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Updated Jul 10, 2024

Workers’ Compensation Insurance: What SMBs Need to Know

What happens if one of your employees is injured on the job? Having a workers’ compensation policy is not only good practice, it’s usually a legal requirement. Learn more about workers’ compensation.

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Katharine Paljug, Business Operations Insider and Senior Writer
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This guide was reviewed by a Business News Daily editor to ensure it provides comprehensive and accurate information to aid your buying decision.

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Hiring employees is an enormous responsibility and business insurance risk that owners must prepare for and understand. Employees can be injured even during the most mundane work tasks. Because workplace injuries are unpredictable, workers’ compensation insurance is crucial. 

Editor’s note: Need a workers’ comp insurance policy for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.

Workers’ compensation insurance transfers the financial risk of a workplace accident to your insurance company. This way, you can focus on running your business while helping employees heal. Here’s what business owners should know about workers’ compensation insurance, including coverage, state laws, filing claims and more.

Did You Know?Did you know
In 2021, total employer costs for workers' compensation were $96 billion, according to the most recent data available from the National Academy of Social Insurance.

What is workers’ compensation insurance?

Workers’ compensation, or workers’ comp, is a type of business insurance that protects employers from liability if their employees are injured in the workplace. This system provides coverage for employees’ lost wages, medical bills and other expenses if they are injured on the job. It also limits the likelihood that employers will face a business lawsuit for workplace-related injuries or illnesses.

Enterprise businesses and large corporations know they need workers’ comp. But many small and midsize businesses don’t realize that they, too, are legally required to buy this small business insurance coverage.

Why small businesses need workers’ compensation

Businesses are legally required to have workers’ comp coverage from the moment they hire employees, explained Jeff Somers, chief operating officer at HouseCanary. “In most states … you are required by law to carry workers’ comp insurance, regardless of your industry or number of employees. You may be required to carry this coverage even if you’re a sole proprietor.”

Very small businesses, or companies whose employees primarily work desk jobs, may skip coverage because they assume that accidents are unlikely. Doing so, however, could result in legal penalties and fines. It could also mean that an accident or injury at the workplace drains your budget and involves you in a lawsuit. Carrying workers’ comp insurance protects you, your employees and your business.

Key TakeawayKey takeaway
Small businesses without proper insurance take dangerous risks that can leave them vulnerable to catastrophic out-of-pocket financial responsibilities.

Understanding your state’s workers’ compensation policies

In the United States, workers’ compensation laws are regulated at the state level. While state requirements are often similar, there may be crucial differences, such as when you are required to buy coverage.

Your state’s regulations also impact how and when you need to report accidents and the penalties for not doing so. If you run a business in Florida, for example, you are required to report claims within seven days after you are notified of an accident or injury.

“If an employer’s late reporting of a claim delays the payment of an injured worker’s benefits, the state of Florida can penalize the business,” said Karen Phillips, general counsel to the Florida United Businesses Association’s workers’ compensation program.

If your employees work in more than one state, you’ll need to purchase coverage in each state, further complicating the requirements. 

“Each state has an agency set up to manage their individual workers’ compensation programs,” said Kevin Hess, partner at management-side labor and employment law firm Fisher Phillips. “Those agencies generally have a wealth of information available to employers to assist them in ensuring they are compliant with the necessary workers’ compensation requirements.”

Did You Know?Did you know
If you’re not sure which agency handles workers’ compensation in your state, this U.S. Department of Labor list will point you in the right direction.

What workers’ compensation insurance coverage you need

Many factors impact the insurance policies your small business needs, including the number of employees you have, their risk exposure and your business’s history of workplace accidents. Businesses in high-risk industries, such as construction, typically pay higher premiums and need more coverage than businesses where employees work at an office.

Depending on your state’s requirements, business owners and sole proprietors may not need to purchase coverage for themselves. While that strategy may save you money right now, it could put you at risk in the long term.

“Small business owners need to understand the cost-benefit analysis,” Phillips said. “The owner’s health insurance policy may not cover workplace accidents, meaning the owner could have to pay out of pocket for any medical bills or lost wages they may have.”

FYIDid you know
To compare insurance rates and policy offerings, visit online insurance quote comparison websites so you can make the best choice for your business.

How to report a workers’ compensation claim

Report all workplace injuries to your insurer as quickly as possible, even if they seem minor or the employee doesn’t press the matter.

“Often, what seems like a minor injury, like a bee sting, can turn into something much more extensive, like an infection, depending on the overall health of the injured worker,” Phillips said. “It’s important to [make a] timely report [of] all claims to the insurance carrier so they can get involved.”

Once you report a claim, the insurance company handles the process, which allows you to focus on running your business.

“The insurance company adjuster manages the injured worker’s care, and the insurance company hires an attorney to defend the employer should the injured worker hire an attorney,” Phillips said. 

The employer’s job during the claims process is to provide any information the claims adjuster asks for and to cooperate fully with any investigation. “Employers who don’t cooperate with the insurance company will often find their insurance being canceled,” Phillips added.

Key TakeawayKey takeaway
Report workplace accidents to your insurer as soon as possible, even if they appear minor, to avoid possible state penalties.

What’s involved in a workers’ compensation investigation

Cooperating with your insurance company often involves some degree of investigation. Larger businesses usually have detailed procedures or corporate policies for how these investigations happen. Small and midsize businesses should have these policies too.

“First and foremost, those policies should include documenting the injury, including any potential witnesses, and when the claim was first reported,” Hess said. “This should be done for each and every claim. The employer should also train employees on the appropriate steps to investigate and document a workplace injury.”

In some cases, you may want or need to administer a drug test following a workplace accident. States have different rules for when and how these tests can be used. In many cases, this depends on how clearly your company’s drug-testing policies are outlined and how available they are to employees.

“Employers should maintain drug-testing policies that are compliant with applicable laws, including the limitation on post-accident drug testing,” Hess said.

To make sure your drug-testing policies pass legal muster, consult a lawyer before you implement them and publish them in the employee handbook – long before any workplace accident occurs.

What workers’ compensation doesn’t cover

While workers’ compensation insurance covers your business in many scenarios, it doesn’t protect you in all of them.

“Workers’ comp doesn’t cover all lawsuits over employee work injuries; it only covers what the state requires them to cover,” Somers said. “In some states, certain types of workplace injuries and illnesses, along with accusations of negligence from employees, may not be eligible for the benefits included in workers’ comp.”

To protect against lawsuits in these instances, you may need additional types of business insurance, such as employer’s liability insurance. This type of insurance can help pay for legal fees, court costs and any settlements you are required to pay.

Workers’ compensation FAQs

The average cost of workers’ compensation for U.S. employers is $1.01 per $100 of payroll, according to the National Academy of Social Insurance. Therefore, the amount you pay will increase depending on the size of your workforce. The premiums you pay will also vary depending on the type of business you run and where your business is located.
In order to calculate how much workers’ compensation you will pay per employee, research how much each insurance company will charge you for a premium rate, which is given in dollars and cents per $100 of payroll. The premium rate will usually depend on your business’ class code that is based on the work employees’ perform and will vary by state. Estimate the employee’s projected annual salary, divide that number by 100 and then multiply it by the premium rate for the total cost of worker’s compensation for that employee.
Shop around and start early. Get quotes from a variety of insurance companies at least a few months in advance of when you’ll need to be covered. You should also ensure that your prospective insurer is using the correct classification code for your employees to avoid potential costly retroactive penalties for mistakes. Learn more about classification codes via your state workers’ compensation agency or the National Council on Compensation Insurance.
Requirements for workers’ compensation will vary by state, business type and business size. Learn more about state-by-state workers’ compensation requirements at the National Federation of Independent Business.
In many states sole proprietors, single-member LLCs or self-employed individuals who do not employ other people are not required to purchase workers’ compensation for themselves, although they may choose to do so.
Lacerations, strains and sprains, contusions, burns, eye injuries, fractures, and cumulative or continuous trauma are some of the most common types of workers’ compensation claims, according to recent U.S. Bureau of Labor Statistics data. Lacerations, for example, are most common in manufacturing, machine jobs, food production and restaurants, and can happen more commonly when workers don’t wear proper safety gear.

Workers’ compensation helps you plan for the unexpected

Business owners always face risk, and worker injuries are among the most difficult risks to predict. Planning for the unexpected with worker’s compensation coverage is not only a smart move as a business owner but also a legal requirement in most cases. 

It’s important to research different insurance carriers to find a policy that works for your business and your budget. Don’t forget that workers’ compensation requirements vary by state, so understand your responsibilities with the appropriate state agency. To find out how best to protect your business in all possible scenarios, consult a workplace insurance expert before hiring your first employee.

Erin Donaghue and Kimberlee Leonard contributed to this article. Source interviews were conducted for a previous version of this article.

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Katharine Paljug, Business Operations Insider and Senior Writer
Katharine Paljug has spent more than 10 years advising small businesses on the digital marketing strategies required to gain exposure, convert leads and strengthen brands. She has partnered with a number of companies on social media management and consulting, website design and maintenance, and content optimization. Paljug's goal is to improve the online presence of each business she serves through cost-effective methods that increase profitability. With a strong understanding of small business finance, Paljug has also contributed to financial outlets like The Balance, First Quarter Finance and The Penny Hoarder. Her guidance has also been featured in HuffPost, and YFS Magazine.
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