Your Franchisees Use 1099 Subcontractors. Who Pays When It Goes Wrong?

Plenty of franchisees in the trades run the same playbook. Land the deal, then sub the actual work out to 1099 crews. They tell themselves the crew is a separate business, so the crew's problems are the crew's problems. They tell you the same thing. So here is the question that decides whether that is true: when one of those crews wrecks a customer's property or falls off a ladder, and the crew has no real insurance, who actually pays?

Not the crew. They are gone. In the trades, an uninsured subcontractor who causes a loss has a habit of going AWOL the day the claim shows up. The bill does not disappear with them. It rolls to the franchisee. And when the franchisee cannot cover it, it rolls again, up to the brand. The word "1099" does not stop any of that. Most franchisors and a lot of franchisees believe it does, and that belief is the most expensive thing in the building.

It gets bigger as the system grows. More roofs, more vehicle wraps, more fences, more laser treatments, more crews in more trucks. Every one of those jobs is exposure. When the work is done by 1099s who carry no real coverage, every job is also a bet that nothing goes wrong. Below is what happens when the bet loses, and how to build a system where it does not land on you.

Key takeaways

• Collecting the subcontractor's certificate is not the same as being covered. A certificate is a snapshot. The sub's policy can be cancelled the week before the loss, and the certificate still looks fine. Paper from the sub is not risk transferred off the franchisee.

• An uninsured 1099 is treated as your employee by the insurance company. At the workers' comp audit, the cost of an uninsured sub gets added to the franchisee's premium as if they were payroll. There is no way to opt out of the audit. It is a condition of the policy.

• "We use 1099s so we don't need workers' comp" is a myth that ends in a six or seven figure claim. If an uninsured sub's worker gets hurt, the franchisee's workers' comp is on the hook as the statutory employer. No comp in place means the franchisee, then the brand, pays the medical and the disability.

• The more you control the crew, the less they are a real 1099. Uniform, branded truck, show up at this time, follow this standard. That is control, and control is what makes someone an employee in the eyes of the IRS and the insurance company. A franchise runs on standards, which is exactly what makes the 1099 story fall apart.

• The brand gets named, even when the franchisee made the mistake. Plaintiffs follow the operations manual upstream. Getting the brand out of a lawsuit still costs real money, and where the brand controlled the specific thing that went wrong, it can be held liable for it.

• You fix this with a process, not a hope. Either require W-2 crews, or build an ironclad subcontractor process with a real agreement, verified coverage including workers' comp, and proof checked per project. The first time you allow a deviation, you have set the precedent for all of it.

Your franchisee collected the subcontractor's certificate. Why didn't it save him?

Because a certificate of insurance is a photograph of coverage on the day it was issued, and the actual policy can be gone by the time the claim hits. Here is a real one. A roofing franchisee did the responsible thing. He hired subcontractors to do the work, and he collected a certificate of insurance from them before they started. He thought he had checked the right box. Then the subs caused property damage to the area around the job, call it seventy-five thousand dollars. He went to file against the subcontractor, because it was their fault. The subs went AWOL and stopped answering. And when the claim reached the sub's insurer, the policy turned out to have been cancelled. The certificate was worthless. There was no coverage behind it.

So who paid the seventy-five thousand? This is the part that matters. This franchisee was one of our customers, and his own general liability policy responded and paid the damage, even though the sub's coverage was gone and the sub had vanished. That is not luck. For franchisees in the construction and contracting trades, there are three things we make sure of in their policy, and all three were doing work in that claim.

First, no subcontractor exclusion, so the policy does not flat out refuse to cover a loss caused by a sub. Second, a normal deductible for subcontractor damage. A lot of contractor policies bury a much higher deductible just for sub work, twenty-five or fifty thousand dollars, when the standard deductible is a thousand or twenty-five hundred. We strip that out or knock it down. Third, no limitation or warranty clause that cancels the coverage if the franchisee did not collect a certificate from the sub. That clause is common, and it is brutal. The carrier says it will only cover sub-caused loss if you collected proof of insurance from the sub. Even with no subcontractor exclusion on the policy, that one sentence lets the carrier deny the claim because you did not keep the paperwork. This franchisee did collect it, but plenty do not, and that is the trapdoor.

So the certificate did not save him. The right policy did. The certificate told him a story that was already false by the time he needed it. If you want to understand why a clean certificate means so little, that is its own subject, and it is covered in the certificate of insurance article. The short version for here: do not let your franchisees believe that collecting a certificate from a sub is the same as being protected from that sub.

"We use 1099s so we don't need workers' comp." Why is that the most expensive sentence in the trades?

Because it is wrong twice, and both wrongs cost money. I have had real arguments, actual arguments, with franchisors and franchisees about what a 1099 is and what it does. So let me lay out the two hits a 1099 crew creates at the same time, because most people only see one of them, if any.

The first hit is the audit. A workers' comp policy is audited every year. That is not your insurance agent being difficult. The audit is a condition written into the standard workers' comp policy, and the premium is based on payroll, what the manuals call remuneration. The rating bureaus that govern this, NCCI in most states and independent bureaus in the others, set the rules, and the rule on subcontractors is plain. If your franchisee hires a subcontractor and cannot show that the sub carried its own workers' comp, the auditor adds that sub's cost to the franchisee's premium as if they were employees. For a labor-only sub with no records, the charge can be as high as ninety percent of what the franchisee paid them. So the franchisee thinks they saved money by going 1099, and then a surprise audit bill arrives charging them comp premium on every uninsured crew they used all year. There is no dodging it. The audit happens, and the math is not on their side.

The second hit is the claim, and it is the one that ends businesses. If an uninsured sub's worker gets hurt on the job, falls off a ladder, breaks his back, ends up a paraplegic in a hospital, who pays the medical and the lost wages? In most states the franchisee does, because the law makes the hiring business the statutory employer of an uninsured sub's workers. The franchisee assumed the 1099 carried that risk away. It did not. Workers' comp reaches uninsured subcontractors, period. So now there is a catastrophic injury, no comp policy on the crew, and the bill lands on the franchisee. And if the franchisee cannot pay it, it keeps climbing.

Run the two together and you see the trap. The same uninsured crew that triggers a surprise premium audit is the same crew that leaves the franchisee holding a hospital bill when someone gets hurt. The franchisee thought 1099 meant none of this was theirs. It was all theirs the whole time.

If they're really 1099s, why does the insurance company treat them like your employees?

Because a 1099 is not a magic word. It is a label, and the label only holds if the relationship behind it actually looks independent. The test everyone uses, the IRS included, comes down to control. Look at three things. Do you control how and when the work gets done. Do you control the money side of the job. And what does the relationship look like, written contract, ongoing arrangement, is the work core to your business. The more you control, the more that worker is an employee, no matter what the tax form says. Some states go further with an even stricter test that starts by assuming the person is an employee and makes the business prove otherwise.

Now put that next to what a franchise actually is. A franchise is its standards. That is the whole product. You build an operating manual so the franchisee can justify investing in your brand and actually make money running your system. Inside that manual are the standards, because without standards you are not a franchise. I can walk into any Chick-fil-A in the country and know exactly what I am getting, because the standard is the same everywhere. That sameness is the value.

So watch what happens when a franchisee subs all the work to 1099s. The crew drives a vehicle with your branding. They show up in your shirt. They show up at the time you told them, and they do the job the way the manual says to do it. Why? Because you required it. That is control. And control is the exact thing that turns a 1099 into an employee in the eyes of the IRS and the insurance company. You cannot have it both ways. Either you enforce the standard, in which case the crew looks like an employee and the exposure is yours, or you let go of the standard, in which case, what are you even franchising? A handshake with no guarantee that a customer in another state can count on? That is not a franchise.

This is why I get frustrated with the whole idea of subbing everything out in a franchise. People do it to skip the cost of real employees and real workers' comp. But what they are actually subbing out is the standard, the process, the safety, the guarantee, everything the brand is supposed to stand for, to save a few dollars. Unless the franchisee has truly transferred the risk, with a real subcontractor agreement, verified entity and licensing, and verified insurance including workers' comp, that sub is going to be treated as an employee when it counts.

How does a franchisee's subcontractor end up suing the franchisor?

By following the chain of control straight up to the brand. A subcontractor causes serious harm or gets seriously hurt. The lawyers do not stop at the franchisee, especially when the franchisee cannot pay. They look at who set the standards the job was run under, and that is the franchisor. I have seen a franchisor pulled into a claim where a subcontractor fell, became a paraplegic, and the loss reached five million dollars. I have seen brands named because a sub caused major property damage on a job run off the brand's playbook.

Here is the honest version of how that works, because it is not automatic. A court will not hold a franchisor liable just for having brand standards and an operations manual. That alone is not enough. The danger is in two places. First, plaintiffs name the brand anyway, and getting out of a lawsuit costs real money in defense, and a lot of these settle. Being right is not the same as being free. Second, the more a brand controls the actual day to day, the specific safety methods, the way that particular job is supposed to be done, the more a court can hold it responsible for the specific thing that went wrong. That can be a problem in the operations manual itself, or it can be straight vicarious liability because the franchisee was doing exactly what the manual told them to do.

So the brand is exposed from both ends. The franchisee's bad subcontractor decision becomes the brand's defense bill. And the brand's own control over how the work is done becomes the plaintiff's argument that the brand should pay for it. The franchisor who assumed a 1099 three layers down was somebody else's problem finds out it was never that simple.

So what should a franchisor actually require?

A real process, with no room to wing it. There are two clean roads here, and the worst thing you can do is stand in the middle of them.

Road one is the simplest. Require W-2 crews and teach your franchisees why. Explain the audit, explain the statutory-employer rule, explain what one uninsured injury does to their business. And show them the upside they are missing by dodging comp. When a franchisee runs real employees with real safety and a real risk-management process, their workers' comp experience mod drops below average over time, and a lower mod is a direct discount on every comp premium they pay. Doing it right is not just protection, it is cheaper than they think once the safety record compounds. Dodging comp does not earn that discount. It just defers the bill to the worst possible day.

Road two is for systems that will allow subcontractors. If you allow them, you build an ironclad process and you do not bend it. That means a standard subcontractor agreement with real risk-transfer language. It means verifying the sub's entity status and licensing, not just taking their word. It means verifying insurance, and not only general liability. I see this constantly: a franchisee proudly shows me the sub's GL certificate and has no idea the sub carries no workers' comp at all. You verify both. You require the right forms and limits. And you check proof of coverage on a real cadence, not once a year. Quarterly at a minimum, and per project is best in class, because a policy that was active in January can be cancelled by March. Match the requirements to the real exposure in your FDD insurance requirements and enforce them through subcontractor monitoring, so this is a system, not a promise.

The reason the process has to be airtight is that the first deviation sets the precedent. The moment you let one franchisee skip the agreement or skip the comp check because they had jobs to get done and were making money, you have told every franchisee that the rule is optional. And the franchisee who skipped it will give you the same excuse every time, right up until the crew with no insurance goes up a ladder and falls off it. There is one more piece, and it is on the insurance side. Put your franchisees on policies that are actually built for this, with no subcontractor exclusion, a normal deductible for sub work, and no warranty clause that voids the coverage over missing paperwork. That is how the roofing franchisee got paid when his sub vanished, and it is the difference between a brand that is protected and one that just thinks it is.

FAQ

If our franchisee collects a certificate of insurance from every subcontractor, is the franchisee protected?

Not fully. A certificate shows coverage existed on the day it was issued, but the sub's policy can be cancelled before the loss, and the certificate still looks valid. Collecting certificates is necessary, but the franchisee also needs their own policy built to respond when a sub's coverage fails, and they need to re-verify the sub's coverage on a regular cadence.

Our franchisees use 1099 subcontractors, so workers' comp is the sub's responsibility, right?

No. If the subcontractor cannot show their own workers' comp, two things happen. The franchisee gets charged comp premium for that sub at the annual audit, and if the sub's worker is injured, the franchisee's comp is liable as the statutory employer in most states. The 1099 label does not move that risk if the sub is uninsured.

Can a 1099 worker really be reclassified as an employee?

Yes. The test is control. The more the business dictates how, when, and where the work is done, including uniforms, branded vehicles, schedules, and methods, the more likely the worker is an employee under IRS and state tests. Some states presume employee status and make the business prove otherwise. Franchise standards push hard in the direction of control.

Can the franchisor get sued over a franchisee's subcontractor?

Yes. Plaintiffs routinely name the brand, and defending that costs real money even when the brand ultimately is not liable. Where the franchisor controls the specific way the work is performed, a court can hold the brand responsible for the harm. Brand standards alone are usually not enough to create liability, but operational control over the specific task can be.

How often should subcontractor insurance be verified?

Not annually. A policy active at the start of the year can be cancelled months later. Quarterly is a reasonable minimum, and verifying per project is best in class, because the only coverage that matters is the coverage in force on the day of the loss.

What is the cheapest way to handle this, run subs or run employees?

Over time, doing it right with employees and a real safety program is often cheaper than it looks, because a strong claims record lowers the workers' comp experience mod and discounts every future premium. Running uninsured subs feels cheaper until the audit bill or the injury claim arrives, and then it is the most expensive option on the board.

Conclusion

The franchisee who hires a 1099 crew is buying a story that the risk belongs to someone else. The audit does not believe that story. The injured worker's lawyer does not believe it. The plaintiff who names the brand does not believe it. The only people who believe it are the franchisee and, too often, the franchisor, right up until the crew with the cancelled policy causes the loss and walks away. A franchise is its standards. The moment a brand pushes those standards down onto people it pretends are strangers, it owns the outcome, and the only question left is whether anyone built the coverage to pay for it.

About the author

Wade Millward is the founder and CEO of Rikor, a technology-enabled insurance and risk management company focused on the franchising industry. He has spent his career working with franchisors, franchisees, and private-equity-backed platforms to uncover hidden risk, design scalable compliance systems, and align insurance strategy with how franchise systems actually operate. Wade writes from direct experience building systems, navigating claims, and helping brands scale without losing visibility into risk.