Workers' compensation insurance provides employees with benefits and protection if they are ever injured or become ill on the job.
The program ensures that employees receive benefits and medical care and (in most cases) protects the employer from legal action in the event of a job-related injury or illness. Workers' comp is similar to other types of insurance in that a company will pay into a workers' compensation fund, from which benefits are paid to employees.
"When employees are injured on the job, workers' compensation provides financial coverage for their medical bills, lost wages and other expenses," said Jeff Somers, president of Insureon. "In addition to protecting employees, workers' compensation limits employers' exposure to lawsuits after work-related injuries."
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How much workers' compensation you need depends on a number of factors, including state laws and your industry. Reputable insurance agencies should be able to help you determine how much you need, but if you want to do your homework, here are the five factors to consider.
1. What does your state require for workers' comp insurance?
To understand workers' compensation requirements, you need to check your state laws. Only Texas doesn't mandate that companies provide workers' compensation for their employees. State laws further require that your workers' comp policies be audited regularly to ensure you are paying an appropriate amount for the risk exposure your people face on the job.
"Since workers' compensation laws are regulated at the state level, business owners should first determine when workers' compensation insurance is required for their business," Somers said. "Usually, it's as soon as they hire an employee." [Interested in business liability insurance? Check out our best picks.]
Some states exempt you from getting workers' comp coverage if you are the sole employee of your business. Before you opt to use this exemption, Somers suggests weighing the potential expense of the claim against the cost of insurance.
"Since most health insurance plans exclude coverage for work-related injuries, sole proprietors may be putting their livelihood on the line if they opt to skip workers' comp coverage for themselves," he added.
2. What is the age of your workforce?
"As employees age, the propensity for injury increases," said Quinten Lovejoy, risk advisor at the Crane Agency. "At the same time, a younger workforce brings about less experience and an increased chance of on-the-job injury."
However, risk is also increasing for the older members of the workforce as more Americans push retirement later. The U.S. Census Bureau reported that more than 20% of Americans over the age of 65 are still working, with that number expected to grow in coming years. Older workers tend to have a harder time proving that their injuries or illnesses happened on the job, given their higher occurrence of pre-existing conditions, so it is important to make sure your employees are aware of their rights and what they are entitled to.
3. What risks do your workers face?
Many factors impact how much workers' compensation coverage a business owner needs and how much it'll cost, including the risks workers face.
"With higher levels of risk comes the need for high levels of coverage," said Lovejoy. "A roofing contractor obviously has a higher risk than someone working in a jewelry store."
Risk factors will determine the cost of your workers' comp insurance. For example, in the state of New York, workers' comp for roofers is $32.42 per $100 of payroll, while it's $2.17 per $100 for retail employees. The Oregon Department of Consumer and Business Services has collected estimated rates by state and industry.
While strong safety standards and procedures can offset the danger, the more hazards your employees work with, the more coverage you should consider. Common risks associated with construction include falls, trench or scaffold collapse, electric shock, and repetitive-motion injuries, according to OSHA.
4. What are the financial risks?
Some cities and states have higher costs of living than others. That means employees need to make more to achieve a similar standard of living. It also means the non-insured costs of medical treatment are higher. Therefore, their losses due to injuries on the job are higher than if they were employed in a different city or state, and they will need more workers' comp.
Not having workers' comp insurance can also pose a massive risk to you, your employees and your business. Penalties vary by state, but Lovejoy said that in states where the National Council on Compensation Insurance (NCCI) governs workers' comp regulations, the NCCI retains the power to assess and fine past premiums for workers' comp coverage that should have been in place, in addition to fines placed by the state government.
5. How much does workers' comp insurance cost?
Workers' compensation insurance varies widely by industry and job type. According to Insureon, workers' comp costs in the U.S. range from 75 cents in Texas to $2.74 in Alaska per $100 in employee wages.
If you are shopping for a workers' comp insurance broker, you should compare prices, coverage and reputation. You'll want an agent who answers your calls quickly and understands your state's requirements as well as the specific hazards of your industry.
You should also know your experience modification rate (EMR), which Lovejoy said is calculated and applied by the NCCI and is critical to determining cost.
"The NCCI is the authority that looks at a company's claims history and makes a projection of its risks based on the business itself and national trends of that industry," he said.
The NCCI, however, does not govern all states. Some states have their own bureaus that provide the same functions as the NCCI.
John Espenschied, agency principal and owner at Insurance Brokers Group, recommends shopping around when you're searching for workers compensation insurance.
"Each insurance carrier will have different risk appetites for business," he said. "Some companies will consider high-risk companies like roofers, while other companies will never offer workers' compensation for [a] roofing business. This means the rates can fluctuate between one carrier and another."
Best workers' compensation insurance practices
You should make it a priority to have all your employees well aware of what is covered, what they are entitled to in the event of a work-related illness or injury, and how the business can support them.
Lovejoy recommended having a program in place for workers returning to work after an illness or injury.
"Companies should have a formal 'return to light duty' program," he said. "If employees are not fit to return to their normal job duties, they can still return to work and perform modified duties and, as such, reduce the overall claim amount."
Additional reporting by Saige Driver. Some source interviews were conducted for a previous version of this article.