When are subcontractors considered employees?

It’s a common misconception among employers that only workers who receive a W-2 form are considered employees.

While this may be true for the IRS or state employment offices, it can differ for workers’ compensation.

For the purposes of workers’ comp, employees are not defined based on how they are paid. Sometimes, laborers who receive 1099 forms are considered employees and are therefore covered by workers’ comp.

One potential example would be a drywall company that uses a subcontractor, paid through a 1099 form, to do their drywall work. This subcontractor works for the company every week, all year long, and doesn’t do any work for other companies. This person could possibly be considered an employee and would be covered by the drywall company’s workers’ compensation policy.

Alternatively, let’s say that same drywall company has a project that requires electrical work. They contract with an electrician who only comes in for a couple of days and has a separate company to do this kind of work for many different people. The electrician likely would be considered an independent contractor, and would not be covered by workers’ comp.

The determination is based on a number of different variables, so these examples might not be applicable in all situations.

How the determination is made

Whether a subcontractor is considered an employee is dependent on many things, including the nature of the work being done and whether it is fundamental to what the business does. Questions asked during the premium audit process help make the determination. Of course, it’s ideal to ask these questions long before the audit takes place so your clients avoid unexpected bills at audit time.

During the premium audit, one question policyholders answer is whether there is anyone who is paid outside of the normal payroll.

Questions auditors ask can vary depending on the state where the employer is located, but they will generally cover the same information. Some of the questions include:

  • Is the relationship between the employer and subcontractor ongoing?
  • Does the subcontractor do work for anyone else?
  • Does the employer provide tools and equipment for the subcontractor?
  • Does the employer cover business expenses for the subcontractor?

If a policyholder answers yes to any of these questions, this could indicate that the subcontractor will be considered an employee. For a more in-depth look, refer to the “Hiring subcontractors” CompTalk, available for order or download in the resource catalog on sfmic.com.

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