is paid using a W2 or 1099 Form for tax purposes does not matter in determining an employer/employee relationship for workers’ compensation purposes.”

The “Gig Economy” and Worker Compensation

Increasingly employers are trying to classify workers as contractors and not employees to escape legal obligations (e.g. payroll tax, workers compensation, health benefits, etc).

This is creating a situation reminiscent of the situation that existed in the early 1900s in which workers lacked protections.

And it has lead for calls by some for contractors injured on the job to be covered by workers compensation insurance.

According to presidential candidate Hilary Clinton:

“the ‘gig economy’ is creating exciting opportunities and unleashing innovation, but it’s also raising hard questions about workplace protections and what a good job will look like in the future.”

Should contractors be protected by workers compensation laws?

Not sure


Recently Uber was in the new for this very reason. One of their drivers sued claiming she was an employee and not an contractor. The California Labor Commission agreed and awarded her reimbursement for expenses incurred as an employee.

Uber was later able to settle lawsuits in Massachusetts and California that allowed it to continue classifying employees as contractors.

However these lawsuits came at a cost. Uber was forced to pay $84 million to settle (which does not including time or money spent defending against the lawsuit).

So employers, especially in the current legal environment, must be prepared for your independent contractor classifications to be challenged and, even if you successfully defend your classifications against such challenges, understand these “victories” may come at a cost.

Key Takeaways

In a sense, by employing contractors, you have more insurance exposures than an organization that hires employees.

You need to be prepared in the event that a worker is deemed a contractor AND the event that a worker is deemed an employee.

Historically courts have sided with injured workers when the workers’ classification falls in a gray area. And, in the current legal environment, with the growth of the “gig economy” this sentiment may be growing.

So the best bet is to purchase liability insurance to cover your exposures associated with non-employees (including independent contractors) and workers compensation insurance to cover any workers who may be deemed to be employees.

It’s also a good idea to require your contractors to show that they have workers compensation insurance for their employees.

If one your contractor’s employees is injured while performing work for your company and the contractor does not have workers compensation insurance, the injured worker will likely try to find someone to pay his or her medical bills and you could be that person.

So require it in your contracts with contractors and ask your contractors to provide proof of their workers compensation insurance (and other insurance coverages!) before work begins.

The good news is that if you’re only hiring contractors and you decide to purchase workers compensation insurance to be safe in the event a state workers compensation board rules that your injured contractor is actually an injured employee, your workers compensation insurance should be pretty cheap.

If you do decide to risk it and not purchase workers compensation insurance, be sure to consult with a qualified lawyer to better understand the associated risks.