Most states require workers' comp. Here's what you need to know about it.
Workers' compensation insurance is a vital (and, unless you're in Texas, legally mandated) part of your business.
Workers' compensation, or workers' comp, is an insurance program that provides benefits to workers who were injured or became ill on the job to make up for medical costs and lost wages while they were out of work.
Workers' comp insurance generally covers injury or loss of limb, illness caused by the job environment (like emphysema), repetitive motion injuries, permanent impairment, medical treatment, rehabilitation, lost wages, death, and liability insurance. Workers' comp will provide coverage regardless of who is at fault – the employee, the employer, co-workers or even customers.
While it might seem like just another business expense, workers' compensation insurance can actually protect you from litigation should an employee become injured or sick as a result of the job.
"Workers' compensation insurance exists primarily to protect the employer," said Chane Steiner, CEO of Crediful. "It is much better to pay for insurance to protect your business in case you are hit with a major claim and don't have the funds to pay it directly."
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Except for Texas, every state legally requires companies to carry workers' compensation insurance either through a private insurer or the state, or the business can elect to be self-insured. Each state has different rules regarding what is covered, how issues are evaluated, how medical care is delivered and the amount of benefits an employee can receive, so be sure to check your state's regulations. Failure to carry the required insurance will result in your business paying for the benefits out of pocket as well as penalties levied by the state.
The cost for workers' compensation insurance varies by provider and industry (high-risk jobs like roofing and construction carry higher premiums than office jobs, for instance). A company's premiums can also either increase or decrease depending on the number of claims filed.
No matter what industry you are in, it is important to carry workers' comp coverage. "A worker can have an accident or get injured under almost any circumstances," said Miguel A. Suro, attorney and founder of The Rich Miser. "Even an office worker can have an accident."
Business owners can reduce claims and lower their premiums by …
- Assessing the safety of the work environment by investigating how safe the equipment is, determining whether it needs to be repaired or replaced, offering safety gear where needed and providing ergonomic office equipment.
- Creating a safe work environment by training all employees on workplace safety, offering updates and tips on best practices, and incentivizing employees' accident-free work.
- Getting injured employees back to work faster.
- Starting an employee wellness program to encourage healthy living and fitness, which can reduce the number of employees injured on the job.
These are six myths and facts every employer should know about workers compensation insurance.
Workers' comp myths
1. Once the workers' comp has been paid, the employer has no more responsibilities.
By staying in close contact with their employees early and often during the recovery phase, business owners can better gauge when the employee will be able to return to work, as well as diminish the possibility of fraud. A return-to-work program can reduce the number of days lost to injury or illness, increasing productivity as a result. By instituting such a program, you may also reduce future increases in workers' comp and disability insurance: When you reduce lost wages, the number of claims drops, which means your premiums drop too.
2. Only larger businesses are required to carry workers' compensation insurance.
Again, laws vary by state, but in many states, a business only needs to have one employee to meet the threshold for workers' compensation. Coverage requirements may also depend on the type of business. For example, in Missouri, the law states that most companies must have five employees before coverage is required, but for a company in the construction industry, the minimum is one employee.
Most experts recommend having workers' compensation insurance no matter what your state's minimum is. In the event of an incident, it could save you thousands of dollars.
"Even if your state doesn't [require it], it's a bad idea to go without it," said Suro. "It leaves both the business and its workers unprotected."
3. Workers' compensation fraud is common.
Most workers' compensation claims are true – studies show that only 1% to 2% of claims are fraudulent. Regardless, it is important to stay vigilant. The insurance industry estimates that fraudulent claims steal around $80 billion per year across all insurance types, according to the Coalition Against Insurance Fraud. Fraud also impacts your business from top to bottom, raising premiums and costing you money. [Related: Learn more about how to prevent workers' comp fraud.]
4. Having employees fill out 1099 forms is a way to avoid paying workers' compensation.
Some small businesses might be under the impression that if their employees fill out 1099 forms, they are classified as independent contractors and therefore do not require coverage. A worker must meet certain criteria to be classified as an independent contractor, and if state or IRS investigators discover that workers classified as independent contractors are in fact employees, your business could face tax penalties and, in some states, be held criminally liable.
Workers' comp facts
5. Workers can be paid for an injury that occurred at work even if it was partially their fault.
While employees don't have free rein to injure themselves on purpose in order to collect benefits, if the injury rises out of or is within the scope of their employment – even if they might have been careless – then they're covered. If an employee sustains an injury while under the influence of drugs or alcohol, benefits most likely will not be covered.
6. An employee can collect benefits even if they weren't at the workplace when they were injured.
According to FindLaw.com, while the laws vary by state, an employee is generally covered anytime they are injured within the scope of performing their duties – even if they are not at their workplace. This includes remote workers, as long as they are officially employed, said Steiner.
Other examples would be employees who are injured at the hotel they're staying at for business purposes or while out running an errand on behalf of the company. Employees are also typically covered if they're injured while attending a company-sponsored event (a company picnic, retreat, etc.). However, workers' comp does not cover employees who are injured while on break, even if they are on company property.