Nearly all states require employers to carry workers compensation. This is a unique insurance that helps protect both employees and employers from the financial fallout of a workplace accident.
You almost certainly need to carry workers compensation if you have employees. The only exceptions are Texas and a few specific industries (varies by state). It’s still often recommended even if not legally required, though.
Here’s a breakdown of what employers should know about workers compensation. From who needs workers comp to how much it costs, we’ve got this covered.
What is workers compensation insurance?
Workers compensation insurance is for employees who become injured or ill due to their work.
Should an employee sustain a job-related injury or illness, workers comp will pay medical expenses and a portion of lost wages. It might also pay rehabilitation costs for severe injuries.
Workers comp also has a significant benefit for employers. As a standard part of filing a claim, employees waive their right to sue over the workplace injury or illness.
(Employees aren’t required to file a claim rather than sue, but workers compensation provides a prompt and known payout. It’s very rare for an employee to risk a lengthy, costly and uncertain lawsuit.)
Does workers compensation cover independent contractors?
When looking at employees vs contractors, workers compensation normally only protects employees. It usually doesn’t protect independent contractors or subcontractors. There are a few exceptions, depending on your state and industry.
How does workers compensation insurance coverage work?
The specifics of workers compensation policies can be quite detailed. The principles of this coverage are surprisingly straightforward, though.
What injuries are typically covered?
Workers comp covers both injuries and illnesses that are caused by work. Most claims fall into one of four categories:
- Acute injuries (e.g. falling, hurt by equipment, electrocuted)
- Chronic injuries (e.g. repetitive motion injury, hearing loss, back pain)
- Acute illnesses (e.g. chemical poisoning, chemical rashes, infections)
- Chronic illnesses (e.g. asbestos exposure, mold exposure, cardiovascular conditions)
- Travel injuries (depending on state, policy terms, employee role and travel location)
What expenses does it pay for?
When an employee sustains a covered injury or illness, workers comp may cover several associated expenses:
- Medical Treatment: Immediate medical costs and additional treatment that’s needed. Could include an ambulance, hospitalization, doctor visits, surgeries, prescription medications, physical therapy, occupational therapy, and other medical costs.
- Lost Wages: A portion of the employee’s lost wages. The percentage varies depending on the state and policy. There’s usually a brief waiting period (e.g. 3-7 days) before this benefit begins, but employees shouldn’t wait to report an injury. Payments for lost wages typically aren’t subject to federal taxes.
- Disability Benefits: Disability if the employee becomes disabled for a prolonged period of time. How long disability payments last depends on the state and policy.
- Death Benefits: In the most severe cases, where an employee tragically passes away, their family members or heirs can receive death benefits.
What is not usually covered?
In order to be covered, an injury or illness must be directly attributable to an employee’s work. It’s obvious when a machinery accident is work-related. Whether a repetitive motion injury, respiratory illness or infection is due to work often requires advanced evaluation. Injuries that occur outside of work aren’t covered.
Additionally, injuries that occur as a result of intentional misconduct aren’t covered, regardless of whether they occur at work.
The default for independent contractors and subcontractors is that they aren’t covered by the hiring business’s policy. In select situations, depending on the state, policy terms and chosen features, contractors might receive coverage. This is one of the more complicated aspects of workers comp.
When should employers report workplace injuries?
Employers should report any workplace injuries promptly. Injuries should be reported even if the severity and potential expenses aren’t known. Promptly reporting an injury ensures the claims process can move along if necessary.
What is the difference between liability insurance and workers compensation?
It’s important to understand how to choose business insurance. General liability insurance and workers compensation are two distinct insurance coverages. They provide different protections, and mustn’t be confused with each other. Many employers should carry both.
Workers compensation insurance
Workers compensation insurance is strictly for injuries and illnesses that your workers suffer. It’s required in many states, and pays expenses like medical costs and lost wages. It doesn’t offer any protection for others, since only workplace injuries and illnesses are covered.
General liability insurance
General liability insurance covers a few common risks, but the most noticeable is third-party injuries.
General liability applies when a third-party, a non-employee, is injured. If a vendor falls in the backroom, customer slips in the parking lot, or teenager jumps from the roof after-hours, these types of accidents might be covered. No protection for employee injuries is provided.
In addition to third-party injuries, damage to others’ property, defamation and false advertising are typically also included among general liability’s protections.
How much is workers compensation insurance?
Workers compensation costs vary a lot. There are many different factors that affect premiums, and it’s impossible to provide an informed workers comp quote without knowing your business’s details. Nonetheless, here’s the math behind how much workers compensation insurance costs:
Factors that affect cost
The bulk of a workers compensation policy’s cost is based on five main criteria:
- Industry Risk Level: Some industries are more prone to workplace injuries than others. Insurance companies take this into account, and many subsequent considerations (e.g. claims history) are adjusted for your industry. Riskier industries, like manufacturing and construction, have higher rates than office-based businesses when all else is equal.
- Job Classifications: Within an industry, some jobs are riskier than others. Each employee is classified according to their job responsibilities. The National Council on Compensation (NCCI) is the most common classification system used. It has around 700 different classifications for industries and jobs. It’s important to make sure employees are correctly classified.
- Payroll Size: Since workers compensation payments include a portion of lost wages, payroll has an impact on premiums. Rates will go up if payroll does, whether that’s due to promotions, raises or new hires. The reverse is likewise true.
- Claims History: As with many types of insurance, recent claims can increase rates. If there has been a recent claim, it’ll likely increase your business’s premiums for a few years. You might qualify for a discount if your business’s claims rate is below the industry’s standard.
- Location: Premiums vary substantially from one state to another. Few businesses have control over the state they’re in, but it’s something you should be aware of if considering expansion into another state.
How premiums are calculated
A business’s industry and employees’ job classifications are assigned numerical factors that correlate to the associated risk level.
Once these are determined, they and other factors are used to calculate a rate per $100 of payroll. This is how much the business pays for every $100 it pays employees. The rate then just has to be multiplied by a business’s payroll.
When businesses have different types of employees, the above calculation might be done for every employee classification. Distinct rates and payroll amounts are used, and then they’re added together for the total workers comp cost.
Workers compensation insurance in California
California has some of the strictest and most expensive workers compensation laws. Virtually every employer in California, even those with only one part-time employee, must carry workers comp. Compliance is strictly enforced, and not having correct coverage carries major penalties.
Failing to carry workers compensation can actually be prosecuted as a criminal offense in California. The misdemeanor is punishable by a fine of at least $10,000, and/or up to one year in jail.
Additionally, the state’s regulators are notorious for scrutinizing independent contractor classifications. Improperly classifying workers as contractors, when they’re actually employees, carries stiff fines. So if you’re looking to at how to start a business in California, it’s essential to understand your obligations around workers compensation and employee classification from day one.
Workers compensation insurance in Florida
Florida’s workers compensation requirements aren’t as strict, but it’s still important to follow any that your business is subject to.
In Florida, the requirement to carry workers comp varies by industry and business size. Businesses working construction (residential, commercial or other) are often required to carry coverage if they have just one employee. Businesses in most other industries might not need coverage for just one employee, as the requirement often doesn’t kick in until there’s a specific number of employees. The state has a few exemptions to its requirements, but these are closely regulated.
When starting a business in Florida, one area where the Sunshine State tends to be more vigilant than some other states is with regard to documentation. Keep all relevant documentation, such as policy documents and payroll records, organized.
Workers compensation insurance in New York
When you look at how to start a business in NY, you’ll see that The Big Apple uniquely separates workers compensation insurance and disability insurance. The two may provide similar protections, but each applies in different situations. Most New York employers are required to carry both workers comp and disability, and enforcement is strict.
Your business will receive a certificate of insurance (COI) for its workers comp insurance and for its disability insurance. Keep these on hand, as they’re often required when bidding on contracts or applying for permits. You can easily request another copy of a COI if you lose one.
When do you need workers compensation insurance?
Exactly when you’re required to procure workers compensation depends on the state’s regulations. You might need to purchase or update a policy when your business:
- Hires its first employee
- Hires additional employees
- Adds part-time staff
- Uses subcontractors (check regulations)
It’s a best practice to review the state’s requirements anytime you bring on a new worker. Keep in mind that just one worker could necessitate coverage.
What happens if you don’t carry workers compensation insurance?
Failing to carry workers compensation can have a few different consequences. Your business could face:
- Fines and penalties (very common)
- Stop-work order (usually until you obtain coverage)
- Liability lawsuit (if an employee is injured)
- Back payment of premiums (which you should’ve paid)
- Jail time (only for the most severe and deliberate non-compliance)
States enforce their own requirements, and the penalties for non-compliance vary depending on the state.
Setting up your business before hiring
Before you can even apply for a workers compensation policy, your business needs to be a legal entity. Most insurance carriers will require your formal business documentation and tax identifiers to issue a quote. Setting up your business involves:
- Formation: You’ll need to prepare and file Articles to establish your business as a limited liability company (LLC) or corporation. Sole proprietors aren’t able to hire employees.
- EIN: You’ll need an employer identification number (EIN) from the IRS. This serves as a unique identifier for payroll and tax purposes.
- Registration: Most states require employers to register with the state’s Department of Labor or comparable agency.
- Finances: Keeping personal finances and business finances separate is important for every business owner, but doubly so if you have employees. Open a commercial bank account for your business.
- Payroll Compliance: Payroll compliance requirements are another item that varies by state, but you’ll have to keep records of employee and tax payments.
Many business owners utilize a platform like Tailor Brands for help with these steps. This helps streamline the process, so you can focus more on finding the right employee and running the business.
Conclusion
If you have or are hiring employees, your state probably requires workers compensation insurance. This is a necessary overhead expense that most employers pay, and it’s also an important insurance coverage to have. Complying with state workers comp requirements helps protect employees and employers from the potential financial costs of an accident. Set up your business, and then find a workers compensation policy that’ll work well.