Most businesses are required to carry workers' compensation insurance to cover their employees, unless they qualify for a workers' comp exemption.
In most states, if you employ any staff, you are required to have workers' compensation insurance, which is a specific type of business liability insurance that covers costs associated with on-the-job injuries to employees. However, most states also have one or more workers' comp exemptions, meaning you don't need to provide a policy for certain people within the company. Qualifying for a workers' comp exemption can help save on the high costs of workers' compensation insurance premiums, at least for a few employees.
What is a workers' compensation exemption?
A workers' compensation exemption means that a business does not need to provide workers' compensation insurance to certain employees or partners. The employer gets to save on the amount that coverage would cost, because the price of workers' compensation insurance is partially based on payroll. Excluding parts of payroll reduces the overall cost.
But this isn't without risk, and there are certain things you need to know about workers' compensation insurance exemptions. When you aren't carrying workers' comp for certain employees, they are not protected by a policy should they get injured at work. While you aren't breaking the law by not having a policy, you are subject to a lawsuit if the injured party feels you are liable for their injuries.
For sole proprietors, the risk of injury could mean high medical expenses plus the loss of income. Imagine that you are a sole proprietor working as an electrician without workers' comp insurance and you trip over your tools, fall, and break your leg. You are unable to work for six weeks, losing much-needed income, and your health insurance denies your claim because the injury happened at work. Because you don't have workers' compensation insurance, you must foot the bills from your savings or go into debt.
Who qualifies for a workers' compensation exemption?
Every state identifies the parties who are exempt from the workers' compensation insurance requirement. You'll want to check with your state's department of workers' compensation to see exactly who qualifies, since it varies from state to state.
As a general rule, most states exempt those who are self-employed or independent contractors. The thinking here is that the self-employed person is willing to absorb the risk associated with the job and isn't going to sue themselves in the event of an injury.
These are some other common types of employees who qualify for exemption in many states:
- Government workers
- Business owners and partners
- Railroad employees
- Farm workers
- Maritime workers
- Domestic and household workers
There are also exemptions for certain types of claims. This means that not every injury or illness obtained on the job will be covered if the injury falls under an exemption.
These are some common claim exemptions:
- Injuries from horseplay
- Mental health issues not caused by work
- Self-inflicted injuries
- Injuries sustained while violating safety rules, company policy or laws
- Injuries sustained while impaired by alcohol or drugs
Like employee exemptions, claim exemptions vary from state to state.
Examples of employee workers' comp exemptions in different states
Because state laws vary, so do the exemptions. Don't assume that you are eligible for an exemption just because you see it listed for another state. Contact your state's department of labor or workers' compensation board, as well as your own legal counsel, to be certain you aren't breaking the law.
These are some examples of exemption variations by state:
- California: Business owners, corporate officers and directors of limited liability companies are eligible for an exemption waiver.
- Colorado: Independent contractors are exempt unless they are construction contractors, in which case they must either have coverage or formally reject coverage.
- Florida: No more than three officers of a construction company may file for exemption, while non-construction business owners must own at least 10% of the LLC.
- Illinois: Business partners, LLC members and corporate officers may be exempt unless they engage in extra-hazardous occupations, such as construction or trucking.
- New Jersey: Members of an LLC and sole proprietors are exempt, while corporate officers are not exempt.
- New York: Entities with no employees or with employees working outside of the state are exempt from coverage.
- Washington: Officers of public corporations, nonpublic corporations and family corporations can be exempt under certain circumstances.
These are just a sampling of the types of exemptions you'll find among states. When verifying that you are exempt from coverage, see if your state has a threshold ownership stake, such as 10% or 25%, to qualify for the exemption. Always consult your legal counsel before establishing any workplace policies regarding workers' compensation, insurance and exemptions.
How to file for a workers' comp exemption
Because laws, policies, and procedures vary by state, you'll want to check with your local workers' compensation board on how you can take advantage of the exemption.
In many locations, you'll need to file a form, often called a "Notice of Election to Be Exempt From Workers' Compensation." While the name may vary slightly, the form will request much of the same information regardless of your state. This is some of the information necessary to process the exemption:
- Business entity type
- Up-to-date business licenses
- Employee details
- Proof of ownership
- Insurance carrier information
Complete the form and file it with your state's workers' compensation board. Often, if you're a sole proprietor but pay yourself via payroll services, the state will be notified of employee liability. You'll be contacted by the board to deliver proof of insurance or proof of exemption.
Once you have the exemption, you'll receive a certificate of your election to be exempt. Keep this with your company's important documents in case you are ever questioned on it.
When you'll want to get workers' compensation insurance
Even if you are legally exempt, there are times when it just makes sense to carry workers' compensation insurance. If you are concerned about getting hurt at work and would be unable to bear the burden of costs if you are injured and can't work, you'll want to get a policy.
Remember that just because you are exempt doesn't mean that you can't get workers' compensation insurance. The process of getting a policy follows the same guidelines for you as it would any other employee. The insurance carrier will want to know your industry, what you do for your job daily, how much you make, and whether or not you've had any claims.
A workers' comp policy also makes it easier to hire employees for part-time work. You may have a large job that you can't do on your own and need extra help for a month or two. With a policy already in place, you'll know you're compliant when you bring people on.
Just as importantly, sole proprietors and independent contractors may be eligible for bigger jobs and contracts if they have a workers' compensation policy. Many government contracts require policies to eliminate the risk to the government entity offering the contract. This is also true for large private-sector contracts where major corporations want to be certain they are not absorbing your workers' compensation risk.
If you are unsure whether you need a workers' compensation policy or if you meet the exemption rules, it's best to shop around and compare plans from the best insurance providers. They'll walk you through the requirements in your state and the pros and cons of taking that exemption if you qualify.