Workers' compensation insurance can be the difference between a normal insurance payout and a crushing lawsuit. Workers' comp protects your business and provides your employees with insurance payouts if they are ever injured on the job. Many states require some form of workers' compensation coverage, depending on what industry your business operates in. Businesses in the construction industry, for example, are almost universally required to have workers' compensation insurance.
Despite these requirements, small business insurance company Insureon conducted a study of the kinds of insurance policies small businesses enroll in. It found that only 17 percent of small businesses polled had workers' compensation insurance.
"One reason could be because some of these businesses are owned by sole proprietors who aren't required to purchase this policy," said Jeff Somers, president of Insureon. "However, in other cases, small business owners may simply think the level of risk they face is small because of the size of their business." [Related: Looking for workers' compensation insurance? Check out our best PEOs of 2018 to find a company that can meet your insurance, payroll and human resources needs.]
It's crucial to know whether your business is required to have workers' comp insurance, which depends on what state you operate in. Even if you're running a business that doesn't require the same kind of physical commitment as a construction or labor-based job, you may still be required to carry insurance. You can start by learning your state's laws with the NFIB's guide to workers' comp laws.
Another important factor is whether your business operates in multiple states. Mitchell Sharp, marketing associate with The Insurance Shop, said that while laws may vary widely from state to state, businesses operating in multiple states need to understand that their policy may be more complicated.
"If a business operates in multiple states, it is important to bring this to the attention of your agent during the quoting process," he said. "Speaking long and honestly with your insurance agent about all the issues your business faces can eliminate a lot of headaches down the road when a claim occurs."
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What is workers' compensation?
Workers' compensation insurance is a policy that provides employees with insurance payouts if they're injured on the job. These policies also protect employers from lawsuits and massive injury payouts if an employee gets hurt. While many small businesses may feel they don't need to enroll in this kind of policy, it's important to consider how you can protect your business.
"On-the-job injuries are extremely costly to small businesses and result in a loss of productivity," Somers said. "And if an employee is injured and can't rely on workers' comp to pay for their medical expenses, they could end up suing their employer."
Workers' comp policies come packed with other protections for your business as well, like preventing a third party from suing your business in the event of an employee injury. The Insurance Information Institute provides an example of this situation: If an employee is hurt on a piece of machinery and sues the machinery company, workers' comp policies prevent the machinery company from suing your business for a related reason.
How it works and what it requires
Workers' comp functions like any other insurance – it's preventative, helping you ensure you and your employees are protected in the event of an accident or injury. You can also attract high-level talent with good benefits and workers' comp offerings.
Your coverage cost and structure will vary based on what state your business operates in. One way to break down the cost is per employee. According to the Bureau of Labor Statistics, small businesses in the service industry generally pay 2 percent of total payroll toward workers' compensation insurance. The natural resources, construction and maintenance industry, on the other hand, may see cost totals closer to 3.5 percent.
Regardless of how you decide to handle workers' compensation, it's important to sign up. Businesses that don't sign up for workers' comp insurance may suffer from penalties from their state.
"Depending on the laws in your state, you could be heavily fined and penalized for failure to carry workers' compensation insurance coverage," said Mark Schmidt, a Philadelphia-based workers' compensation attorney.
How to get insured
Your premium will vary based on numerous factors, including your state, type of business and number of work-related injuries. If you're interested in signing up for workers' comp, you can work with an insurance expert to provide coverage for your business. If you don't have an insurance company or expert, it's important to find a good insurance professional who can help you keep your business protected.
If you're looking to learn more about workers' compensation and how to get insured, check out these resources to help in your search:
- The Bureau of Labor Statistics provides some tables and charts to understand average costs of workers' compensation.
- If you're looking for a full-service insurance, payroll and benefits offering, you can check out our guide to choosing a professional employer organization as well as our best picks for 2018.
- Insureon provides a workers' comp cost breakdown. While this company offers insurance policies for small businesses, some articles can help a new small business owner understand exactly what's required.
- The Insurance Information Institute provides small businesses everywhere with up-to-date information on insurance policies, including workers' comp.