While it may seem daunting at first, new small business owners will find that putting workers’ compensation insurance in place is fairly simple and straightforward.
While workers’ comp costs extra for a business owner, it is a necessary—and legally required—expense that’s worth getting separate from employer’s liability insurance, because it does provide benefits for both the injured worker and the company:
Employees receive no-fault insurance against workplace injuries, as long as the injuries or illnesses aren’t due to intentional or illegal acts. Medical expenses are covered and wage replacement benefits are included under workers’ comp benefits. It can also pay death benefits to employees’ families.
Employers are protected against lawsuits by any employee who receives a work-related injury. In most states, workers’ compensation law is seen as a kind of compromise to reduce litigation related to workplace injuries. But keep in mind that employees may be able to sue outside of the workers’ compensation system in some situations, so you should also have general liability business insurance in place as a best practice.
Here are a few tips for when and how to put workers’ compensation insurance in place and how to keep the cost down as your business grows.
When to purchase workers’ comp insurance
Getting injured at work happens regularly, so if you think paying for workers’ comp is paying for something you won’t need, think again … you never know when you’ll be dealing with an injured employee who will require medical care or wage replacement. In 2021, there were 2.6 million nonfatal workplace injuries and illnesses across private industries, according to the US Bureau of Labor Statistics. In fact, the Insurance Information Institute cites that transportation (including vehicle crashes) accounted for 38% of workplace deaths in 2021, whereas 16.4% were attributed to falls and 15.4% were because of exposure to harmful substances or environments.
Plus, workers’ compensation coverage is required by law in most states (unless you qualify for an exemption), even when a company has just one employee, whether full-time, part-time, seasonal, or occasional. In California, it’s required to be in place at the time of the first employee hire. (See CA Code Sec 3200.)
To learn more about state requirements for workers’ comp, check out your relevant state entity:
How much does workers’ compensation cost?
There are several factors that will affect how much you’ll need to spend on workers’ compensation. They include:
Your number of employees. More workers means you’ll be paying a larger premium to cover your total number of workers.
The industry you’re in. Premiums are higher if the jobs are riskier, as in there is a higher risk of being harmed while on the job. (Class codes that relate to different types of jobs factor into calculations for the cost of workers’ comp.) For example, according to the National Safety Council, construction has the most workplace deaths; transportation and warehousing has the most days off from work for injuries and illnesses per 10,000 workers; education and health services had most nonfatal injuries and illnesses with days off from work; and agriculture, forestry, fishing, and hunting have the highest death rate for every 100,000 workers.
Your claims history. An experience modification rating (aka an Experience Mod) is factored into your workers’ comp cost (i.e., your premium payments). That mod factor is a multiplier, so if your claims history is better or worse than the industry average, your workers’ comp cost will be less or more, respectively.
The state you’re in. Some have state-funded coverage as a choice, while others don’t, meaning private insurers are your only option. Four states require you to use the state-funded insurance and don’t allow private insurers to compete: North Dakota, Washington, Wyoming, and Ohio.
Many states use the class codes set by the National Council on Compensation Insurance (NCCI), except for 11 states that have their own class code system, though they may still work with the NCCI. Those states with their own independent rating bureaus are California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, and Wisconsin.
This is a basic formula to give you a general idea of the estimated total you will spend on workers’ comp:
This is the calculation for the estimated amount per employee:
How to purchase a workers’ compensation policy
In most states, including California, a “state fund” provides a simple and certain workers’ comp coverage option.
Private insurance carriers also offer workers’ compensation benefits, frequently targeting specific, preferred industries. Business owners can contact a local insurance agent or your state’s workers’ compensation board to bind an insurance policy.
If you’re self-insured, you’re in charge of paying the benefits for the claim in full. (Usually, certain big businesses are allowed to be self-insured.)
Many payroll companies provide a convenient option as well. Under this option, workers’ compensation insurance is administered through payroll as a deduction. Consult with your payroll company to find out more about this option.
Reducing workers’ compensation insurance cost
There are some exceptions to workers’ comp requirements that can vary according to state laws. In California, you should be aware that coverage is not required for:
Sole proprietors
Officers of a wholly-owned corporation, and
Independent contractors
Taking advantage of these exclusions can help reduce the cost of workers’ comp for your organization, especially for a newly formed company. But be sure to check with your legal counsel or your insurance company to be sure you meet the requirements for the above exceptions.
For example, workers need to meet the definition of an independent contractor, otherwise you may find that person classified as an employee by your workers’ comp policy. (Labor Code 3357 creates a presumption a worker is an employee.)
Workers’ compensation insurance coverage as you grow
As a company grows, it creates a history with regard to workplace safety. This safety or claims history—the ration of workers’ compensation claims to payroll—becomes a company’s experience modification rating, which as shown in the above formula, directly impacts its workers’ compensation insurance cost.
To keep your workers’ comp claims and insurance premiums low, strive to maintain a safe work environment. For office workers, this may mean being conscious of ergonomic work environments. (With that in mind, employers need to think about workers’ comp considerations for employees who work from home.) For companies with 20 or more workers, or with hazardous exposures, this may involve the implementation of an Injury and Illness Prevention Program (IIPP). According to the Occupational Health and Safety Administration (OSHA), there are also reporting requirements for serious work-related injuries and illnesses based on a minimum number of employees along with recordkeeping forms to fill out, though certain industries are exempt. This OSHA safety and health handbook provides an overview for small businesses.
Need help getting started? Reach out to us at Gusto, where our automated workers’ comp service will take care of everything for you.
