Workers’ compensation, or workers’ comp, is a type of small business insurance that you buy as a business owner to cover injured workers.
Workers’ comp is different and separate from disability benefits, and can help cover the medical bills, rehabilitation costs, and lost income for work-related injuries and illness—regardless of who was at fault. It can also pay death benefits to employees’ families.
How does workers’ comp work?
When an employee gets injured at work, they can file a workers’ compensation claim. In return, they (generally) aren’t allowed to sue you, their employer, for any negligence that might have caused the injury.
In nearly all states, a workers’ compensation policy is the only remedy available for accidental workplace injuries. That means that as long as you pay your health care premiums, you’re protected from a big out-of-pocket payment if an employee gets injured on the job.
Most states have laws that dictate how much employees should be paid out and what type of benefits they should receive. Usually workers’ comp covers around two-thirds of an employee’s wage before the accident or illness occurred by calculating the average weekly wage to determine the amount of workers’ comp coverage that should be received. And it can also cover things like:
- Medical care
- Retraining costs
- Compensation for any permanent injuries
- Benefits to survivors
- 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
Is my business required to have workers’ comp insurance?
If you have employees that aren’t owners of the company, you’re likely required to buy workers’ compensation coverage. The only state that doesn’t require workers’ comp insurance is Texas.
To make sure your business stays compliant, check your state laws to be clear about your workers’ compensation requirements. Each state has its own rules about who is required to be insured, and many states have exemptions for:
- Fewer employees than the state requires
- “Casual labor,” which is often classified as “brief,” “occasional,” or “irregular.” (If you have seasonal employees, this may apply to you.)
- Domestic employees
- Agricultural employees
- Independent contractors
- Employees paid solely by commission, like real estate agents
The key here is to make sure you’re classifying your employees correctly. If you hire an independent contractor and don’t bother buying workers’ comp, you might be in trouble if the state determines that your contractor is actually an employee.
Plus, some states may treat uninsured contractors or subcontractors as your employees if they get injured while doing work for your company.
Are you a sole proprietor? If so, you may not be required to purchase workers’ comp insurance, but you might want to consider buying coverage anyway. If you’re completing contract work, your usual medical policy might not cover your own workplace injuries. Plus, many companies and individual clients that hire contractors might want you to have it anyway.
If you aren’t covered when you should be, you may:
- Have to pay claims out of pocket
- Have to pay a fine
- Lose the right to do business in your state
- Be sued by injured employees
- And yes, even do jail time
Should I get workers’ comp insurance even if my state doesn’t require it?
Remember, Texas is the only state that doesn’t mandate workers’ comp insurance. Every other state requires most businesses to buy workers’ comp insurance.
If you’re registered to do business in Texas, you may still want to purchase workers’ comp insurance, as it could protect you from civil lawsuits if any of your workers get hurt on the job.
Who pays for workers’ compensation?
As an employer, you pay for workers’ compensation insurance. If an employee files a claim, your insurance company pays out the benefits.
If you’re self-insured, which is when employers pay the entire cost of a compensation claim, you’re in charge of paying out the benefits. (Typically, only some big businesses are allowed to be self-insured.)
How much is workers’ comp insurance?
Like any type of insurance, the cost really depends on your business, industry, and the type of work that your employees perform.
Factors that can impact your workers’ compensation insurance cost include:
- Annual payroll amount: The smaller your team, the lower your premium.
- The “risk class code” of jobs being performed: (Some jobs are riskier than others, like construction, for example.)
- The overall rate of injuries within your industry
- The rate of injuries within your state
- Your company’s claims history: The safer your business, the less you may have to pay over time, and vice versa.
- 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.
How do I get a workers’ comp policy?
While most states allow you to buy private insurance (for instance, through a workers’ comp service like Gusto), five states and two U.S. territories require you to purchase insurance exclusively through state-operated funds.
Those states and territories are Ohio, Wyoming, Washington, North Dakota, West Virginia, Puerto Rico, and the U.S. Virgin Islands.
Some states allow you to self-insure if your business is big enough, but you have to meet strict self-insurance requirements. Check your specific state laws for more details on whether your business needs to buy it, or if you can self-insure.
There are three major types of workers’ compensation insurance policies.
- Traditional insurance: This works the same as most insurance policies, in that you pay a regular premium.
- “Pay as you go” insurance: You only get access to this if workers’ compensation is integrated with your payroll, which means the premium is calculated based on the amount you pay in each payroll period.
- State fund: This is when you buy insurance through a state-governed insurance provider.
A traditional workers’ comp 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.
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.
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 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 won’t forget about making 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 workers’ compensation 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. Here’s a list of all the available state funds.
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
- Federal Tax ID Number (EIN) for your business, or a Social Security number if you’re a sole proprietor
- Recent history of any workers’ comp claims
What types of injuries are (and aren’t) covered by workers’ compensation insurance?
Again, it differs from state to state, but generally, the insurance covers injuries that happen during the course of employment, whether the employee was doing their job safely and properly, or if it was due to your work environment.
This doesn’t mean the injury has to happen at your regular workplace. Someone can be traveling for a conference or running an errand and still be covered. The level of impairment—such as whether the job injury led to a permanent disability—also impacts the amount of worker’s comp benefits received.
Injuries that usually qualify for workers’ comp include:
- Trauma, like repetitive strain or stress injuries
- Occupational diseases, including cancer
Typically, workers’ compensation won’t cover injuries that:
- Are self-inflicted (e.g. someone punched a wall and broke his hand)
- Happen while the employee is committing a serious crime
- Happen while the employee isn’t on the job
- Happen when an employee is violating company policy
- Happen when the employee is under the influence of drugs or alcohol
Is workers’ compensation taxable?
Generally, your employees won’t pay taxes on their workers’ compensation benefits. But an employee’s benefits may be taxed if they also receive Social Security Disability Insurance (SSDI) at the same time.
Be sure to talk to your accountant for more details about your specific tax obligations.
How can I help my employee file a workers’ compensation claim?
If an injured employee needs to file a workers’ compensation claim, you should have them get started as quickly as possible, since some states require people to file within a certain amount of time.
Under state workers’ compensation laws, you’re also required to:
- Hang up notices around the workplace that include information about employees’ rights, workers’ compensation benefits, and details about your insurance provider.
- Provide the necessary paperwork, which differs in each state. In California you would need to give the employee a Form DWC-1, and you would both need to fill out some details. You should work with your insurance company here, as they may provide the claim form for you.
Once an employee receives the paperwork, they send it to the insurance company, who will either approve or deny the claim.
How will a workers’ compensation claim affect me as an employer?
Generally, you shouldn’t have to worry about getting sued about the incident. Employees receive workers’ comp in return for not being able to take you to court, even if the injury was due to your negligence.
That being said, you can still get sued as an employer and should also have general liability insurance in place as a best practice. Employees may be able to sue outside of the workers’ compensation system in some situations. But if you deliberately tried to hurt someone, liability insurance won’t provide coverage.
Make sure to double-check that all claims are legit and job-related. A false workers’ compensation claim can have a severe impact on your business. Your comp costs may rise if your employee submits a successful claim.
Having workers’ comp insurance is great, but active prevention is also key. Make sure you inform all your employees about their insurance coverage, make workplace safety an important part of your everyday policies, and create procedures if a work injury occurs.
Because with the right safety policies in place, you and your team will hopefully never have to reach for it.
Want to learn more? Talk to an expert about how workers’ compensation works.