As a small business owner, you may hire a crew to help you manage your work. Whether you’re a carpenter with a full-time apprentice or a face painter who hires an independent contractor to help out at festivals, you may be wondering, do I need workers compensation insurance?
The short answer is, it depends. The long answer? As a small business owner, it’s important to understand the ins and outs of workers compensation insurance and how it applies to your business. Thus, we’ll break the question in two:
- Am I legally required to have workers compensation insurance in my state?
- Do I need workers compensation to protect my business from risk?
Below, we’ll answer is workers’ comp required? Additionally, we’ll break down this specific insurance so you know how to best protect your small business and its employees.
Workers’ compensation 101
Workers’ compensation is a kind of insurance policy that can protect against liability if your employee or independent contractor is injured on the job. Thus, it provides two kinds of protection:
- Protection for employees and independent contractors – If an employee is injured or falls ill as a result of their work for you, workers’ compensation helps guarantee they’ll have the financial resources they need to recover.
- Protection for your small business – If your employee is injured, an insurance policy can help cover their expenses so that medical bills (or legal costs, should the case go to court) don’t affect your business’ financial health.
Across 49 states (save for Texas), most small and mid-sized businesses are legally required to hold workers’ comp insurance if they have a single employee. However, depending on the size of your small business, its legal designation, and other factors, you may be exempt from state requirements.
Workers’ comp requirements
There are no federal regulations regarding workers’ compensation. That means that each state has unique workers’ comp employer obligations, especially when it comes to small businesses. There are at least five factors that can affect whether or not your business is required to hold workers’ compensation:
- Legal designation – If your business is a partnership, sole proprietorship, or member-managed LLC, you may not need workers’ compensation to cover partners, members, etc.
- Number of employees – For example, Kentucky exempts businesses with fewer than two employees, Arkansas and Wisconsin exempt businesses with fewer than three employees, and Mississippi exempts businesses with fewer than five employees.1
- Your industry – Some states provide exemptions for domestic workers, agricultural employees, and even real estate agents.
- Employees vs. independent contractors – If you work with independent contractors rather than employees, you may be exempt from your state’s requirements. However, it’s important to understand how your state defines independent contractors (as its definition may differ from the IRS’).
- Total payroll costs – Several states exempt businesses with a payroll under a certain ceiling. For example, Vermont excludes businesses with a yearly payroll under 10K, while Kansas sets the ceiling for requiring insurance higher at 20k.
Be sure to check with the National Federation of Independent Businesses to understand the laws in your state.
My business is exempt: do I really need workers' comp?
Now you’ve checked your state requirements. If you’re not required to have workers’ compensation, it’s time to move on to the second part of the question we started with: Do I need workers compensation to protect my business from risk?
Let’s imagine a scenario like the following.
You’re a party planner who hires an assistant. You pay them on a 1099, as an independent contractor with a set monthly stipend. You also directly manage and oversee their work. Your assistant then gets injured at a particularly raucous party, and sues you for the cost of their rehabilitation.
In this case, even though the IRS believes this employee is an independent contractor, your state may determine at trial that they’re actually an employee. Now, you’re responsible for their medical costs, your own legal fees, and a fine from your state for failing to provide workers’ comp.
In this case, the small business owner wasn’t required to have workers’ compensation—but they may wish they had it. If you hire employees or independent contractors, even for a day or weekend-long event, workers’ comp can help protect you in situations like the following:
- Accidents and injuries – Say you’re a deck builder who uses a crew to complete jobs. Should one of your employees incur an injury during deck installation, workers’ comp could help cover their medical bills and costs.
- Illness – Say you’re a lawn care professional who works with a partner. Should they become ill as a result of exposure to pesticide, workers’ comp would help cover the cost of their treatment.
- Repetitive stress injury – Say you’re a financial assistant who uses employees to help with data entry. Should one develop carpal tunnel from all the clicking and typing, workers’ comp would help cover their medical costs.
- Disability – In scenarios like the above, a chronic injury or illness could prevent an employee from working and lead to lost wages. Workers’ comp would help cover their financial loss.
As you can see, in situations like the above, you could be held liable for your employees’ injury. If you don’t have workers’ compensation, you could find yourself responsible for medical costs, legal fees, and even fines.
Doesn’t my insurance already cover that?
No. As a small business owner, you may already have the following kinds of policies:
- General liability insurance to provide coverage against client and third-party claims of bodily injury, personal injury, advertising injury, and property damage
- Professional liability insurance to provide coverage against claims of errors and mistakes related to your professional services
However, your employees are not clients or third parties. Therefore, their injuries are not covered by general liability insurance. Likewise, professional liability insurance can protect you from errors in your work with clients, but not your failure to insure your employees.
Get protected with insurance
As a small business owner, you know that costly medical claims or legal fees could threaten your business before it’s really taken off. In order to make sure your business can keep growing and thriving, take every precaution to protect yourself from risk—even if it’s not legally required in your state.
Essential business insurance policies include:
- General liability and professional liability insurance to help provide coverage against client and third-party claims
- Workers’ compensation to provide insurance coverage to your employees and independent contractors
After all, insurance may have a monthly cost, but knowing you’re protected from risk is invaluable.
As a small business owner, you’re a leader in your community and for your company. Being a leader means staying informed of state and local regulations, as well as taking the extra step to protect your company and crew.
Here at Thimble, we’re invested in taking the extra step, too. That’s why we’ve created insurance for the 21st century. Get general liability insurance and professional liability insurance policies by the hour, day, or month and protect your business when you need it.
With a professional liability, general liability, and workers’ compensation policy, you can make sure you’re covered in the case of third-party, client, and employee claims. That’s 360° insurance that goes well beyond the bare minimum to protect your business’ present and future.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.
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