Question – What is workers’ compensation insurance and why does my business need it?
Our Answer – Workers’ compensation benefits provide medical treatment to cover medical care for injured workers in addition to disability payments for lost wages from time away from work. Should the injury be more substantial, this insurance provides a disability benefits and job training should the injury prevent the employee from returning to the job they previously had.
Worker’s compensation provides coverage regardless of who is at fault, but what is important to know about this insurance is that in most cases, the injured employee isn’t able to sue the employer.
According to the Occupational Safety and Health Administration (OSHA) and the Bureau of Labor Statistics, there are almost 3 million serious injuries and illnesses and almost 4,500 deaths annually from job-related injuries. Precautions can be taken to keep the workplace safe, but accidents are going to happen. Without this insurance, one claim could close a business.
Workers’ compensation law and requirements vary by state. Workers Compensation Insurance is mandatory for companies with a minimum number of employees in 49 of 50 states, but the minimum number varies by state. Workers compensation is almost always required when employing 3-4 people, but it’s critical to check your state’s laws as you may need Workers Comp coverage, even as a sole proprietor. Sole proprietors and partnerships without employees may not be required to have coverage and in some states, immediate family members may not require coverage either. The only state that does not broadly require Workers Compensation Insurance is Texas; however it is required under certain circumstances.
Check out Step 8 in our guide to starting a business to find more information.
Who pays for workers compensation insurance?
The business, not the employee pays for workers’ compensation insurance.
How does a business purchase workers’ compensation insurance?
Purchasing workers’ compensation varies by state but generally there are three ways for companies to purchase it.
In most states, employers can purchase workers comp insurance through a state-run program through the department of labor, department of industrial relations or other similarly named department that regulates labor in the state.
While most states give business owners the option of purchasing this insurance through the state-run program or a private company, four states require the insurance to be purchased through the state administered program (North Dakota, Ohio, Washington and Wyoming)
State-run insurance programs have often been created with the intention of keeping the costs of private insurance down by creating competition. Therefore, an employer with fewer than ten employees may choose a state-run insurance program as they do not need extensive coverage. If an employer has been a part of several incidents or is in a high-risk industry and private insurers will no longer provide them with coverage for an affordable price, enrolling in a state-run insurance program may prove to be a helpful option.
Private Insurance Companies
Most states employers have the option of purchasing workers’ compensation insurance through the insurance carrier of their choice.
Similar to state-run insurance programs, employers will often pay a premium to an insurance company to provide workers’ compensation Insurance to their employees. An employer may choose a private insurance company over a state-run insurance program as its services may be more comprehensive and offer greater coverage.
In most states, very large businesses with sufficient resources have the option to self-insure.
How much does workers’ compensation insurance cost?
Workers’ compensation insurance premiums are calculated based on what a business does, the number of employees and total wages. As you would probably guess, premiums will be higher for higher-risk work-related activities.
Private insurance is usually going to cost less than a state-run program, but many owner-operated sole proprietorships are too small to get an affordable price. State run programs provide a minimal, inexpensive policy just to show proof of insurance and is usually a better option in these cases. Depending on the riskiness of the business activities, these policies will often cost less than $1,000 annually.
Do business owners need workers’ compensation?
It varies by state, but most states don’t require sole proprietors and partnerships to purchase workers’ compensation insurance until they hire employees who also aren’t owners. Most states will allow sole proprietors and partners to cover themselves for workers’ compensation if they choose to, but it isn’t required.
That being said, it’s not uncommon for clients to require the independent contractors they hire to have workers’ compensation coverage. So, even if no one works for you, your clients may require you to be covered as a way to limit their liability.
Another thing to think about is that even if you aren’t required to carry workers’ comp insurance, you may want to consider it to pay for any medical expenses and replacement wages if the business owner is injured at work. This way they are still able to receive an income while you are healing.
Have a question about starting a business? Let our business advisors who have worked with over 1,200 entrepreneurs answer your questions. Best of all, there is no charge!