Forty-nine states require employers to have workers’ compensation insurance to pay for medical bills and lost wages for employees hurt on the job. While this is mandatory, there are workers’ comp exemptions for some contractors and sole proprietors. In some cases, even when contractors are exempt, they may be better off getting workers’ comp insurance.
There are times when independent contractors may need to get a workers’ compensation policy as they hire temporary help or bid on large contracts. In these cases, a pay-as-you-go workers’ compensation policy ensures coverage is intact but keeps costs directly associated to actual payroll needs. AP Intego is the industry leader with quick online quotes that innovated the pay-as-you-go workers’ compensation standards.
How Workers’ Comp Insurance Works
Workers’ comp insurance is a type of business insurance that pays for medical bills, rehabilitation services, lost income, and potential death benefits to employees or their survivors if an employee is hurt on the job. Employers are required to carry workers’ compensation in every state but Texas.
Workers compensation is a type of commercial insurance generally based on no-fault laws, meaning it doesn’t matter if the employer or employee is responsible for the injury. However, if the employer is found not meeting safety standards or the employee was doing something illegal when injured, there can be other ramifications, including claim denial. Contractors should consider workers’ comp as part of their business insurance needs.
State Requirements for Workers’ Comp Insurance
Employers need workers’ compensation insurance in every state and the District of Columbia with one exception, Texas. However, there are 11 states that require fewer employees before mandating workers’ compensation insurance.
The 11 states that have higher employee thresholds before workers’ comp is required are:
- Alabama: Businesses with five or more employees are required to carry policies. In corporations and LLCs, the officers and members are not exempt and considered to be employees.
- Arkansas: Most small businesses with at least three employees must have valid coverage.
- Florida: Industry-specific rules apply. Construction businesses that have at least one employee, non-construction businesses with four or more employees including officers, and agricultural businesses with six or more regular employees must have coverage.
- Georgia: Employers who have three or more employees with exempted officers counting as employees must carry workers’ comp. Contractors who have subcontractors perform tasks may be required to maintain workers’ comp if subcontractors don’t have coverage.
- Mississippi: Companies with five regular employees must maintain coverage; all partners and officers don’t count as employees. Independent contractors are exempt, but the employees of subcontractors must be covered.
- Missouri: All construction companies with at least one employee must carry coverage with officers counting as employees. Employers with at least five employees must maintain coverage.
- New Mexico: Construction contractors must carry coverage regardless of total employee count while all other businesses with three or more employees are required to maintain workers’ compensation.
- North Carolina: Businesses with three or more employees must maintain workers’ comp; that includes coverage for minors and undocumented workers. A special requirement exists for any business that has at least one employee working in contact with radiation.
- South Carolina: Companies with at least four employees working full-time or part-time must maintain coverage.
- Tennessee: Employers with five or more employees must carry coverage unless the employer is in the construction or coal mining business, where coverage must be maintained regardless of the number of employees or subcontractors.
- Virginia: Any business with two or more employees must maintain coverage.
Of these 11 states, a handful have a separate requirement for any employer with a contractor’s classification or companies with people working directly in contact with ionizing radiation. These are industry-specific adjustments. Small business owners should confirm the exact requirements of their state to maintain compliance with all laws and regulations.
The five of these states with an adjusted threshold specifically for contractors are:
- New Mexico
Texas is probably the most unusual state when it comes to requirements and exemptions. The state doesn’t require business owners to get workers’ compensation insurance as a general rule, but contractors working with government entities must get coverage.
Always confirm state requirements prior to making workers’ compensation insurance purchase decisions. Keep in mind that even though a small business may be exempt from obtaining workers’ compensation, they could be sued and deemed liable if an injury happens to an exempt employee.
Contractors Who May Have a Workers’ Compensation Exemption
Depending on individual state laws, there are different types of contractors and small businesses that qualify for a workers’ compensation exemption. Most of the time, exemptions are for employers who meet the state’s employee threshold, certain business entities, and specific occupations, such as domestic help.
The types of exempt workers’ compensation contractors include:
Sole proprietors are usually exempt from having to maintain workers’ compensation insurance on themselves. The idea is that a sole proprietor who gets hurt will not sue himself for damages. However, if that sole proprietor is working on large public or private contracts as a subcontractor, the general contractor often requires coverage.
Many states exempt casual labor from workers’ compensation requirements. Casual labor is usually defined as workers hired to do tasks that are not part of a business’ normal operations, such as a law office hiring a janitorial crew to clean the office. However, states can have different definitions for casual labor.
Most states define casual labor in one of the following ways:
- Work hired to do tasks on a brief, sporadic, occasional, or irregular basis
- Contracts with limited or capped pay for the work; once the cap is met, the employee moves from casual labor to a regular, non-exempt employee
- Limited number of employees before the employer moves from casual labor status to non-exempt employees
Most domestic employees are usually considered exempt employees. This means homeowners don’t need to obtain special workers’ compensation insurance for those hired to help in the home. States may have hourly requirements for this arrangement before the domestic employee is considered a non-exempt employee.
Domestic employees eligible for workers’ compensation insurance exemptions include:
- Baby sitters and nannies
- Landscapers and yard maintenance
- House cleaners
- Personal chefs
Many homeowner’s insurance policies have the option to obtain a small workers’ compensation rider for domestic employees at a very reasonable rate. If you are concerned about coverage for those working in your home, talk to your homeowner’s insurance agent first.
Commissioned Real Estate Agents
Some states offer a workers’ comp exemption for real estate brokerages that employ commissioned real estate agents who work strictly on commission. In-house support staff and salaried workers are not exempt.
Other Exempt Employees
There are other employees who meet limited exclusion status in some states. While these are not seen widely throughout the country, it is good to check them off your list of potential employees requiring workers’ compensation insurance.
Limited exemptions for workers’ compensation insurance requirements include:
- Volunteer ski patrol employees
- Members of the clergy
- Some taxicab drivers
- Professional athletes
- Athletic contest officials
- Officers of nonprofit associations and corporations
- Direct salespeople
- Newspaper resellers
- Musicians and performers
Businesses that don’t meet the criteria for the workers’ comp exemption must have a valid workers’ compensation insurance policy in force before they hire their first employee to remain compliant with state laws. Failure to do so can result in hefty fines and criminal prosecution.
Reasons to Get Workers Comp Even if Exempt
Even if you are an exempt employer, consider the ramifications of workplace injuries to yourself or employees. Flip this around: Injured employees have the right to sue employers without workers’ comp for medical bills, wages, and even mental anguish. The cost of workers’ comp insurance is often far cheaper than the costs associated with a lawsuit brought by an injured employee or contractor.
You Occasionally Hire Help
Many contractors and sole proprietors work independently for most projects throughout the year. However, larger projects may require more help, leading independent contractors to hire employees for specific gigs. It is important for employers to maintain workers’ compensation insurance throughout the year to prevent problems with obtaining it.
Regularly purchasing and canceling policies not only can increase premium costs since insurance carriers are unsure about the risk, but it could lead to delays in getting a policy when you need urgent coverage for a job.
Your Clients Require Workers’ Comp
Many states that have workers’ compensation exemptions have special mandatory requirements for independent contractors working with government contracts and public entities. Even Texas, which has no formal requirement for most businesses to maintain workers’ compensation, requires those working in a public capacity to have it.
Businesses in the private sector will also request a certificate of insurance (COI) from contractors working at third-party locations or on projects to maintain workers’ compensation. If a contractor wants to get hired for bigger projects, he usually needs to maintain what is called a ghost policy at the very least. A ghost policy is a minimum coverage, minimum premium policy based on no payroll costs.
Workers’ Compensation Exemption Alternatives
When you don’t have a workers’ compensation insurance policy, you are considered self-insured. You are responsible for the costs associated with work injuries to yourself and your employees even if you meet the exemption rules. The alternative is to maintain a small workers’ compensation policy to have protection in place.
There are a couple of ways to purchase workers’ compensation affordably:
Sole Proprietor Workers’ Compensation Ghost Policy
A ghost policy is a workers’ compensation policy purchased by contractors who may hire non-exempt employees for limited periods of time during the year. The policyholder pays a minimum premium based on zero payroll dollars. If the sole proprietor or subcontractor hires anyone and they get injured, the claim is covered.
The contractor himself may also be eligible if he becomes injured on the job. Ghost policies are commonly used when subcontractors need to satisfy general contractors’ requirements for workers’ compensation coverage even though they are personally exempt and have no employees.
Workers’ Compensation Insurance Through a Professional Employer Organization (PEO)
A professional employer organization (PEO) is a human resources provider that many small businesses utilize. The PEO serves as the employer of record and is able to get policies at better rates because of the number of employees on record from different companies. This helps independent contractors and small business owners save costs on workers’ compensation premium and health insurance.
Pros & Cons of Workers’ Compensation Exemptions
There are both advantages and disadvantages to workers’ comp exemptions for contractors. Every business owner should consider his business needs, personal risks, and overall goals for contract work to help make a decision about exercising his exemption.
Pros of Workers’ Compensation Exemptions for Independent Contractors
The pros of workers’ comp insurance exemptions for contractors include:
- Saves money: Small business owners and independent contractors don’t need to spend money on potentially expensive workers’ compensation policies.
- Alleviates administrative tasks: The maintenance and audit requirements to keep workers’ comp policies in force are removed from an independent contractor’s workload.
Cons of Workers’ Compensation Exemptions for Independent Contractors
The cons of workers’ comp insurance exemptions for contractors include:
- Increases potential liability: Any accident with an exempt employee could lead to lawsuits. Work accidents could put the business at financial risk if the owner isn’t able to work.
- Limits job opportunities: The lack of workers’ compensation insurance may disqualify many independent contractors from getting major contracts with private companies and public entities.
- Negatively impacts on morale: Employees working for an exempt employer who exercises his exemption may feel there is little concern for employee health and safety, and that can have a negative effect on morale.
Workers’ Comp Insurance Frequently Asked Questions (FAQs)
Workers’ compensation insurance and the various state exemptions that exist can lead to a lot of confusion.
What is workmans’ comp exemption?
Workers’ compensation exemptions release business owners from the obligation of carrying workers’ comp insurance. Business owners can get exemptions for themselves or certain employees if they meet all state requirements. Exempt employees could still sue an employer for medical bills and lost wages if their injuries are the result of negligence.
Is workers’ comp insurance required for the self-employed?
Self-employed individuals generally meet workers’ compensation exemption rules in most states. However, many contracts the self-employed person will bid for often require the self-employed worker to obtain workers’ comp insurance, and show a certificate of insurance (COI) as proof of coverage.
Do I need workers’ comp for independent contractors?
General contractors typically don’t need to obtain workers’ compensation insurance for independent contractors. Confirm that independent contractors and any subcontractors they have are covered by requesting a certificate of insurance that confirms the type and amount of insurance in force.
Why am I being asked for a certificate of insurance (COI)?
When contractors work for other public entities, companies, or even in people’s homes, they may be asked to show proof of insurance coverage with a certificate of insurance. The COI lists the liability coverages, including workers’ compensation, the small business owner has that alleviate the liability from the hiring entity.
Workers’ compensation insurance exemptions reduce the insurance costs for small business owners and independent contractors. Exemptions are defined by state laws and should be reviewed annually to confirm compliance with independent contractor rules. If you are exempt from getting coverage, review the pros and cons before making a final decision.
Get professional insights as to what exemptions are available and whether or not you actually want to exercise those rights. Liability exists whether you have a workers’ compensation insurance protection or not. Talk to a broker like AP Intego to see how inexpensive a policy you can get to protect you and anyone you might hire.