Are Your Subcontractors Really Subcontractors, or Are They Employees?

By David Mrozek

Having been in the insurance business for over 17 years, I've seen lots of attempts to avoid paying taxes and workers compensation for employees. By far the most common is to pay them on a 1099 and call them subcontractors. I've also seen what can happen when this goes wrong. Let's take a look at a couple of examples of "things going wrong".

1. A floor covering contractor had 2 "subcontractors" that work for him. He paid them on 1099's and didn't carry workers compensation. They were installing new carpeting in a home. While carrying the carpeting into the house, one of the guys missed a step down and fell, with the roll of carpeting on top of him. He tore his ACL and fractured both bones in his right forearm. He sued the contactor for workers compensation and won. The contractor(who didn't have workers comp, remember?) had to pay just over $28,000 for the surgery on the ACL, the broken bones, and three months of lost wages. Do you know why?
2. A tile contractor had 4 subcontractors working with him. He had a liability policy and workers compensation. After his policy renewed, he got a bill from the insurance company for around $6,000. How about this one?

The answer to both questions has to do with the rules to be classified as an independent contractor. The IRS has specific language that defines an independent contractor and insurance companies use this same criteria and more to determine whether someone is really a subcontractor or a common law employee. The biggest determining factor is who determines what that person does. Does the company control or have the right to control what that person does? In most cases, if this is true, that worker is not an independent contractor, they are a common law employee, regardless of how they are paid or what they are called.

Other factors to consider are who controls the financial aspects of that worker i.e. how they're paid, whether expenses are reimbursed, who provides tools/equipment, etc. as well as if there are contracts that define the relationship. Does that worker work for anyone else? Do they have their own location, even if it's an office in their home? Do they carry their own insurance? If this doesn't describe your subcontractor, you're walking a fine line that could cost you.

Let's take a look at the two examples above and explain why things happened the way they did(by the way, these are both true stories).

1. Since the worker didn't qualify as a subcontractor(he only worked for that floor covering contractor and his job was controlled by him), he's an employee. Employers have a responsibility under the workers compensation law for any injuries that happen on the job. This responsibility exists whether they have workers compensation insurance or not. Since that worker got hurt on the job, his employer is responsible for the medical costs and work loss for that employee.
2. What happened here was similar to above. At the end of the policy period, the contractor had an audit of his workers comp and liability policies. Even though he called his workers subcontractors, they didn't work for anyone else and didn't carry their own insurance. Once again, the employer would be liable for any injury to a worker or any damage they caused while working for him. Therefore, the insurance company charged for workers comp and liability for those workers.

How do you deal with this? If your workers are actually employees, pay them as such and include their payroll in your workers comp and liability(if it's rated that way). If they are really subcontractors, get certificates of their insurance. Otherwise, you'll get charged for them.

Get an agent you can trust. A good agent will advise you how to deal with your workers and save you a lot of money and hassle.

Have questions on how to determine whether a worker is an employee or a subcontractor? A good agent will be able to help you. It's good for your employees and good for your business.

I can't count how many times I've seen this. I've walked away from businesses that wouldn't do it right. Those businesses usually don't last long. Do it right and stay in business.

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