Despite being a necessity for almost every U.S. employer, workers’ compensation law can be confusing and complicated for small business owners.
This guide outlines what you need to know to buy workers’ compensation insurance for your small business. Click on any of the following links below to jump to a section within this article.
The U.S. Small Business Administration reports that 17.3% of small businesses employ at least one worker, which means approximately 1 in 5 small business owners is legally required to carry a current workers’ compensation insurance policy.
“Approximately 1 in 5 small business owners is legally required to carry workers’ compensation insurance.”
Workers’ compensation is the system put in place to cover medical expenses and lost wages for employees when they’re injured at work. Not only is it meant to protect your employees, but it also protects you should your employee choose to sue for damages.
Workers' compensation insurance definition: While often used interchangeably with "workers' compensation," workers’ compensation insurance is the policy most employers purchase annually to provide coverage.
The history of workers’ compensation in the U.S. goes back to worker protections that arose from the Progressive Era in the early 20th century.
After a deadly fire at the Triangle Shirtwaist Company factory in New York City, state legislatures began to require employers to compensate workers for injuries sustained on the job, regardless of fault. The insurance product followed soon after to help employers afford work comp claims, by offering no policy limits on employee medical care.
This includes providing a safe, healthy workplace environment, free of hazards, as well as proper employee training and safety information. But some states have specific laws around workplace safety. For example, some require that employers establish safety committees, while others also require a safety plan for certain workplace sectors. Check with your state’s specific regulations to avoid oversight.
Workers’ compensation is mandated across the U.S., but because it’s regulated at the state level, each state has its own requirements. Familiarize yourself with your state’s rules to make sure you’re in compliance. Generally speaking, though, if you employ at least one person, there’s a good chance you’re legally required to carry a workers’ compensation insurance policy.
Keep in mind: you must abide by the rules of the state in which your employees are performing work — not where your business was founded or is currently headquartered. Whether or not it’s required, workers’ comp insurance protects small business owners by covering medical expenses and lost wages for injured workers, and pays for employer legal defense fees in the event of a lawsuit.
Here are some of the factors that vary from state to state.
In most states, any employer with one or more employees is required by law to carry workers’ compensation insurance. However, there are some states (like Georgia) where this doesn’t hold true. Instead, workers’ compensation coverage isn’t required until a company reaches three or more employees.
Furthermore, how an employee is defined differs. Most states agree that the employee limits apply to full- and part-time employees, but they may differ in how they treat sole proprietors, partners, members of an LLC, independent contractors, "gig economy" workers and family members.
States may determine how a business obtains a workers’ compensation policy, including whether small business owners can purchase a policy from any state-licensed insurer, or if all employers must buy from the state fund. (More on this below.)
All workers’ compensation policies, by default, provide coverage within state lines. Some states offer reciprocity with other states, or honor an All States Endorsement. This can be added to a policy by your insurer to allow coverage to apply in any non-monopolistic state for temporary work or business-related travel.
If your employees are traveling across state lines for work, or your business is moving or expanding to another state, check the requirements there before employees begin work.
Workers' compensation across state lines: If your employees are traveling across state lines for work, or your business is moving or expanding to another state, check the requirements there before employees begin work.
Workers’ compensation insurance is a common commercial policy in the U.S. that provides coverage to workers and employers. Most businesses with employees are required by law to carry workers’ compensation (jump to workers' comp requirements).
Others choose to carry coverage because even if it's not required, an employer can still be held liable for a workers' compensation claim. Like any insurance policy, workers' comp insurance can protect an employer and the bottom line by limiting liability.
The policy provides financial compensation for employees injured or killed on the job, and sets limits on the employer's liability. It covers various types of work-related injuries and illnesses, including those from: “On-the-job accidents,” disease, mental illness, or disability from illness or injury caused by job duties or equipment.
In the event of a workplace-related accident or illness, an employee can file a workers' compensation claim with their employer. The employers' workers' compensation policy would then provide financial support for the employee, which may include:
The amount paid depends on the nature of the claim, but in general employee benefits have no limits and no exclusions. In the case of wage replacement and disability or death benefits, the amount paid out is based on the employee's current wages, and a limit may be set by the state's governing body.
In addition to paying out benefits if an employee is injured, workers' compensation insurance policies protect employers by limiting liability.
All insurance policies have “limits of liability,” which is the maximum an insurance company will pay in the event of a claim. What's called "Part B" of a workers' comp policy addresses the employer’s liability in the case of a lawsuit.
If the employee claims the employer's negligence led to the accident, they might choose to sue the employer for additional damages. In this case, Part B would kick in to cover the employer’s legal defense, plus any monies awarded to the employee. Unlike Part A, this portion of the policy does have limits, or the maximum amount the policy will pay out. The employer can choose the limits when purchasing insurance.
Want the 2-minute explanation? Read The Absolute Beginner’s Guide to Workers’ Compensation.
If your employee is injured on the job, you’re responsible for providing the appropriate forms and information about the claims process. Once the claim is filed and approved, the employee will begin receiving benefits. From there, you and the employee will develop a plan for returning to work.
Give the injured employee proper medical attention. Whether the injury falls under an emergency or treatment with a regular physician, give your employee options of doctors who take on workers’ compensation patients. Provide the injured employee with claim forms within 24 hours from the time the injury occurred. Collect statements from witnesses and send copies to your insurance provider. Along with the above statements, provide all accident reports mandated by your state to your provider. You may need to send this report to multiple people, so keep a couple copies on hand. Prepare a statement of the employee’s wages, including overtime. Create a file for the injured employee and include copies of all correspondence on the matter. Make sure to check in with the employee to asses their health and healing.
As an employer, workers’ compensation is a necessary cost to budget for the upcoming year. But how much should you set aside? First, it’s important to understand how policy costs are calculated.
Workers’ compensation rates are key to determining the cost of a workers’ comp policy. Rates are set by your state’s rating agency or bureau using four different factors: class code, location, payroll, and experience.
Every business is assigned an industry classification code that’s used to communicate the relative risk employees face and to recommend a baseline cost to insure workers in that business. In some states, this base rate is assigned and cannot be altered by the insurer.
Like many industries, insurance is influenced by the economy and government regulation of each state, and this drives costs. In general, more strictly regulated and worker-favoring work comp systems like Florida and Massachusetts can expect higher rates than less regulated and more business-favoring states.
It’s actually payroll — not the number of employees — that’s used to calculate the final premium cost. If your state has a higher cost of living with higher-than-average wages (for example, California and New York), you can expect work comp costs to be on the higher end of the national range.
New businesses and businesses with a history of claims will have a harder time securing coverage and may pay higher rates. After three years in business, you are assigned an Experience Modifier, which reflects the company’s workplace safety relative to others in the same class code. This Experience Mod is a mandated credit or debit that any insurer must apply to your final premium cost.
Business owners cannot control many aspects of a work comp premium, but you can save money on the cost of small business insurance by working with an insurance agency that has a strong network of business insurance carriers and by encouraging safe workplace practices. Many insurers also offer a variety of payment options to spread costs throughout the year.
To learn more, read our post on how to estimate what your policy will cost.
“You can control costs by working with an insurance agent that has a strong network of carriers, and by encouraging safe workplace practices.”
For very small businesses — those with five or fewer employees — workers' compensation insurance works largely the same way as it does for larger organizations. But keep in mind:
For a detailed explanation, read How to Get a Workers' Compensation Quote: The Step-by-Step Beginner’s Guide.
“Many independent agents can’t or won’t write work comp because it’s often more difficult and less profitable work for them. In this case, a work comp specialist can provide the guidance and policy you need.”
Whether your state has a private or public work comp market will dictate your options for insurance shopping. Here are some options if you’re a small business looking to purchase a workers’ comp policy.
A licensed insurance carrier, broker or agency
Most small businesses will start shopping with their local broker or insurance agency. However, serving small businesses isn’t profitable for most traditional insurance companies, thus insurance agents have little incentive to write policies for less than five employees or $250,000 in payroll.
WorkCompOne was created to address these challenges and connect small businesses with the workers’ compensation policies they need.
This is an insurance carrier run by the state government, which, in non-monopolistic states, competes with the private market. It can be a good alternative for businesses having a hard time finding coverage elsewhere.
Assigned risk pool
Because carrying insurance is legally mandated, employers have to find coverage somewhere. As a solution, some states offer an assigned risk pool for higher-risk businesses or businesses that have had multiple work comp claims.
If you’ve been denied coverage by several insurers, consider contacting your state’s assigned risk pool for coverage.
Whether you’re experienced or a first-time buyer, purchasing workers’ compensation insurance for your small business all starts with getting a quote. To get started, you’ll need to provide information about your company and employees. Have the following in front of you before contacting an insurer:
WorkCompOne offers a new, simpler way to get the work comp coverage you need. No more complicated forms, and no business too small.
We’ve helped thousands of small businesses get covered - Get your workers’ compensation quote today.
If you’re a small business owner, you’re familiar with the frustrations of workers’ compensation insurance. The team at WorkCompOne knew there had to be a better way to connect small business owners with the work comp policies they need.
WorkCompOne is a Cleveland-based online insurance agency that’s changing workers’ compensation insurance. By bringing together best practices in technology and insurance, we’ve built an easy, new way for businesses to secure workers’ compensation insurance online.
Trusted by thousands of small businesses since 2012, WorkCompOne offers coverage to businesses of all sizes through its online platform, best-in-class customer service and partnership with leading national carriers. Learn more about the WorkCompOne solution.
We've rounded up quick answers to the most commonly asked workers' compensation questions in this post: Your Most-Asked Questions About Workers’ Compensation, Answered [FAQs]
For even more workers’ compensation resources, check out the following related links: