You may be surprised, but every single state requires businesses to have workers' comp.
Startups often look for ways to cut costs, and workers’ compensation insurance may seem like a unnecessary expense mandated by useless bureaucrats and politicians.
And while every U.S. state mandates that startups carry workers’ compensation insurance in some form, it may seem tempting to skirt the limits on what is legal.
But that is just as much of a mistake as thinking that you can just start a business without the expense of ever consulting a lawyer or an accountant. Worker’s compensation insurance is mandatory, with strict penalties for noncompliance. And even if there was no such law, a smart startup needs a solid policy. Here are some reminders about why workers’ comp insurance is so important, as well as some tips for getting the best policy with the lowest premiums.
Explaining Workers’ Compensation Insurance
Every business, even ones mostly behind a desk, will have workplace accidents, injuries and illnesses. Workers’ compensation insurance kicks in during those instances, and provides benefits and compensation such as reimbursing medical expenses or lost wages. If a worker is killed on the job, insurance will provide death benefits to the employee’s family.
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Unfortunately, there is no easy way to estimate how much your startup may have to pay for insurance. Insureon reports that a 2012 study of workers’ comp found that it could range from $.75 in Texas to $2.74 in Alaska. But those numbers are an average across all industries. For example, construction and mining businesses can pay a great deal more for worker’s comp compared to professional practices.
Pie Insurance points out that before workers’ insurance became commonplace in the late 19th and early 20th centuries, employers and especially employees would be stuck in lengthy and costly legal battles to determine whether the company had to pay. As a result, workers’ compensation insurance is no-fault, which means that it will kick in even if the employee is partially responsible for the injury as long as it happened on the workplace. Furthermore, employees generally forfeit the right to sue the employers for the injury if they take the benefits.
Workers’ Compensation Insurance and the Law
So what are the penalties for not having insurance? As noted above, practically every U.S. state has some law about this insurance, though the specifics vary from state to state. The NFIB has a complete list of regulations per state which is accurate as of 2017, and you should take the time to find up-to-date information for your specific state.
In some states such as Tennessee and Georgia, only employers that have either five or more regular employees or are in certain fields must carry workers’ compensation. In other states such as California, employers with as little as one employee must have coverage. Texas is the only state where worker’s compensation insurance is mostly optional.
Furthermore, penalties can vary from state to state, though generally come in the form of fines which can become as large as $100,000. But if the state finds that you willfully failed to get workers’ compensation or that you intentionally underreported your number of employees to get past regulations, that can become a felony complete with prison time and your business can be forcibly shut down. Businesses can also get in trouble if they work in multiple states, and must make sure that they are compliant with every state where they have even one employee.
The benefits of a sound policy
The penalties for not having insurance may be stiff, but companies should have a workers’ comp policy even if there were no government penalties at all.
There are two primary benefits for having a policy. First, your business protects itself from legal liability. Employees can still sue you if you intentionally hurt them and were not just negligent in caring for their health and safety, but you will otherwise not have to deal with the costs of a lengthy and potentially damaging lawsuit.
Even if there is no lawsuit, your business can find itself paying for a worker’s lengthy rehabilitation instead of insurance without a policy. And if such a cost ends up destroying your business, you may end up still liable to pay.
How to lower premiums
The benefits of a good workers’ comp policy should be clear. Nevertheless, you still want your startup to get the best protection possible while not bankrupting yourself in the process. While avoiding paying for insurance, just like auto insurance, altogether is foolish, there are ways to lower your premium just as there are with your car insurance.
Your premium will be calculated by looking at the rate of accidents and loss history in your business, and then compared to similar businesses. Business with a lower than average accident rate will pay lower premiums.
Consequently, you should look to improve your company’s safety record. Gensuite has a few good ideas, such as figuring out where your company can improve, holding regular safety training sessions, and having employees involved in creating a safe culture. Beyond that, your business can also lower premiums by creating a return to work program. This allows injured employees to come back to work faster by assigning them duties which they can still handle, and shows them that their services are still valued.
There are many barriers which a startup has to consider before they can get their business off the ground, but many of these barriers exist for good reason. The cost of paying workers’ compensation may seem like a hassle, but over time is an important means of protecting your business from lawsuits and medical bills.