If you have employees, you've got plenty to worry about to ensure they're happy and productive in their roles. But did you realize you may be required by law to provide Workers' Compensation Insurance to cover your staff?
While the specifics vary from state to state, once you hire an employee in any capacity—i.e. seasonal, part-time or full-time—you may have a legal obligation to provide this coverage.
What It Covers
Workers' Compensation insurance covers the expenses related to an on-the-job injury. That includes:
- Hospital and doctor's bills
- Medication costs
- Rehabilitation expenses
- Lost wages
- Death expenses
- Legal expenses in case of lawsuit
Who Needs It?
Every state has different requirements when it comes to Workers' Compensation. Some states, like Arizona, require it (Arizona requires it for any company with at least one employee, which is pretty much every business), while other states allow you to self-pay for work-related injuries and illnesses.
Texas doesn't have a Workers' Compensation requirement unless it is for employees working on government contracts.
On the other side of the equation is self-insurance. If you're considering this option, make sure you qualify for your state's requirements if there are any.
In California, for example, in order for a company to qualify for self-insurance, you must have a net worth of a minimum of $5 million plus a net annual income of $500,000, and post of a security deposit. For many companies, it's simply more cost-effective to buy Workers' Compensation insurance than to have this kind of money in reserve in case of emergency.
Related Article: Why Even a Small Business Needs Workers' Compensation Coverage
Who Does it Protect?
While it may be called “Workers' Compensation Insurance,” it actually protects employers from lawsuits on behalf of employees injured while working. Before the existence of insurance like Workers’ Compensation, employees who experienced injury or illness on the job were forced to pursue legal action against employers who might have been fined or held responsible for medical bills.
About a century ago, states began implementing a “no-fault” system so that employees could quickly receive medical and other benefits. Of course, not all claims are covered. In general, the injury or illness must occur while the employee is working in the “course and scope” of employment.
Here’s what you need to know about Workers’ Compensation.
Some Employees or Businesses May Be Exempt
Depending on the state where your employees do their work, you may find exemptions contingent upon the location or industry of employment. In many states household domestic servants are exempt from needing coverage.
While most states require Workers' Compensation for any business, 11 states have employee threshold numbers that require only businesses with that number of staff or higher to have this insurance. In Virginia, for example, businesses with three or fewer employees are exempt.
If your company is a sole proprietorship, partnership, or family-owned business that does not have employees, you may find similar exceptions. However, remember that anyone you hire to do work for your company, be it a painter or even a cleaning contractor, can make a claim against you and be eligible for compensation benefits from your company.
Certain Professions are Required to Be Covered
While some states may set a threshold for the number of employees that a business needs before it's required to purchase Workers' Compensation insurance, others have regulations on different industries. In New Mexico, only businesses with three or more employees are required to comply, however, any business in the construction industry must carry Workers' Compensation insurance.
Your Company May Be on the Hook and Not Even Know It
Depending on the industry you’re in, your company may be on the hook if you hire subcontractors that do not have their own insurance. It is very important to independently confirm that your subcontractors have valid Workers’ Compensation policies because certificates may be forged. Ask for proof of policy before any work begins, and confirm it.
In addition, insurance companies may even audit your W-2s and 1099s to make sure that your company is in compliance. If they find that employees are miscategorized or subcontractors have expired policies, you may receive a hefty retroactive premium bill in order to maintain your coverage.
Often startups are working on tight budgets and looking to cut costs wherever they can, but don't cut corners on Workers' Compensation Insurance, or you might pay for this mistake down the road. In most states, the moment you hire an employee, you have an obligation to provide this benefit and as well as others.
Related Article: 9 Ways to Save Money on Business Insurance
There Are Ways You Can Lower Your Rates
While you may think that premiums for insurance have been increasing, Workers’ Compensation premiums are actually at a 25-year low. In addition, there are steps you can take to lower your insurance costs such as:
- Raising your deductible
- Shopping around for coverage
- Taking advantage of incentives in your state
- Implementing a comprehensive safety program
- Maintaining an injury-free workplace
When you invest in training and education that helps your employees do their jobs in a safe and careful manner, you reduce the potential for injuries and claims, and can even receive incentives for demonstrating your company’s commitment to safety.
Check with your state to see what the requirements are in terms of Workers' Compensation coverage. Not being covered appropriately could put your business at risk.