Once a business owner has an employee and sets up payroll, they’re probably legally required to have workers’ compensation insurance. But, on the ever-growing list of things that small business owners worry about, insurance is rarely noted. And who can blame them! For the most part, business owners see insurance as a safety net for a successful business; a way to keep a business from going under due to an unfortunate incident.
The downside of this mindset is that a business owner may not think about insurance at all until they’re an ‘established business,’ and, unfortunately, this kind of thinking may result all sorts of unnecessary fines, penalties, and headaches.
First off, what is worker’s compensation insurance?
Workers’ compensation (or ‘workers’ comp’ for short) is a form of insurance that protects your employees if they’re injured on the job. In exchange, the employee gives up the right to sue the employer. Each state has different rules on when workers comp is required, so you should check your state’s requirements, but in general, once you have an employee, you are legally required to carry it.
Most states will also conduct annual audits on your payroll and workers comp, and this can result in hefty fines if it’s not been done properly. One startup we know got hit with an $18,000 fine from the state of New York because their workers comp expired during the year.
So how can you get the most from your policy?
A lot of factors go into pricing a workers comp policy, and most of them aren’t subject to much discretion. In general, a policy is priced off of: i) the amount of payroll, and ii) the classification of the job. Through these two factors, you can see how a construction company and a similarly-sized software company could have two very different prices.
This is because the risk profiles of the two companies will be very different as construction jobs are relatively more dangerous than a software job. However, for an agent to get you the best pricing possible, it’s important to recognize the different roles that people in each of those businesses perform. For example, even within a software company, the workers comp rate for an office manager could be three-times as high as one for a software developer.
So the best thing you can do is speak to an agent. A good agent will generally work to get the best classifications possible, within reason, but it’s always helpful to review and make sure that everyone has an accurate job description, which will also help the audit process go smoothly.