6 Things You Need to Know About Workers Compensation Insurance

Business.com / Insurance / Last Modified: February 22, 2017

If your small business is expanding to the point where you need to hire an employee, you'll need to read up on federal and state laws...

If your small business is expanding to the point where you need to hire an employee, you'll need to read up on federal and state laws regarding workers compensation insurance.

Workers compensation is an insurance program set up to provide workers who were injured on the job benefits to make up for lost wages while they're out taking care of their injury.

According to entrepreneur.com, areas it covers include:

  • Injuries or loss of limbs
  • Illnesses, like emphysema
  • Injuries caused at work, like repetitive motion injuries
  • Medical treatment
  • Rehabilitation needed so employees can return to work
  • Lost wages (up to two-thirds of the employee's salary)
  • Death
  • Liability insurance for the company for lawsuits filed by injured employees

While it might seem like just one more annoying business expense, offering workers' compensation can actually protect you from litigation should an employee become injured or sick as a result of the job. Every state but Texas requires companies to carry workers compensation insurance -- either through a private insurer or the state, or, the business can elect to be self-insured.

The cost for workers compensation insurance varies by provider and industry (high-risk jobs like roofing or construction carry higher premiums than office jobs, for instance). In addition, a company's premiums can either increase or decrease depending on the number of claims filed.

Business owners can help reduce claims and lower premiums by :

  • Accessing the safety of the work environment by investigating how safe the equipment is, whether it needs to be repaired or replaced, offering safety gear where needed and providing ergonomically friendly office equipment.
  • Creating a safe work environment by training all employees on workplace safety, offering updates and tips on workplace safety, 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 should reduce the number of employees injured on the job.

Below are six myths and facts every employer should know about workers compensation insurance:


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, according to an article on LexisNexis.com. Instituting a return-to-work program can help reduce the number of days lost to injury or illness, and as a result increase productivity. Such a program also helps reduce any future increases in workers comp and disability insurance (when you reduce lost wages, the number of claims drop, 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 needs only have one employee to meet the requirement for workers compensation. Coverage requirements can also be dependent on type of business; for example, in Missouri, the law states that for most companies there must be a minimum of five employees before coverage is required, but if that company is in the construction industry, the minimum is one employee.

3. Workers compensation fraud is common. While the media fueled these claims by the insurance industry, studies show that only 1 to 2 percent of claims are fraudulent. The insurance industry estimates fraudulent claims cost companies $5 billion annually, in 2000. But a team of independent researchers estimates the national price tag is probably closer to $1.2 billion, according to an article on PBS.org.

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 they have their employers fill out 1099 forms then they're classified as independent contractors, and therefore do not require coverage. There is a set of guidelines a person must meet to be classified as an independent contractor, and if state or IRS investigators discover that workers classified as independent contractors are, in fact, employees, the business could face tax penalties and in some states be held criminally liable.


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 reign 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 receives benefits for sustaining injury while under the influence of drugs or alcohol, he or she 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, generally any time an employee is injured within the scope of performing their job -- even if they are not at their workplace -- they're covered. Examples include  a salesperson who is injured at a the hotel he's staying at for business purposes or an employee who's injured 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 (ie: a company picnic, retreat, etc.). On the flip side, workers comp does not cover employees who were injured while on break, even if they are on company property.

Photo courtesy of Stock.Xchng.com

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