Should I Get Workers Compensation Insurance for Independent Contractors

Should I Get Workers Compensation Insurance for Independent Contractors

Should I Get Workers Compensation Insurance for Independent Contractors?

The answer to this question depends on whether or not your employees are actual Independent Contractors (ICs) or employees and your appetite for risk. Every day you take risks. The same is true for your business. Here are my thoughts on this aspect for small businesses. Please note that this is not legal advice, and I am not an attorney. Do your due diligence before you make this decision.

Are Your Employees ICs? States Differ.

Categorization varies from state to state. California has one of the most liberal views on this and offers the ABC test to help small business owners to make this decision. You can find that test online here:

Federal IRS Rules

The IRS has its test and many forms to use for your determination. It’s less straightforward but valuable. Their Common Law Rules depend on the degree of control and independence and fall into three categories:

  1. Behavioral
  2. Financial 
  3. Type of Relationship

They are further defined on these pages:

Some states offer a more straightforward questionnaire, for example, Oregon:

Suppose you have been misclassifying workers for some time and are worried about penalties from past years. In that case, the IRS offers a Voluntary Classification Settlement Program that charges a reasonable fee but allows you to move forward without fear of being penalized for past mistakes.

Exempt Categories

The California Supreme Court’s decision in Borello vs. Dept. of Industrial Relations offers some other considerations and helps in many traditionally exempt categories. The legal information site,, provides a worthy explanation and should help you make decisions, especially for California.

Workers Compensation and Independent Contractors Back to the Original Question: Should I Get Workers Compensation Insurance for Independent Contractors?

If you are comfortable that your employees are correctly categorized as ICs, the next question is, “Should I purchase workers’ compensation insurance for them?” The answer depends on your budget and your risk tolerance. Experts I spoke to tell me that, on average, and depending on your type of business, a small business should expect at least one injury every seven years. This is possible regardless of your workers’ status as employees or ICs. Independent contractors can still get injured and they can file a claim.  If they go to an emergency clinic, the first question they are usually asked is, “Were you injured on the job?” 

Your risks, as an employer, include the following:

  1. The cost of covering that IC’s medical expenses
  2. Potential legal fees if the IC files a lawsuit or tries to hold your business responsible for their injuries
  3. Possible penalties if the EDD or any other government agency decides that you misclassified your workers.

Some business owners feel comfortable classifying their workers correctly and are willing to accept the possible costs of an injury or lawsuit. Others would instead not take those risks and are willing to pay the price for workers’ compensation insurance. That cost will protect you from legal fees, possible penalties, and worker’s medical costs. 

We hope that by reading this, you will at least be able to make a more informed choice.

UPDATES: November 09, 2022 – Below are two links that (although lengthy), offer an exhaustive explanation and a summary directly from authoritative sources:

Disclaimer: The information here is my researched opinion as an insurance expert. I am not an attorney. Therefore, this article is not and should not be taken as legal advice. Please exercise adequate due diligence.

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