If you hire subcontractors in North Carolina, their workers’ comp problem can become your workers’ comp problem. It doesn’t matter that the sub is a two-man outfit that isn’t required to carry coverage on its own. It doesn’t matter that you paid them on a 1099. The law that decides this is G.S. 97-19, and the piece of paper that protects you is a certificate of insurance collected before the job starts.
Here’s how it works, and what to do about it.
The Three-Employee Rule Is Not the Whole Story
Most business owners know the headline rule. According to the NC Industrial Commission, in general, businesses that regularly employ three or more employees are covered by the Workers’ Compensation Act and need a policy. Corporate officers count toward the three, though they can elect to exclude themselves from coverage.
So a subcontractor with one or two employees usually isn’t required to buy workers’ comp for its own sake. That’s where people get tripped up. The sub may be legally fine without a policy. You, the contractor who hired them, are not.
What G.S. 97-19 Actually Says
G.S. 97-19 covers any principal contractor, intermediate contractor, or subcontractor who sublets work. If you sublet a contract without getting a certificate showing the subcontractor has workers’ comp in place, you are liable for injuries to that subcontractor’s employees on that job, to the same extent the sub would be if it were covered by the Act.
The statute says this applies whether or not the subcontractor regularly has fewer than three employees. That’s the part that catches small contractors. The three-employee threshold protects the sub from a legal requirement. It does not protect you.
The certificate is your defense
The statute gives you a clear way out. If you obtain the certificate before you sublet the contract, you can’t later be held liable to that sub’s employees for workers’ comp benefits within the term the certificate shows. The certificate has to be issued by a workers’ comp insurance carrier (or, for a self-insured sub, be a certificate of compliance from the Department of Insurance). You can get it from the sub or from the Industrial Commission.
Two situations where you’re still off the hook
The statute also says you are not liable to the sub’s employee if either of these is true:
- The subcontractor actually had a compliant workers’ comp policy in effect on the date of the injury, even if you never collected the certificate on time.
- The sub’s policy expired or was cancelled before the injury, but you got a certificate before subletting the work and didn’t know about the expiration or cancellation.
Notice what’s missing from that list: a sub who never had a policy and a contractor who never asked. That’s the exposure.
Who Pays First
Under 97-19, a claim filed with the Industrial Commission has to be brought against every party liable for payment, and the Commission sets the order those parties are exhausted in, starting with the immediate employer. If you end up paying, the statute lets you try to recover what you paid from whoever would have been liable without this section.
In plain terms: if your uninsured sub can’t pay, the claim moves up the chain to you. You can chase the sub for the money afterward, but a small uninsured contractor who just had a worker seriously hurt usually isn’t sitting on the cash.
For example, say a general contractor hires a two-person framing crew and pays them on a 1099. Nobody asks for a certificate. One of the framers falls off a second-floor deck and needs surgery and months off work. The framing crew has no policy. Under 97-19, the general contractor can be on the hook for that worker’s medical bills and wage benefits.
A 1099 Doesn’t Settle Anything
Paying someone on a 1099 is a tax reporting choice. It doesn’t decide whether that person is an employee for workers’ comp purposes, and it doesn’t change what 97-19 says about subcontracted work. If the person you paid is really working like an employee, or if they bring their own helpers onto your job, you can have exposure either way.
The Audit Side of This
There’s a second cost that shows up even when nobody gets hurt. Workers’ comp policies are typically audited after the policy term ends. If the auditor finds payments to subcontractors and you can’t produce valid certificates for them, the carrier may treat those payments as payroll and charge premium on them. That bill can be a surprise, and it lands months after the work is done.
For example, a contractor who paid $80,000 to uninsured subs during the year could see that $80,000 added to the payroll base at audit, rated at whatever class code fits the work. The certificate you didn’t collect in March becomes a premium bill the following spring.
What to Do About It
- Get the certificate before the sub starts. Not after the job, not when the auditor asks. The statute’s protection is tied to obtaining it before you sublet the work.
- Check the dates. Make sure the policy period covers the whole job. Write the expiration date down and ask for a renewal certificate if the job runs past it.
- Check that it’s a workers’ comp certificate. A certificate that shows only general liability doesn’t do anything for 97-19.
- Keep the file. Store every certificate with the sub’s invoices so you can hand the auditor a complete set.
- Don’t pay uninsured subs like they’re insured. If a sub has no coverage, talk to your agent before they start about how that payroll will be treated on your policy.
- Ask about a blanket option if it fits. The statute allows a principal or owner to cover contractors and their employees under a blanket policy. Whether that makes sense depends on your operation and your carrier.
The Short Version
Your subcontractor’s size doesn’t protect you. A 1099 doesn’t protect you. A workers’ comp certificate collected before the job starts does. It takes a few minutes per sub and it’s the cheapest protection you’ll ever buy.
If you’re not sure how your current policy treats subcontractor payments, or you want someone to look at your certificate process before your next audit, call Safenet Insurance Group at (336) 280-4606, or request a quote online.
This article is general information, not tax or legal advice. Talk to your CPA and attorney about your specific situation.
Related Coverage
- Workers’ Compensation Insurance: coverage for employee injuries, required for most NC businesses with three or more employees.
- Contractors Insurance: coverage packages built for trade and specialty contractors.
- General Liability Insurance: protection when your work damages someone else’s property or injures a third party.
- Commercial Umbrella Insurance: extra liability limits above your primary policies.