Workers' compensation, or workers' comp, is 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, and limits the likelihood that employers will be sued for workplace-related injuries or illnesses.
Enterprise businesses and large corporations know they need workers' comp coverage. But many small and midsize businesses don't realize that they, too, are legally required to have this coverage.
Why SMBs need workers' comp
Businesses are legally required to have workers' comp coverage from the moment they hire employees, explains Jeff Somers, president and head of retail at Insureon. "In most states … you are required by law to carry workers' comp insurance, regardless of your industry or number of employees," says Somers. "You may even be required to carry this coverage even if you're a sole proprietor."
While very small businesses, or firms whose employees primarily work desk jobs, may skip coverage, assuming that accidents are unlikely, doing so could result in legal penalties and fines. It could also mean that an accident or injury at the workplace could drain your budget and involve you in a lawsuit. Carrying workers' comp insurance protects you, your employees and your business.
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Your state's policies
In the United States, workers' compensation laws are regulated at the state level. While these requirements are often similar, there may be crucial differences in the coverage your business is required to have, 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. In Florida, for example, employers are required to report claims within seven days after they are notified that an accident or injury occurred.
"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," explains Karen Phillips, the general counsel of the Florida United Businesses Association's workers' compensation insurance program.
If your employees work in more than one state, you'll need to purchase coverage in each state, which can further complicate the requirements. "Each state has an agency set up to manage their individual workers' compensation programs," says Kevin Hess, a partner in 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."
What coverage you need
Many factors impact the coverage your 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 says. "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."
Reporting a claim
Any and all workplace injuries should be reported to your insurer as quickly as possible, even if they seem minor or if 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," says Phillips. "It's important to timely report all claims to the insurance carrier so they can get involved."
Once you report a claim, the process is handled by the insurance company, allowing 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 explains. 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."
Post-accident investigation and drug testing
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. SMBs 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. This should be done for each and every claim," advises Hess. "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, and in many cases, this depends on how clearly your company's drug-testing policies are outlined and available to employees.
"Employers should maintain drug-testing policies that are compliant with applicable laws, including the limitation on post-accident drug testing," Hess says.
To make sure your drug-testing policies pass legal muster, consult with a lawyer before you put them in place, long before any workplace accident occurs.
What isn't covered by workers' comp
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 warns. "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 coverage, 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.
To find out how best to protect your business in all possible scenarios, consult a workplace insurance expert before you hire your first employee.