Is workers’ compensation required?

One of the most exciting moments for a small business owner is when you finally get to hire employees. Of course, the flip side is the responsibility. Hiring workers means you need to have all your ducks in a row — and not just in front of your new employees. Most states want to know that you and your employees are financially protected if they get hurt or sick at work, and they do that through workers’ compensation requirements.

These requirements vary by state; however, most of the differences are in the details. Many characteristics, like requiring certain employers to carry workers’ comp insurance and fining those who don’t, appear so often that we can discuss them generally.

Let’s take a look at some key workers’ compensation requirements.

What does workers’ compensation cover?

When people ask “what does workers’ compensation cover?” they’re usually looking for an answer to one of two questions:

• What events trigger workers’ comp coverage?
• What costs does the policy cover?

The answer to the first question shows how the variety in workers’ compensation requirements impacts coverage. Most states require workers’ comp coverage to kick in if an employee suffers a work-related injury or occupational disease. However, states can define these differently. For example:

• Physical injuries: Workers’ comp policies typically cover physical injuries whether they’re caused by sudden accidents or develop over time. However, some states limit coverage to injuries caused by a traumatic incident, like a sudden accident, or by rapid repetitive motions.
• Occupational disease: Most states also require coverage for employees who contract illnesses because of workplace exposures. Common examples include asthma, cancer, and hearing loss. Communicable diseases are often excluded, but a few states have enacted legislation that creates a presumption of exposure for certain essential workers in response to COVID-19.¹
• Psychological injuries: Some states require insurers to cover psychological injuries unrelated to a physical injury, like post-traumatic stress disorder, as long as they occur during the course of employment. However, many only pay claims for psychological injuries that follow a work-related physical injury, and a handful do not cover psychological-only injuries at all, such as Florida, Ohio, and Kansas.

The answer to the second question is a bit more straightforward. Generally, workers’ comp covers costs incurred by the injured worker, such as:

• Medical expenses.
• Partial lost wages.
• Death benefits.
• Funeral costs.

Every state except the four monopolistic states that do not allow private companies to sell workers’ comp insurance (Ohio, North Dakota, Washington, and Wyoming) provides employer’s liability insurance with workers’ compensation coverage on the policy. This coverage pays your legal fees if an employee sues over a workplace injury that isn’t covered by workers’ compensation insurance. For example, if an employee is not covered under state workers’ compensation law, employer’s liability insurance often covers your costs if the injured worker sues.

For many employers, that raises a question about insurance coverages: Won’t my general liability coverage or professional liability coverage pay these costs if my employee is injured?

And the answer is: absolutely not. Every type of insurance addresses different circumstances. General liability insurance, for instance, usually only covers claims over the bodily injury of non-employed third parties — essentially, someone who doesn’t work for your business. Professional liability insurance covers claims about errors and mistakes related to your professional services that cause a financial loss to a third party. Most professional liability policies exclude bodily injuries.

What states require workers’ compensation?

Every state except Texas has laws making workers’ compensation insurance mandatory for businesses with employees.² But how those laws apply to your business depends on a variety of factors, like your business size, industry, and legal entity.

Texas employers should also note that while they aren’t required to carry coverage, they have other workers’ compensation requirements to meet.³ For example, they have to notify the state that they’re opting out of coverage.

Is it illegal not to have workers’ comp insurance?

It is illegal to skip workers’ comp coverage if your state requires it. In fact, workers’ compensation requirements are usually in effect the moment you meet the number of employees that trigger them. In a lot of states, that’s your first hire.

Penalties for not having workers’ comp coverage vary by state, but in general, you could face:

Fines—Often, fines are the first penalty for noncompliance. States may charge two to three times the premium you should have paid, a one-time fine, or a per-day fine until you buy insurance — or some combination of these. Plus, fines can be much higher if the state finds you were intentionally non-compliant. Pennsylvania, for example, charges business owners $2,500 for each day without coverage and $15,000 for intentional violations.⁴

Jail time—Ignoring workers’ compensation requirements is a criminal offense in many states and can result in jail time. In some states, like Missouri, noncompliance starts as a misdemeanor with subsequent violations raising the charge to a felony.⁵

Civil lawsuits—Injured employees usually can’t sue their employers, but that changes in most states if you don’t have workers’ comp insurance. In the District of Columbia, business leaders can even be held personally liable.⁶

Are employers required to have workers’ comp?

While many states’ workers’ compensation requirements kick in as soon as you have a single employee, others only require coverage after you hire a certain number of workers — usually between three and five. However, most states have a list of the kinds of employees who are exempt from workers’ compensation requirements.

Your industry comes into play, too. Business owners in high-risk industries like construction often have to get workers’ comp no matter how many employees they have. Further, in some instances an employer may be responsible for covering a contractor’s or a subcontractor’s employees. Florida is a good example of this.⁷ The state mandates workers’ comp for businesses with four or more employees unless you’re in construction. Then you need coverage for only one worker and must ensure contractors and subcontractors have workers’ compensation coverage, too.

Your legal entity is also a factor in your workers’ compensation requirements. In some states, LLC members and corporate officers are counted as employees but can opt out. In others, they’re not automatically exempt. Sole proprietors can often opt out of coverage for themselves, but usually still have to provide coverage for their workers.

Do you need workers’ comp with just one employee?

Many states’ workers’ compensation requirements make coverage necessary the moment you hire even one employee. In fact, a lot of states even require workers’ comp insurance for a single part-time employee. That’s why it’s important to contact your state’s workers’ compensation board before you hire anyone.

One more thing: you may want to get a workers’ compensation policy for yourself even if the law does not require it. Business owners sometimes do this to protect their assets if they suffer an injury that keeps them from earning income, particularly if they’re in a high-risk industry. Moreover, some states require you to cover subcontractors and their workers if they don’t have insurance of their own.

Who must carry workers’ comp insurance?

Any business owner who fits their state’s criteria for workers’ compensation must carry coverage or risk fines, penalties, and sometimes even jail time. And as we noted above, you may even want coverage when you aren’t required to have one because it can help protect your business.

But there’s one more situation where you may be required to get workers’ compensation insurance and not even know it, and that’s when you hire independent contractors. Few states require business owners to cover 1099 workers (i.e., independent contractors). However, simply deciding workers are independent contractors and opting not to cover them can get you in trouble.

Most states have a set of standards to meet before they’ll call your worker an independent contractor. These standards vary by state, but generally have to do with how the employer treats the worker. The less autonomy a worker has in how she uses her time, the more likely it is that she is an employee who should be covered by your workers’ comp.

Who administers workers’ comp insurance?

The governing agencies in charge of workers’ comp vary almost as much as the laws.⁸ Many states use a commission or board to administer workers’ compensation requirements. Others house a division of workers’ compensation in their department of labor, licensing, or workforce development.

States also use ratings bureaus to help them with the finer details of calculating workers’ compensation premiums. Much of this work involves collecting data and using it to figure out how risky different jobs are to insure. The majority of states use the National Council of Compensation Insurance, but some have their own ratings bureaus.⁹

Check workers’ comp requirements before hiring your first employee

Being a small business owner means staying on top of details, including your state’s workers’ compensation requirements. You could face hefty fines and possibly jail time if you fail to.

But more importantly, you leave your business’s finances and your employees unprotected. That’s why it’s so important to get educated about your state’s laws and then get covered.

And if you need general liability coverage or professional liability coverage, you can get a quote in just 60 seconds for 150 professions. Click “get a quote” here or on the app and get your policy instantly.

Sources:

1. National Council Of State Legislatures. Covid-19: Worker’s Compensation.
2. Texas Department Of Insurance. Employer Resources.
3. Texas Department Of Insurance. Non-covered Employers: Information For Employers From The Division Of Workers’ Compensation.
4. Pennsylvania Department Of Labor & Industries. Pa Workers’ Compensation Employer Information.
5. Department Of Labor & Industrial Affairs. When An Employer Doesn’t Have Workers Compensation Insurance.
6. Department Of Employment Services Labor Standards Bureau. If You Are A District Of Columbia Employer This Is What You Need To Know About Workers’ Compensation.
7. Division Of Workers’ Compensation. Coverage Requirements.
8. US Department of Labor Office of Workers’ Compensation Programs. State Workers’ Compensation Officials.
9. IRMI. Rating & Statistical Bureaus.