Originally published April 26, 2022; updated March 4, 2025.

Businesses are required by law to have workers compensation insurance for their employees. However, the need for this essential coverage can be a bit confusing to businesses that engage the services of independent contractors, also referred to as 1099 employees or 1099 contractors.

Since 1099 contractors aren’t direct employees of your business, you may skip their coverage on your company’s workers compensation policy. However, this is not the best practice for your business.

According to the U.S. Bureau of Labor Statistics, independent contractors account for roughly 7.4% of the labor force. Those numbers have continued to increase at a steady rate, especially in the aftermath of the COVID-19 pandemic. The better you understand the differences between independent contractors and employees, the better you can protect your business with the right insurance protection. This is not only to comply with local and state laws but also for the additional benefits worker’s comp insurance offers employers.

What is Workers' Comp?

Workers’ compensation, often called workers’ comp, is a state-mandated insurance program that provides financial benefits to employees who suffer work-related injuries or illnesses. It is designed to cover medical expenses, lost wages, and rehabilitation costs, ensuring that employees receive support while recovering from workplace incidents.

Who Does Workers’ Compensation Cover?

Workers' compensation primarily covers W-2 employees, including:

• Full-time employees: Standard employees who work under an employer’s direct supervision.
• Part-time employees: Even those who work fewer hours may still be eligible for coverage.
• Seasonal and temporary workers: Depending on state laws and employer policies, these workers may qualify for benefits.
• Apprentices and trainees: Those in on-the-job training programs are typically covered.

However, workers’ compensation does not automatically cover 1099 independent contractors, volunteers, or gig workers. While independent contractors are generally responsible for their own insurance, there are exceptions where they might be entitled to coverage, such as misclassification or if a business provides voluntary coverage.

What is the Technical Difference Between Contractors and Employees?

The differences between the two are anything but simple. According to the IRS, the differences between the two are measured in the following three categories: 

1. Who has behavioral control of the worker? This includes things like instructions provided, tools supplied, evaluation systems used, and training of the worker.
2. Who has financial control? This may include things like reimbursement for expenses (more common with employees than independent contractors), method of payment, and who provides the equipment (most businesses provide equipment for employees while independent contractors provide their own).
3. What is the relationship between the two? Businesses often provide employees with benefits, such as health insurance, retirement benefits, etc. This is not usually the case with independent contractors. Also, most 1099 contractors are engaged for a specific project or predetermined length of time while employees are more permanent and long-term in nature.

Because tax requirements are different between the two, the IRS takes the misclassification of workers seriously. When it comes to the insurance needs of your business, the differences are subtler.

Risks for Businesses When Working with 1099 Status Workers

Hiring independent contractors (1099 workers) provides flexibility and cost savings, but it also exposes businesses to significant risks and liabilities. Mismanaging these risks can result in financial penalties, legal troubles, and damage to your reputation.

Misclassification Risks and Legal Consequences 

Misclassifying workers as independent contractors instead of employees can lead to: 

• IRS and state fines for non-compliance 
• Back pay for wages and benefits owed to workers 
• Retroactive contributions to workers' compensation and unemployment insurance 

Agencies like the IRS and Department of Labor actively audit businesses to enforce proper classification, making compliance essential.

Lack of Workers’ Compensation Coverage 

1099 workers aren’t typically covered by a company’s workers’ compensation policy. If a contractor is injured while working and the court determines they were misclassified, your business could be responsible for medical expenses, lost wages, and other damages.

Liability for Workplace Injuries 

Even if a contractor is correctly classified, businesses can still face third-party liability claims. Contractors injured due to unsafe working conditions or negligence may sue your business for compensation.

Compliance and Reputation Risks 

Noncompliance with labor laws doesn’t just result in fines—it can also harm your business’s reputation. High-profile cases of misclassification often receive negative press, which can erode consumer trust and impact your brand.

Financial Risks and Unexpected Costs 

While hiring contractors may seem cost-effective upfront, the financial fallout from lawsuits, insurance claims, and regulatory penalties can quickly outweigh any savings. Careful evaluation of worker classification is essential to avoid unexpected expenses.

Tips to Mitigate Risks 

To protect your business, consider these proactive steps: 

• Create detailed contracts that define the working relationship 
• Use the IRS “right to control” test to confirm independent contractor status 
• Purchase general liability or contingent workers’ compensation insurance 
• Consult HR or legal experts to ensure compliance with state and federal labor laws 

By managing these risks effectively, businesses can enjoy the benefits of working with independent contractors while staying compliant and protected.

Alternative Coverage Options for 1099 Workers

Since independent contractors and gig workers typically aren’t covered under traditional workers’ compensation policies, they must explore alternative options to protect themselves in case of work-related injuries. Here are some key coverage options available:

Occupational Accident Insurance (OAI) 

Occupational accident insurance is a popular alternative to workers’ compensation for independent contractors. It provides coverage for:

• Medical expenses related to work injuries 
• Disability benefits for lost wages during recovery 
• Accidental death and dismemberment benefits for severe injuries 

Many gig platforms, such as rideshare companies, offer OAI as an optional or built-in benefit for their workers.

General Liability Insurance with Injury Coverage 

Some 1099 workers choose general liability insurance to cover third-party injuries or property damage. While this does not cover personal work-related injuries, some policies offer endorsements that provide limited medical coverage for the policyholder.

Health Insurance and Disability Insurance 

Since 1099 workers are responsible for their own medical expenses, having a comprehensive health insurance plan is crucial. Additionally, disability insurance can help replace lost income if an injury prevents them from working.

Voluntary Workers’ Compensation Policies 

Some states allow businesses to voluntarily extend workers’ compensation coverage to independent contractors. If you regularly work with a company, check whether they offer an opt-in workers’ comp plan.

Business Owner’s Policy (BOP) for Sole Proprietors 

For self-employed professionals, a business owner’s policy (BOP) can bundle liability coverage with some protection for injuries sustained while working. This is especially useful for contractors in high-risk fields like construction.

Each of these options has its benefits and limitations, so it’s important for 1099 workers to carefully evaluate their specific needs and circumstances to select the most suitable coverage.

Check Your State Requirements and Work with a Trusted Agent

Some industries, such as the construction industry, often maintain workers compensation insurance for all contractors on large job sites. However, some states have specific requirements for which types of contractors require worker’s compensation protection.

Our advice? Work with a trusted insurance agent, like our team at Arnold Insurance to help you make the best decision for your business when it comes to insurance coverage and answer all your burning insurance questions.