As a Colorado small business owner, knowing how to correctly categorize your employees is crucial when doing payroll and applying for workers’ compensation insurance.

More importantly, incorrectly categorizing your employees on your workers’ comp policy can result in steep legal penalties and ramifications. 

It’s no secret that the jargon surrounding employee identification categories can be confusing and overwhelming. 

Let’s break down the different types of employee categories and how they affect your workers’ comp policy coverage.  

What's the difference between 1099 workers, contract labor, independent contractors, and subcontractors?

1099s Workers & Contract Labor

When it comes to workers’ comp, 1099 workers are considered employees. 

More specifically 1099 workers are considered Contract Labor. Which probably leaves you wondering, what is contract labor?

Contract labor includes workers who aren’t considered full-time employees. Contract labor employees also won't meet the independent requirements of an independent contractor or have their own workers' comp coverage.

Contract labor employees:

  • Work for an insured business
  • Are not paid like employees (1099)
  • Do not meet the independent contractor classification requirements
  • Do not hold their own workers’ comp policy and is included on your business’s policy

If an employee does not meet the classification requirements of an independent contractor or subcontractor, then they’re a contractor laborer/1099 worker. 

It’s important to note that businesses are required by Colorado state law to include contract labor workers as employees on your business’s workers' comp policy. 

Simply put, your policy is required to cover any type of employee you’ve paid throughout the year. This includes any those you’ve compensated via IRS 1099 forms, laborers paid with cash and uninsured subcontractors.

Independent Contractors

Independent contractors are individuals engaged in an independent trade, free from control. They sometimes carry their own work comp, but they are not necessarily required to.

Independent contractors are workers who are not directly employed by your company but are still paid to do work for your business. 

The Colorado Workers' Compensation Act defines independent contractors as workers that meet the following requirements:

  1. When it comes to how performing services, independent contractors are free from your companies’ control and direction.
  2. Independent contractors belong to an independent business related to the company’s provided service.

The biggest difference between independent contractors and employees is that employees are directly employed by your business, whereas Independent contractors are self-employed

Independent contractors pay their own taxes and are typically responsible for their own benefits and insurance, including workers’ comp. 

Many supply their own tools for a job, set their own working hours and often work for more than one business. 

But, like most things in life, there are exceptions

As required by Colorado state workers’ compensation regulations, you'll need to include the employee in your policy if your business:

  • Provides tools or equipment to the independent contractor
  • Controls their working hours 
  • Directs the independent contractor on how to perform a service or complete a job

Business owners typically aren’t required to withhold taxes or pay taxes on independent contractor service payments. 

On the other hand, employees are hired by your business directly. Your company pays employment taxes for them and withholds taxes (Social Security, Medicare, etc.) from their pay using W-2 forms. Only your business employees should be using W-2 tax forms. 

Additionally, business owners exercise more control over their employees. Employee’s responsibilities, tasks, hours and wages are set by business owners.

Need help figuring out if your worker is an employee or independent contractor? 

Use the chart below to understand how to properly categorize your employees. 


A subcontractor is a company hired by your business with their own employees. 

Any subcontractor with Colorado employees is legally required to have an active workers’ comp insurance policy to cover their own employees. 

Checking that the subcontractor you are hiring has an active policy is critical.

If the hired subcontractor doesn’t have an active workers’ comp policy and one of their employees gets injured while on a job for you, their claims will become your responsibility.

Ensure that the subcontractor you hired has their own workers’ comp policy requesting a copy of their certificate of insurance for proof. 

To help protect your business, start requiring independent contractors to inform you when they hire any subcontractors.  

When an independent contractor hires a subcontractor, it’s the independent contractor who is responsible for their work and compensation, not your business. 

Because of this arrangement between the independent contractor and their hired subcontractor, it’s important to cover your butt in case the subcontractor suffers a work-related injury while completing work. 

Make sure your back is covered when it comes to working with contractors. Help protect your business by including a clause in your work and business partner contracts that requires both independent contractors and their hired subcontractors to have their own workers’ comp insurance policies. 

Employee Misidentification Legal Penalties & Ramifications

Misidentifying your employees can end up costing you, big time. 

Employee misidentification occurs when business owners mislabel their independent contractors and employees. This often occurs when employees are mislabeled as 1099 workers and independent contractors.

When business owners mislabel their employees as independent contractors, they skip out on paying into unemployment, workers’ comp, and other employee-related insurance and taxes. 

If your business is accused of misidentifying its employees as independent contractors, you’ll have to repay all the taxes and benefits you didn’t previously pay. 

Common misidentification legal ramifications and financial penalties include:

  • Wage reimbursements for wages you would have paid an employee, such as overtime, time and a half, and minimum wage
  • Federal and state income taxes, including back taxes, penalties, Social Security, Medicare, and unemployment
  • Misidentified employees’ workers’ compensation benefits payments
  • Offering proper employee benefits, including health insurance, retirement, etc.

Make sure your Colorado small business and employees are covered, no matter what.

Unsure if your worker is an independent contractor or employee? Contact our Cake Client Care team for help properly categorizing your workers when it comes to workers’ comp insurance. Our team of expert, friendly underwriters are happy to help you with all things workers’ comp related.

Still need coverage for your Colorado small business? Find out why thousands of businesses trust Cake for quick, reliable, next day workers’ comp coverage.

Cake’s mobile workers’ comp quote application allows business owners to get a free, non-committal quote in 90 seconds and active coverage in five minutes.