Do I Need Workers’ Comp Insurance?

The answer to “do I need workers’ comp insurance” depends primarily on whether you have employees. Plan to purchase workers’ compensation insurance coverage if you do. You probably don’t need to if you don’t have employees.

Workers’ compensation as a requirement

Employment is the primary determiner of whether your business needs workers’ compensation. However, your state and business structure also impact whether coverage is required.

Businesses with employees

Nearly all states generally require businesses with employees to carry workers’ compensation coverage. States require coverage regardless of number of employees, hours worked, or whether employees are full-time or part-time.

If your business has 1 or more employees, plan to purchase workers’ compensation insurance. There are few exceptions to the general requirement.

Businesses with independent contractors

Whether businesses that hire independent contractors and subcontractors need workers’ compensation coverage is less straightforward. Requirements for independent contractors vary by state, and sometimes even by the specific situation. It’s wise to talk with an insurance agent about this type of situation.

Sole proprietors and LLCs without employees

A sole proprietor or limited liability company (LLC) with no employees usually won’t be subject to a workers’ comp coverage requirement. They may not be protected against work-related injuries without coverage, though. Standard health insurance benefits sometimes exclude work-related injury.

Sole props and small business owners seeking workers’ comp for themselves might be able to acquire it through a special state program. Private insurance companies also offer coverage in select situations.

Special situations

Certain circumstances call for particular considerations when determining whether workers’ compensation is needed:

• Corporate officer: Corporate officers of closely held corporations may be able to exclude themselves from coverage. Many states allow this if they have at least 20% to 25% stake in the company.
• Domestic servants: Domestic servants might be classified as employees or independent contractors. Coverage is almost certainly required if they’re an employee, and could be if they’re an independent contractor.
• Seasonal employees: Seasonal employees normally require coverage while they’re employed. Requirements are irrespective of how many employees, whether full-time or part-time, and employment duration. Businesses with seasonal workers should adjust their coverage at the start and end of every busy season.
• Out-of-state employer: Employers with workers in other states need to abide by the laws where their workers are located. This may necessitate obtaining different coverage than would otherwise be purchased and/or purchasing from that state’s program.
• Family members: Family members likely need to be covered if they’re paid employees. Family members may be considered employees in some states even if they aren’t actually paid.

In all of these situations, the expertise of a knowledgeable workers’ compensation insurance agent is helpful.

Workers’ compensation is broadly recommended

Even in situations where workers’ compensation isn’t legally required, it’s still broadly recommended for small and midsize businesses. Few businesses could afford to pay a claim without incurring major financial stress. Premiums for coverage tend to be much cheaper. Policies may be purchased any time during the calendar year. Consider consulting the insurance company that provides your other business insurance products to begin inquiring about availability, pricing, and details.

Protection for employers

In addition to simply being the right way to treat employees, providing workers’ compensation affords employers important legal and financial protections.

Legal penalties for insufficient coverage can be immediate and severe. Having coverage that meets state requirements can ensure that businesses avoid:

• Stop work order: States enforce their requirements by issuing stop work orders (SWOs) when required coverage isn’t in place. These prohibit a business from continuing to operate until they are covered.
• Fines: States have steep fines for not carrying workers’ comp. Fines usually begin accumulating on day 1 of no coverage or an SWO. For example, Massachusetts fines businesses at least $100 per day (not business day) from the day an SWO was issued.
• Jail time: In severe cases, not having workers’ compensation can result in criminal charges. For example, some states have laws that allow for up to 1 year in jail.

Additional financial hardship can stem from lawsuits filed by injured workers. The recently reported average workers’ comp claim hovers around $41,000 (nearly double for auto accidents). These don’t include attorney and court fees incurred during a lawsuit. Employees rarely sue when workers’ compensation covers claims.

Protection for employees

Since workers’ compensation benefits are paid to employees, the insurance certainly serves them as well. Injured employees often are eligible for payment of:

• Medical bills (usually all medical costs).
• Rehabilitation costs.
• Missed or lost wages.
• Job retraining expenses.
• Death benefits to survivors.

Coverage may not apply until after a brief waiting period. Once a claim is approved, it’ll normally cover medical bills retroactively to the date of injury. Lost wages might also be retroactively covered, or they may only be covered after the waiting period.

Basic business necessity

In addition to state requirements, businesses may also find that they need workers’ compensation coverage to bid on and secure contracts, obtain certain banking products, and secure real estate leases or loans.

Make sure your business complies with workers’ compensation requirements

All of this generally holds true across most states, but requirements do vary nationwide. Check specific requirements of any state where your business has employees. Make sure you’re in compliance with all applicable workers’ comp coverage requirements for your out-of-state employees.

Learn more from our free guide on workers’ compensation. For ongoing tips, tools, and resources for HR and businesses management, visit Workest by Zenefits daily.