You've built your general contracting business from the ground up, handling everything yourself. But now you're ready to grow. Maybe you landed a bigger project, or perhaps you're just tired of working 80-hour weeks. Either way, hiring your first employee is a major milestone—and it triggers some serious insurance requirements you can't ignore.
The moment you become an employer, you're stepping into a new world of liability. Workers' compensation, employment practices coverage, vehicle insurance—these aren't optional extras. They're legal requirements in most cases, and skipping them can cost you everything you've built. Let's break down exactly what insurance you need when you hire that first person.
Workers' Compensation: The Non-Negotiable Requirement
Here's the thing most new employers don't realize: in the majority of states, workers' compensation insurance becomes mandatory the moment you hire your first employee. Not your second. Not your third. Your first.
California, Florida, and Minnesota are perfect examples—one employee triggers the requirement. But it's not universal. Georgia and Texas, for instance, only require coverage when you have three or more employees. Texas is particularly unusual in that it doesn't mandate workers' comp for most private employers at all, though you'd be foolish not to carry it.
The cost varies wildly based on what your employees actually do. Construction work isn't just one classification—the National Council on Compensation Insurance uses nearly 800 different class codes to categorize employees based on risk. If you're building 1-2 family homes, you're likely looking at class code 5645. Commercial work or buildings over three stories? That's code 5403. The average rate for construction ranges from $5.25 to $10.25 per $100 of payroll, depending on your state and specific classification.
Here's where people mess up: they put all their employees under one classification code to simplify things. Don't do this. If you have someone doing office work, they should be classified as clerical (typically code 8810) with a much lower rate. If your field employees spend some time on framing and some time on finish work, you can split their payroll among different codes as long as you keep detailed time records. Getting this wrong can cost you thousands when the insurance company audits your payroll at the end of the year.
The Subcontractor Trap You Need to Avoid
You might be thinking, "I'll just hire subcontractors instead of employees and avoid all this." Smart move, but it comes with a massive gotcha: in most states, if your subcontractor doesn't carry their own workers' compensation insurance, you become liable for their claims.
Michigan, Minnesota, South Carolina—the list goes on. These states treat employees of uninsured subcontractors as your statutory employees. That means if a sub's worker gets hurt on your job site and the sub has no coverage, guess who's paying? You are. This is why general contractors require certificates of insurance from every subcontractor before they step foot on a project. It's not bureaucracy—it's survival.
Even if you're still a one-person operation hiring subs, you need to verify their insurance status. Get a current certificate of insurance, make sure it shows workers' compensation coverage, and keep it in your files. If they claim to be a sole proprietor with no employees, get that in writing. Some states allow exemptions for genuine sole proprietors, but you need documentation.
Employment Practices Liability: The Coverage You've Never Heard Of
Workers' comp protects you when employees get physically injured. But what protects you when an employee claims you fired them unfairly, discriminated against them, or created a hostile work environment? That's where Employment Practices Liability Insurance (EPLI) comes in.
Small businesses are actually the most vulnerable to employment claims because they typically lack HR departments, employee handbooks, and formal policies around hiring, discipline, and termination. You might think, "I only have one employee, what could go wrong?" A lot, actually. Wrongful termination lawsuits, harassment claims, discrimination allegations—these can happen with just one employee, and defending against them is expensive even if you win.
The good news? EPLI is surprisingly affordable for small contractors. The average cost starts at just $18 per employee per year according to 2025 data. Small businesses pay an average of $222 monthly, or about $2,665 annually. That's cheap insurance against a lawsuit that could easily cost $50,000 or more to defend.
EPLI can often be added as an endorsement to your Business Owner's Policy (BOP) or general liability policy, or you can purchase it as a standalone policy. Coverage typically reimburses you for legal defense costs, settlements, and judgments related to employment claims. One important note: most EPLI policies only cover employees, not independent contractors, so you may need additional endorsements if you work with contractors regularly.
Commercial Auto and Hired/Non-Owned Coverage
Here's a scenario that plays out constantly: You hire an employee. They need to pick up materials for a job. They use their own truck. On the way back, they cause an accident. Whose insurance pays?
Not their personal auto policy—that excludes business use. Your general liability policy? Nope, that doesn't cover auto accidents. This is exactly the coverage gap that bankrupts small contractors who think they're fully insured.
If you have company vehicles, you need commercial auto insurance. Period. But even if you don't own any vehicles and your employees use their own, you need Hired and Non-Owned Auto Liability coverage. This protects you when employees use personal vehicles for business purposes or when you rent vehicles for work. It's typically inexpensive—often just a few hundred dollars annually—but it closes a critical exposure.
Many general contractors add hired/non-owned coverage to their general liability policy as an endorsement. It's a simple addition that prevents catastrophic losses. Just make sure you review what's actually covered—some policies have limitations on the types of vehicles or uses that are included.
Special Considerations for California Contractors
If you're contracting in California, pay close attention. The state has been tightening workers' compensation requirements significantly. Senate Bill 216 was originally set to require all licensed contractors to carry workers' comp starting January 1, 2026, regardless of whether they have employees. However, SB 1455 delayed this requirement until January 1, 2028.
Certain license classifications already face stricter rules. If you hold a C-8 (Concrete), C-20 (HVAC), C-22 (Asbestos Abatement), or D-49 (Tree Service) license, you're required to maintain workers' compensation insurance right now, even if you have zero employees. California is moving toward making this universal for all licensed contractors, so plan accordingly.
Getting Started: What You Need to Do Now
Before you extend that first job offer, take these steps. First, verify your state's specific workers' compensation requirements—don't assume anything. Contact your state's workers' compensation board or your insurance agent to confirm the threshold and any industry-specific rules.
Second, gather accurate payroll information and job classification details for quotes. Insurance companies need to know exactly what work your employee will perform. Be specific and honest—vague descriptions or minimizing the risk level will come back to haunt you during the annual audit.
Third, talk to your insurance agent about bundling coverages. Getting workers' comp, EPLI, and hired/non-owned auto from the same carrier often results in discounts and simplifies your insurance management. Many carriers offer Business Owner's Policies that can include several of these coverages in one package.
Finally, set up systems to track payroll by classification code from day one. Use time sheets that differentiate between different types of work. Keep detailed records of subcontractor insurance certificates. Create a simple employee handbook that outlines your policies, even if it's just a few pages. These practices don't just help with insurance—they're the foundation of a professional, scalable business.
Hiring your first employee is exciting. It means your business is growing. But growth without proper protection is just risk. The insurance requirements might seem overwhelming at first, but they're actually straightforward once you understand them. Get the right coverage in place before day one, keep accurate records, and you'll avoid the expensive mistakes that derail growing contractors every single day.
