For many businesses, workers’ compensation insurance isn’t just a must-have, it’s required by state law. Every state specifies what kinds of businesses need to carry workers’ comp and what types of employees need to be covered under a policy. In this guide, we’ll cover some of the most common factors that determine whether or not you need workers’ comp, possible exemptions and potential penalties for non-compliance.
Factors that affect whether or not you need workers’ comp
Not every business or self-employed individual has to purchase workers’ compensation insurance. Every state has its own guidelines detailing which businesses need to purchase insurance and what types of employees need to be covered under a policy. Here are some factors that are common in most states:
Number of employees
A key factor in determining the need to purchase workers’ comp is the total number of employees. In many states, businesses are required to have coverage even if they have just one part-time or full-time employee. In other states, the number may be two, three or more. In almost every state, employees are counted the same whether they’re part-time or full-time.
Before you start doing a headcount, check your local workers’ comp requirements. Depending on your state, certain types of employees might not count toward your total.
Whether you hire contractors or full time workers
When it comes to independent contractors (or 1099 workers), regulations can vary depending on your state. In many, businesses are not required to provide workers’ comp coverage for independent contractors. Independent contractors pay self-employment taxes and provide their own benefits, leaving business owners off the hook for workers’ comp in most cases.
If you hire independent contractors, it could still be in your best interest to add them to your workers’ comp policy even if it’s not required. This would protect you from potential lawsuits if they end up sustaining an injury or becoming ill while performing work for your business.
An important thing to keep in mind, however, is that it’s possible for an employee to be misclassified as an independent contractor. The IRS and Department of Labor have strict guidelines for whether a worker should be classified as an independent contractor or an employee.
If you’re self-employed with no employees
Self-employed business owners, independent contractors and sole proprietors with no employees are often not required to carry workers’ comp insurance in their state.
Purchasing your own workers’ comp insurance coverage could be a good idea, both from a risk-management and an opportunity perspective. With your own policy, you can be sure that you’ll be able to receive medical coverage and lost wages if you sustain an injury while performing your work.
As an independent contractor, you might find that some businesses won’t want to work with you unless you can prove that you’re covered under your own workers’ comp policy. Having your own policy signals to a business that they likely won’t have future liability issues should you get injured while contracting for them.
Workers’ comp exemptions
Most businesses in the United States are required to have workers’ comp coverage for all their employees. But on a state-by-state basis, there are certain employee categories that are exempt from coverage requirements. Types of workers who are exempt can include:
- Real estate brokers
- Casual laborers
- Domestic servants
- Musicians, performers and entertainers
- Commission-only salespeople
- Agricultural workers
Should you buy workers’ comp even if it’s not required?
Before electing to forego the purchase of workers’ comp insurance, it’s a good idea to measure the costs and benefits. Even if you’re not required to carry workers’ comp, the amount you pay in premiums is likely to be insignificant compared to the financial fallout your business could face in the wake of a workplace incident. An injured employee might file a lawsuit that could be crippling to a small business. Likewise, if you’re an independent contractor, an injury could lead to significant medical costs and an inability to earn money for several weeks or months.
Penalties for not having workers’ comp
If you operate in a state which requires workers’ comp coverage (in other words, anywhere except Texas), you can be subject to steep fines and penalties if you don’t provide the necessary coverage to your employees. Like everything else workers’ comp-related, penalties are determined by state laws. Some factors that can influence how much you’ll pay in penalties if you’re non-compliant are:
Reason for non-compliance
Many state laws stipulate a range of fines for non-compliance, which means that the reason behind your lack of coverage can go a long way in determining how much you’ll pay in penalties. If the reason you don’t have coverage is because you withheld information or attempted to falsely portray your employees being exempt from coverage, you could end up paying a steep penalty. If, on the other hand, you had a lapse in coverage due to an accident or mistake, your penalty could be a little more lenient.
Duration of non-compliance
Most states will consider the amount of time you’ve been non-compliant when determining how much you’ll be penalized. For example, in New York, employers are subject to a $2000 penalty for every 10-day period in which they are non-compliant.
Size of staff
In some states, penalties are different depending on how many employees you have. In these instances, a non-compliant business with 20 employees should expect to pay more in penalties than a non-compliant business with 2 or 3 employees.
The bottom line
If you run a business with employees, there’s a good chance you’re required to carry workers’ comp insurance. If you’re unsure, visiting your state’s workers’ compensation board website should give you the information you need to make an informed (and legal) decision regarding your business.
Even if you’re not required to carry workers’ comp, you can still benefit from having coverage. Medical expenses and legal fees that result from workplace injuries can be devastating to a small business, and the price you pay today in premiums can save you immeasurable amounts of money in the future.