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What is Workers’ Compensation Insurance?

What is Workers’ Compensation Insurance?

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What is Workers’ Compensation Insurance?

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

How much does workers’ compensation insurance cost?

Workers’ compensation insurance premiums are calculated based on what a business does, the number of employees, and the total wages. As you would probably guess, premiums will be higher for higher-risk work-related activities.

Private insurance is usually going to cost less than a state-run program, but many owner-operated sole proprietorships are too small to get an affordable price. State-run programs provide a minimal, inexpensive policy just to show proof of insurance and are usually a better option in these cases. Depending on the riskiness of the business activities, these policies will often cost less than $1,000 annually.

Comparison sites like Coverwallet can provide business insurance costs in just a few minutes.

Do business owners need workers’ compensation?

It varies by state, but most states don’t require sole proprietors and partnerships to purchase workers’ compensation insurance until they hire employees who also aren’t owners. Most states will allow sole proprietors and partners to cover themselves for workers’ compensation if they choose to, but it isn’t required.

That being said, it’s not uncommon for clients to require the independent contractors they hire to have workers’ compensation coverage. So, even if no one works for you, your clients may require you to be covered as a way to limit their liability.

Another thing to think about is that even if you aren’t required to carry workers’ comp insurance, you may want to consider it to pay for any medical expenses and replacement wages if the business owner is injured at work. This way, they are still able to receive an income while you are healing.

Do I Need Workers Comp for Subcontractors?

Workers’ compensation is important insurance coverage that shields your business from lawsuits or medical bills resulting from on-the-job injuries. In addition, workers’ comp is required in many (but not all) states whenever you have employees.

But is a subcontractor considered an employee? Generally, no. A subcontractor is not considered an employee, and they do not receive company benefits like medical insurance or paid time off. However, in some cases, subcontractors can collect from your workers’ comp policy if they do not have their own coverage.

You can protect yourself from claims by including in the subcontractor’s contract that they must have their own coverage and provide proof of coverage before work begins. Since the workers’ compensation laws vary by state, always check your state’s laws to ensure you comply.

Do independent contractors need workers’ comp?

First, let’s differentiate between independent contractors and subcontractors. Both may be sole proprietors, but the key difference is the relationship with the employer. An independent contractor is hired by, reports to, works for, and is paid by the employer.

Conversely, subcontractors have an employment relationship with the independent contractor. The subcontractor is hired by, reports to, completes work for, and is paid by the independent contractor.
In many cases, employers are required by law to provide workers’ compensation insurance to full-time and part-time employees. And depending on the state, independent contractors may also be counted as employees due to their relationship with the employer. So, you may need to include the independent contractors on your policy or require proof of coverage from the contractor before work begins.

Further, the requirements for workers’ comp coverage for independent contractors vary by job type. For instance, jobs in construction often require that employees, general contractors, and subcontractors have workers’ comp coverage.

What if my subcontractor does not have insurance?

If your subcontractor does not have insurance, you can request they get a policy and provide proof of insurance before the project begins. Although you may not be required to put subcontractors on your workers’ comp policy, there are scenarios where you could face penalties if the subcontractor doesn’t have their own insurance coverage.

To avoid penalties or potential liability, many employers include in the contract that the subcontractor must have their own workers’ comp policy and provide a certificate of insurance (aka a COI).

Are subcontractors covered under my workers’ comp?

A subcontractor can be covered under your workers’ comp policy if they are providing a necessary service to complete a project.However, you would have to pay an additional premium for the subcontractor’s wages like an employee. In this case, the wages reported on a 1099 tax form are used for the payroll fee for subcontractors.

Additionally, even if the subcontractor is not on your policy, they can still collect on your insurance policy. For instance, say a general contractor doesn’t have coverage and while working on your project, their injured worker can file a claim on your policy for the workplace injury. When this occurs, the insurance company will charge you an additional premium, or payroll fee, for the subcontractor’s wages.

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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.

What is Workers’ Compensation Insurance?

What is Workers’ Compensation Insurance?

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