What is Workers’ Compensation Insurance?
Workers’ compensation benefits provide medical treatment to cover medical care for injured workers in addition to disability payments for lost wages from time away from work. Should the injury be more substantial, this insurance provides disability benefits and job training should the injury prevent the employee from returning to the job they previously had.
Worker’s compensation provides coverage regardless of who is at fault, but what is important to know about this insurance is that, in most cases, the injured employee isn’t able to sue the employer.
According to the Occupational Safety and Health Administration (OSHA) and the Bureau of Labor Statistics, there are almost 3 million serious injuries and illnesses and almost 4,500 deaths annually from job-related injuries. Precautions can be taken to keep the workplace safe, but accidents are going to happen. Without this insurance, one claim could close a business.
Workers’ compensation benefits provide medical treatment to cover medical care for injured workers in addition to disability payments for lost wages from time away from work. Should the injury be more substantial, this insurance provides disability benefits and job training should the injury prevent the employee from returning to the job they previously had.
Worker’s compensation provides coverage regardless of who is at fault, but what is important to know about this insurance is that, in most cases, the injured employee isn’t able to sue the employer.
According to the Occupational Safety and Health Administration (OSHA) and the Bureau of Labor Statistics, there are almost 3 million serious injuries and illnesses and almost 4,500 deaths annually from job-related injuries. Precautions can be taken to keep the workplace safe, but accidents are going to happen. Without this insurance, one claim could close a business.
Why do employers need to have workers’ compensation insurance?
Employers need workers’ compensation insurance even when they only have one part-time employee. The insurance protects the business from lawsuits or extensive medical bills resulting from injuries that happen while working or at a work location. For example, if an office worker slips on a fraying carpet and breaks a hip, the business could be responsible for medical costs, rehabilitation and disability costs, or even a lawsuit.
Employees who use the workers’ compensation benefits after an injury exchange their right to sue the business. Therefore, workers’ compensation protects both parties: It protects the business from lawsuits and gives the employees ample coverage to cover their costs after an injury. A workers’ compensation policy provides coverage for expenses such as:
- medical bills
- lost wages
- disability care
- ongoing care
- funeral expenses
Who pays for workers’ compensation insurance?
The business, not the employee, pays for workers’ compensation insurance.
How does a business purchase workers’ compensation insurance?
Purchasing workers’ compensation varies by state but generally, there are three ways for companies to purchase it.
State-run Programs
In most states, employers can purchase workers comp insurance through a state-run program through the department of labor, department of industrial relations, or other similarly named department that regulates labor in the state.
While most states give business owners the option of purchasing this insurance through the state-run program or a private company, four states require the insurance to be purchased through the state-administered program (North Dakota, Ohio, Washington, and Wyoming)
State-run insurance programs have often been created with the intention of keeping the costs of private insurance down by creating competition. Therefore, an employer with fewer than ten employees may choose a state-run insurance program as they do not need extensive coverage. If an employer has been a part of several incidents or is in a high-risk industry and private insurers will no longer provide them with coverage for an affordable price, enrolling in a state-run insurance program may prove to be a helpful option.
Private Insurance Companies
Most state’s employers have the option of purchasing workers’ compensation insurance through the insurance carrier of their choice.
Similar to state-run insurance programs, employers will often pay a premium to an insurance company to provide workers’ compensation insurance to their employees. An employer may choose a private insurance company over a state-run insurance program as its services may be more comprehensive and offer greater coverage.
Self-Insured
In most states, very large businesses with sufficient resources have the option to self-insure.
Common Questions About Workers’ Comp Insurance
What are the penalties for failing to carry independent contractor workers’ comp insurance?
Most states in the U.S. require businesses to cover their employees with workers’ comp. However, the definition of an employee varies depending on your state, and sole proprietors (or independent contractors) may or may not be considered employees. Additionally, each state may have additional requirements for specific roles or types of employees.
Penalties for not having workers’ compensation coverage for independent contractors also vary by state. In many scenarios, the penalty is a fine, but the penalties can also be as severe as misdemeanor charges, felony charges, or jail time. For instance, non-compliance can become a criminal offense in Pennsylvania, Illinois, and New Jersey.
Please note that the state and the IRS may disagree on who and what a subcontractor is, but here is a glimpse at how workers’ compensation requirements and penalties vary from one state to the next.
New York
- Who is an employee? A business with employees needs coverage. An employee is anyone working under the employer’s supervision on and off-premise. This includes temporary or unpaid positions but not sole proprietors.
- What are the penalties for non-compliance? The penalty is a fee of $2,000 for every 10 days without coverage, during which an employee works without coverage. Noncompliance can also result in a misdemeanor, felony, or up to a $50,000 civil penalty.
California
- Who is an employee? An employee is any part-time or full-time individual working for the company unless the individual is a sole proprietor. Independent contractors are generally excluded.
- What are the penalties for non-compliance? Noncompliance can result in a $10,000 fine, potential jail time, and further state penalties.
Texas
- Texas does not have a workers’ compensation requirement for businesses. However, the penalty for not having workers’ comp is a potential lawsuit or hefty medical bills if an employee is injured while working.
Florida
- Who is an employee? An employee is any full-time or part-time individual hired directly by the business. Any business with four or more employees needs a workers’ comp policy. Both independent and subcontractors working in construction need to provide proof of their own coverage before the start of a project.
- What are the penalties for non-compliance? The penalty for noncompliance is a fee equal to two times the premium within the previous two years and potential criminal charges.
Tennessee
- Who is an employee? Workers’ comp is required if there are five or more employees. The employee count includes family members and part-time workers. In Tennessee, a 20-factor test determines if the individual is considered an employee or an independent contractor.
- What are the penalties for non-compliance? Failing to comply is fined based on a percentage of the employee’s wages.
Final Thoughts
When you have employees, independent contractors, or subcontractors working for you (especially in fields with a high risk of injury), it is best to have workers’ compensation coverage or require that the contractor provides proof of coverage. No one wants an unexpected insurance claim or to suddenly find out they are out of compliance. The best way to avoid this is to check if coverage is required in your state for employees and who is considered an employee.
