Is an Independent Contractor Covered by Workers Compensation? | DirectWorkComp

Does your business have employees or independent contractors?  If someone is truly an independent contractor, by law, an employer does not have to provide workers compensation coverage. However, sometimes business owners do not classify independent contractors correctly. This creates serious potential problems for the business or owner.

Today, we are going to talk about how to determine if someone is truly an independent contractor.

1099 Workers Compensation Confusion 

Workers comp for independent contractors is a topic that is commonly brought up when visiting with a small business. They’ll tell us that they don’t have any employees, only independent contractors, and therefore do not need to purchase workers compensation insurance. A common question that would then be asked is “how do you know they aren’t employees?”  Most often the response provided by the business owner is that they are an independent contractor because they pay them using a 1099.

The reality is that the definition of an independent contractor is not determined by whether or not they are paid using a 1099 form. The status of an independent contractor is really determined based upon the relationship that they have with that employer/business. In some situations, independent contractors have been successful using an employer’s workers compensation policy because courts have ruled that they were in fact an employee, not an independent contractor.  It may be risky for a business to assume just because they are compensated via a 1099 form, they are not an employee.  In a lawsuit, the relationship will be scrutinized and your business may be at risk if it turns out, they are an employee.  Without a workers compensation policy, claims would be paid for by the business or owner which may result in financial ruin.

The IRS has developed a 20-factor test to determine whether or not an individual is an employee or an independent contractor.


The IRS 20-Factor Test

  1. Instructions– workers who must comply with the business’ instructions as to when, where, and how they work are more likely to be employees than independent contractors.
  2. Training– the more training that the business provides to its workers, the more likely it is that they are employees. The underlying concept is that independent contractors are supposed to know how to do their work and, thus, should not require training from the purchasers of their services.
  3. Integration– workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees.
  4. Services rendered personally– companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.
  5. Control of assistants– if a company hires, supervises, and pays a worker’s assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.
  6. Continuous relationship– A continuous relationship between a company and a worker indicates a possible employment relationship. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential projects.
  7. Flexibility of schedule– workers for whom the business establishes set hours of work are more likely employees. In contrast, independent contractors generally can set their own work hours.
  8. Full time required– workers whom the company requires to work or be available full time are likely to be employees as it gives the company control over most of the worker’s time. In contrast, independent contractors can generally work whenever and for whomever they choose.
  9. Need for on-site services– requiring someone to work on company premises, particularly if the work can be performed elsewhere, indicates a possible employment relationship.
  10. Sequence of work– if a company requires work to be performed in a specific order or sequence, this control suggests an employment relationship.
  11. Reports– if the business requires workers to submit regular reports on the status of a project, an employment relationship may be indicated
  12. Payment method– hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more characteristic of independent contractor relationships.
  13. Expenses– independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.
  14. Tools and materials– workers who use company-provided equipment, tools and materials are more likely employees.
  15. Investment– independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.
  16. Realization of profit or loss– workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.
  17. Work for multiple companies– workers who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.
  18. Services available to general public– workers who make their services available to the general public through business cards, advertisements, and other promotional items, are more likely independent contractors.
  19. Right to fire– workers who can be fired at any time are more likely employees. In contrast, your right to terminate an independent contractor is generally limited by specific contractual terms.
  20. Right to quit– workers who can quit at any time without incurring any liability to you are more likely employees. Independent contractors generally cannot walk away in the middle of a project without running the risk of being held financially accountable for their failure to complete the project.


Getting a Review by the IRS

Independent Contractor Workers Comp

Are you wondering if your workers are classified correctly? You can always apply to the IRS to get a determination letter telling you how it sees your workers – as employees or independent contractors. You may also apply to the IRS if you have been classifying workers as independent contractors. This application for “530 relief” allows you to get relief from liability or payment if you have been classifying workers as independent contractors in error. It looks at factors that might be in your favor as good faith efforts to comply with the law.

If you are wanting more information, the IRS has a page titled Independent Contractor (Self Imployed) or Employee? 


Direct Work Comp

Direct Work Comp LLC believes that businesses shouldn’t have to struggle to purchase insurance based on their individual needs. A simple, fast process that provides customers with a great experience should be available. At Direct Work Comp, we do just that with our expert service and fast online quote system.

Direct Work Comp is headquartered in Des Moines, IA, and operates in several states in the Midwest.  Our list of states is here.  We provide a personal touch and a local feel to the solutions and services we provide our clients.

We hope this blog about independent contractors & workers compensation helped answer your questions. Direct Work Comp not only helps businesses gain access to workers compensation, our goal is to help educate as well. If you have any questions, please drop us an email at or reach out for your comprehensive insurance quote!

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