Here’s a confusing issue. In most states sole proprietors are excluded from workers compensation coverage by statute, not in all, but in most states. The issue comes when a small individual contractor with no employees who is a sole proprietor wants to work for a larger contractor. Most times the larger contractor will require the subcontractor to have a workers compensation policy in place and be included within that coverage.
So what’s up when the sole proprietor is not required by the state to have coverage but the general contractor makes that requirement. Why does this happen?
A few things are at work here. First, when a general contractor hires an uninsured sub, the general contractors workers comp insurance company, at audit time, will pick up the payment made to the sub and charge the general for that exposure. Second, it seems to just be good business to use insured subcontractors. So when a general contractor requires a sub to provide workers comp insurance it may not be because of a state rule or regulation, it may just be the cost of doing business with that general contractor or hiring party!
Lesson Learned: Here’s where I say…remember, workers compensation rules are state specific! Be sure to check with your state authority regarding sole proprietor rules. An example: some states, again not all, allow individual waivers, where an individual may waive their rights under the workers comp statutes. So check with your state!