When it comes to hiring for specific tasks or roles, the differences between employees, subcontractors, independent contractors and contractor laborers can get confusing. Then throw in what you need to know about how they impact your payroll and workers' compensation insurance policy, and you might end up feeling pretty lost.

Don't worry, there's good news—it's not quite as complicated as you think.

In fact, we're going to break it down in this post so you can understand the differences between these types of contractors and how each can impact your business.

Here's what you need to know.

What is an Independent Contractor?

Unlike an employee, an independent contractor is someone you pay to do work who is not directly employed by your company. The key factor to understand when it comes to independent contractors vs. employees is that independent contractors must meet two requirements set by Colorado's Workers' Compensation Act:

  1. The independent contractor must be free from your business' control and direction over how the service is performed.
  2. They must be customarily engaged in an independent business related to the service being performed.

So while you pay an independent contractor, they are not someone you would include on your workers' compensation policy. Typically, independent contractors will have their own workers' comp insurance policy that covers their business.

However, there are a few exceptions to keep in mind. If, for example, your business provides the independent contractor with tools or equipment, controls the hours they work or directs them on how to do the job then you may have to include them in your policy as required by Colorado workers' compensation regulations.

What is a Subcontractor?

Sometimes, you'll need to hire a company that has its own employees—this is also known as a subcontractor. For companies who have employees in Colorado, workers' compensation insurance is a legal requirement. So, the company you hire as a subcontractor should have their own workers' comp insurance too.

When you're ready to hire any subcontractors, be sure they provide you with their certificate of insurance to prove they have their own coverage. If they don't, you can end up being responsible for any claims.

It's also a really good idea to require any independent contractors to notify you if they hire any subcontractors. You can also include this as a clause in any contracts to verify that they have their own workers' comp insurance.

The key here is that when it comes to subcontractors, they have made their arrangements with the contractors, not with you. Because of that, it's the independent contractor who is responsible for the work product and payment of the subcontractor, not you or your business.

What is Contract Labor?

The term contract labor is really a catch-all bucket. What it covers is anyone who you don't consider a full-time employee and who also doesn't meet the independent requirements of an independent contractor or carry their own workers' compensation insurance.

Contract labor workers get included on your workers' comp policy as if they were an employee. So, that would cover anyone who you've paid during the year via IRS 1099 forms, day laborers paid in cash and uninsured subcontractors.

The general rule of thumb is if they don't meet the requirements of an independent contractor or subcontractor, they land right here.

Impacts on Your Workers' Comp Insurance

Now, when it comes to your workers' compensation insurance, it's important to keep a few key things in mind.

To start, any person you have classified as a full or part-time employee you have working for you gets covered by your workers' comp policy under the Colorado worker's compensation insurance law.

Next, in most cases, any independent contractors you hire get excluded from your workers' comp policy as long as you secure proper documentation to show they are free from your direction and control (invoices, independent contractor forms, business cards, etc.). But keep in mind, there are a handful of exceptions.

There are requirements for subcontractors to have their own Colorado worker's compensation insurance policy. But, make sure you are collecting certificates of insurance for any subcontractor you work with, otherwise if one of their employees gets injured while on the job the responsibility could fall on you.

Finally, don't forget about contract labor. Remember, these are people who don't fit into the independent contractor or subcontractor categories. In these instances, you will need to add these people to your company's workers' comp policy.

Make Sure You're Covered

Now that you know the difference between independent contractors, subcontractors and contractor laborers it's important to make sure you've got the right workers' compensation coverage for your needs.

You can do that by contacting Cake. The smart folks at Cake can help answer your biggest questions about the ins and outs of Colorado's workers' compensation insurance regulations and ensure that you have just the right coverage.

Get started today. Call Cake if you have questions or get a workers' comp quote online in minutes.