Workers’ compensation insurance is required in most states to cover medical bills, rehabilitation costs, and lost wages for employees who get injured or experience a work-related illness. Costs vary depending on factors such as your business’ location, industry, and payroll. Typically, small business owners pay $450 per employee in annual workers’ compensation premium.
Getting affordable workers’ comp means properly classifying employees and keeping accurate payroll records. The Hartford has a pay-as-you-go program for small business owners to make workers’ compensation insurance costs reflective of existing employees rather than a guess at annual payroll.
How Does Workers’ Compensation Insurance Work?
The state governs workers’ compensation insurance, but most require employers to purchase coverage to pay for employees’ workplace injuries and occupational diseases. In exchange, coverage limits the employer’s risk of workplace lawsuits, fines, or penalties while providing employees with the support they need to recover like surgery, rehabilitation, medications, or disability pay.
Workers’ compensation insurance is considered no-fault insurance, meaning it pays regardless of whether the employee or employer is negligent. Typically, employees cannot collect workers’ comp benefits and sue their employers. Many workers’ comp policies also include employer’s liability coverage to pay for lawsuits, as well as settlements and judgments against the business, should an employee claim their on-the-job injury was due to their employer’s negligence.
What Does Workers’ Compensation Insurance Cover?
Depending on your state, workers’ compensation insurance pays costs associated with any worker, full- or part-time, who is injured on the job. Coverage is mandatory in 49 of the 50 states for any business that has employees, with Texas being the only exception. Because it isn’t federally mandated, there are differences in coverage.
There are four main categories that workers’ compensation policies cover:
Lost wages: Gives employees a percentage of their average weekly wage while not working during their recovery
Medical expenses: Pays the costs of medical care, as well as physical and occupational therapy
Death benefit: Provides surviving families members financial benefits due to the loss of a deceased employee’s income
Legal costs: Covers the employer’s attorney bills, court fees, and other expenses if the employee sues for negligence
State laws vary on the definition of a work-related injury, but most include injuries that occur at your workplace as well as some that happen off-site, like on a client’s location. As long as the employee is doing something related to his or her job, workers’ comp covers the injury.
What Workers’ Compensation Insurance Doesn’t Cover
Some states cover any workplace injury as long as it wasn’t caused by intentional personal harm or obtained during an illegal activity. Other states limit coverage to injuries directly related to an employee’s job duties. This often leads to claim denials for:
- Self-inflicted injuries
- Injuries due to employee roughhousing
- Injuries sustained while commuting to/from work
- Injuries sustained during voluntary recreational activities
- Injuries sustained while committing a crime or when an employee is in violation of company policies
- Drug or alcohol-related injuries
Who Needs Workers’ Compensation Insurance?
State law determines if a business needs workers’ compensation, but coverage is a good idea for any business with employees. In many states, you are legally required to purchase workers’ compensation insurance if you have even one employee while others only mandate coverage once you reach a certain number of employees. In general, workers’ comp is needed for:
Employer: Your business is usually covered if an employee decides to sue, claiming that your negligence was the reason for their injury. Your defense expenses plus associated damages potentially owed to the employee are covered.
Employees: Workers’ comp covers your employees if they’re hurt on the job by paying a portion of their lost wages as well as paying for related medical costs.
Common Workers’ Compensation Insurance Exemptions
Because states regulate workers’ compensation laws, each can mandate who needs coverage as well as workers who don’t. Common workers’ compensation insurance exclusions include:
- Independent contractors: By definition, independent contractors aren’t considered employees of a business, so they aren’t eligible for workers’ comp benefits. Be careful not to misclassify workers as independent contractors as you could end up owing payroll taxes.
- Family members: Immediate family members are often exempt from coverage because they might just help out from time to time with the business, but not count as an actual employee.
- Limited liability company (LLC) members & corporate officers: Again, LLC members and corporate officers often aren’t viewed as actual employees of the business, but many states do allow them to opt into coverage.
In most cases, even if these individuals are exempt in your state, you still have the option to obtain workers’ compensation coverage for them. Business owners without employees may even choose to get self-employed workers’ compensation.
How Much Does Workers’ Compensation Insurance Cost?
Workers’ compensation insurance costs vary widely depending on your industry and location. Most carriers have policies starting at $250 per year for one or two employees in low-risk industries. As the workers’ classification risk increases, rates go up, often exceeding thousands of dollars annually. The Occupational Safety and Health Administration (OSHA) injury cost calculator helps business owners understand the potential cost of not having workers’ compensation insurance.
How is Workers’ Compensation Calculated?
The premium a business pays is determined with a simple formula that considers the job type, the business’ claims history, and its total payroll. Workers’ compensation is quoted as a rate per $100 of payroll.
Class code rate: Classifications codes are used to determine the level of risk for different jobs. Hundreds of codes in 38 states are managed by the National Council on Compensation Insurance (NCCI) with each code reflecting a specific type of job. The remaining states use either their own ratings bureaus or operate as a monopoly for workers’ comp.
Experience modifier: An experience modification rate (EMR) is a multiplier that starts at 1.0 and is used to determine whether an employer should pay more or less based on the number and types of workers’ comp claims they’ve had.
Payroll: Workers’ compensation rates are then applied to your total estimated annual payroll and used to calculate your workers’ compensation premium.
In the News:
Employers in the 38 states that use the NCCI’s rating system may be able to exclude some portion of their payroll during the COVID-19 crisis. The bureau recently announced it will allow employers who have paused operations to reclassify employees who cannot work but still receive paychecks. Reclassification will exclude these employees’ pay from the business’ workers’ comp premium calculations.
Workers’ Compensation Insurance Requirements by State
Workers’ compensation is governed internally by each state. This means every deadline, process, and benefit varies by state as do any penalties for noncompliance. Employers need to know what’s required in their state so they can avoid civil and criminal penalties.
Workers’ Compensation Requirements by Industry
In addition to state laws, there are often workers’ comp requirements for specific industries—even if you are exempt under the general rules. For example, construction companies are often required to provide workers’ comp insurance regardless of whether their employee counts are below the required limit due to the higher risk of injury. Government contractors are also usually required to provide workers’ compensation for their employees.
Penalties for Not Carrying Workers’ Compensation Insurance
Workers’ compensation insurance is a legal requirement for employers. If you don’t obtain workers’ compensation, you can face fines or penalties—even jail time. The severity of a penalty depends on the state, as well as the seriousness of the offense. Most states allow employees to sue you and your business to recover lost wages and medical expenses. Going without coverage also makes it harder to get a policy when you apply.
For example, failure to carry workers’ comp in New Jersey is considered a criminal offense, with violators facing up to $10,000 in fines or jail time of up to 18 months. In Illinois, employers can be fined up to $500 for every day of noncompliance.
How to Get Workers’ Compensation Insurance
You can typically obtain workers’ compensation insurance on the open market from a private carrier like you would for other types of business insurance. In some states, you can opt to buy state-funded workers’ comp. Additionally, some business owners can self-insure or obtain coverage via a professional employer organization.
A commercial insurance provider can offer workers’ compensation. This is best if you need to buy other policies along with workers’ comp, such as commercial general liability or a business owner’s policy (BOP), and you want all your business insurance policies in one place. The best workers’ compensation companies seek to train employers on safety and make the process of buying and paying for workers’ compensation insurance easy.
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If your business is in a high-risk industry or you have existing workers’ comp claims, obtaining insurance from your state fund might be the right choice. State funds often guarantee coverage for businesses that struggle to find coverage with a private carrier. Not all states have a fund. However, Ohio, North Dakota, Washington, and Wyoming require businesses to purchase workers’ comp from the state fund.
Rules for providing self-insurance vary by state. Some allow it while others don’t. In general, they require businesses to meet specific financial requirements or have a bond and hire an administrator. Typically, you also need to demonstrate a commitment to loss control and conduct a feasibility study.
Professional Employer Organization
A professional employer organization (PEO) is best if your EMR isn’t great, and your existing premiums are too high. That’s because instead of being quoted based on your claims history, you’ll have the benefit of your employees being pooled with others. That results in a group rate that’s often lower than what your business might qualify for on its own.
How Do Workers’ Compensation Insurance Claims Work?
We’ve said it before, we’ll say it again: As with most aspects of workers’ comp, the claim process varies by state. Typically, if an employee is injured on the job, the employer has a limited timeframe to begin the claim process. All parties involved must act promptly, or the claim could be denied. When filing a claim, the employer must:
- Provide the injured worker with appropriate paperwork and guidance
- File the claim with their insurer
- Comply with state law for reporting work injuries or illnesses
Frequently Asked Questions (FAQs)
People often ask many questions when shopping for workers’ compensation insurance because it has so many factors affecting price, including industry, company history, and claims history. Here are some of the most common questions about workers’ comp.
What if my business is in one state, but my workers travel to other states for work?
Most states cover employees who travel to another state for business purposes, but you’ll find that some limit the extent of the coverage. Some, for example, end coverage after a specified number of days. In others, workers’ have to meet certain qualifications for coverage to apply. Business owners with traveling employees should discuss their situations with their agents.
My employees have health insurance, so why do they need workers’ compensation insurance?
Health insurance does not cover work-related injuries. If an employee reports the injury circumstances to a medical provider, the health insurance company will contact the employer to bill costs to the employer’s workers’ compensation policy. Employers who don’t have workers’ compensation can be sued for the claim by the injured worker or the insurance company as well as be subject to state fines and penalties.
What if I feel my workers have been classified incorrectly?
Every small business owner should review how their insurance company classifies workers for workers’ comp pricing. Doing this at policy inception and with every audit and renewal helps ensure you aren’t paying construction worker rates for an office clerk or are not covering employees you’ve classified as independent contractors. Look up work classes with NCCI codes and talk to your agent about discrepancies.
The vast majority of businesses are required by law to buy workers’ compensation insurance. Even those that are exempt, however, should seriously consider purchasing a policy to cover employees and protect themselves from lawsuit liabilities when workers get hurt on the job.
By working with a workers’ comp insurance specialist, business owners can manage costs while having the right coverage in place at all times. The Hartford can help with a fast, no-obligation quote.