Q: What Is Workers’ Compensation? Why Do I Need It? How Do I Get It?

Workers’ compensation, or workers’ comp, is an insurance that you buy to cover your employees in case they get hurt at work.

In nearly all states, the employer’s workers’ compensation policy is the only remedy available for accidental workplace injuries. That means that as long as you pay your premiums, you’re protected from a big out-of-pocket payment if an employee gets injured on the job.

Gusto makes payroll, benefits, and HR actually easy.

Do I need to have a workers’ compensation policy?

The short answer is that it depends on your state. The vast majority of states require employers to have workers’ compensation. Not having workers’ comp can put you at risk for some hefty fines.

However, each state has different regulations on which businesses need to have them.

For example:

  • In California, all employers need to have workers’ compensation insurance, regardless of the number of employees they have.
  • In Mississippi, employers with five or more employees must have workers’ compensation insurance coverage.

To make sure your business stays compliant, check your own state’s workers’ compensation laws.

What does a workers’ compensation policy cover?

A typical workers’ compensation policy covers:

  • Wage replacement for money lost while injured
  • Medical treatment of the injury
  • Vocational rehabilitation if necessary
  • Other benefits to certain workers (e.g. coal miners) or their dependents.

Okay, how much does workers’ comp cost?

A workers’ comp quote is determined using the following factors:

  • Annual Payroll: The smaller your team, the lower your premium.
  • Claims History: If you have a low frequency of losses or accidents, your premium may also be lower.
  • Business industry and role of employees: If your business industry and/or employees’ roles are deemed “high risk,” your premiums may be higher.
  • Inclusion/exclusion of owners or officers: Some states allow corporations to exclude owners and/or officers from coverage, which can lower the price of premiums.  

The average cost of workers’ comp insurance is around 1.4 percent of a person’s total compensation. So if one of your employees makes $75,000 a year, you can expect to pay in the ballpark of $1,050 a year on workers’ comp insurance.

For a more accurate estimate, it’s best to reach out to a licensed workers’ compensation insurance provider and get a quote that’s customized for your business, state, and industry.

Gotcha, how do I get a workers’ comp policy?

There are three major types of workers’ compensation insurance policies.

1. Traditional

A traditional policy charges an upfront premium that’s based on your estimated annual payroll and your risk classification per the type of industry you’re in. Why does this matter? Well, certain industries are dicier than others. For example, if you’re a dynamite manufacturer, your risk might be a little higher than say, a donut shop. (Even if their frosting is the bomb.)

At the end of the year, an audit is conducted to make sure your premium price is fair. The auditor compares your actual payroll amount to the premium you’re getting charged. At the same time, they also double check that your team is classified correctly. Based on the audit, your company may be required to pay more or you might get a refund.

Here’s a bit more on how employee classification plays into this: Let’s say you own a landscaping company and you want to add tree removal to your line of services. To kick off the new offering, you put two of your landscapers on your chainsaw crew. This new risk means that your chainsaw-wielding employees will be classified differently than the other landscapers on your team.

2. Pay as you go

The pay-as-you-go option is only available if your workers’ comp is integrated with your payroll. Here, your premium is automatically calculated based on the actual amount of payroll each pay period. This means no estimates, no hefty upfront payments, and 100% accurate deductions.

With direct communication with your insurance carrier, this model also helps you minimize or potentially eliminate the pain of expensive audits altogether. As a result, you don’t overpay or underpay, and you never forget about sending in a payment.

3. State fund

State funds are commonly seen as a last resort for companies who can’t get their hands on a private policy.

Since workers’ comp is required in most states, this can be a solid choice for businesses who have a higher risk or have a long history with losses and claims. Want to see what’s out there? Here’s a list of all the available state funds.

You can get a workers’ comp quote through an all-in-one small business solution like Gusto or through an insurance carrier. Regardless of how you purchase your insurance, remember to have the following information on hand when it’s time to get a quote:

  • Business name   
  • Physical and mailing addresses
  • Telephone and fax numbers
  • Number of locations
  • Number of employees by location
  • Annual payroll by location
  • Type of business entity
  • Recent history of any workers’ comp claims

Your workers’ comp lesson is now a wrap. With the right policy in the bag, you can keep your team safe, no matter what life throws their way.

Want to learn more? Talk to an expert about how workers’ compensation works.

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