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Does Your Small Business Need Workers’ Compensation Insurance?

Written by: Veronica Baxter

If you have an employee, probably. Find out how workers’ compensation works and how it can protect you, your business, and your employees.

What is Workers’ Compensation Insurance?

Every state in the U.S. has a no-fault, statutory, administrative system by which workers who are injured or contract a disease or illness on the job are provided medical care and compensation for wages lost while recovering, funded by employer-paid insurance.

What is the Purpose of Workers’ Compensation?

The purpose of workers’ compensation (commonly called “workers comp”) is to get the worker healed and back to work when and if possible.

Without workers’ comp, medical expenses and lost wages would have to come out of the employer’s pocket. If the employer is unwilling to pay, the worker would have to file a lawsuit and establish liability. Not only does this destroy the employer-employee relationship, but there is no guarantee that the worker will ever be paid, and if he or she is, it might be months or even years down the road.

Workers’ comp takes liability out of the equation and keeps disputes over work-related injuries out of the court system.

How Does Workers’ Comp Work?

Ideally, a worker reports an injury to the employer, the employer reports it to the insurance company and to the state, and the insurance company pays the workers’ medical bills and lost wages.

What happens more often is that the insurance company balks at paying certain medical expenses. When these disputes occur, they are heard and decided by an administrative workers’ comp judge. Situations the insurance company frequently challenges include:

  • - Extended physical or occupational therapy
  • - Compensation for partial permanent disability
  • - Compensation for total permanent disability
  • - Any time the insurance company can argue that a procedure is not necessary
  • - Any time the insurance company can argue that a procedure is not related to the work injury
  • - Any time the insurance company can argue that a procedure is not reasonable

Who Is Required to Have Workers’ Compensation Insurance?

Every state’s requirements differ. Texas is the only state that does not require workers’ comp at all, but every other state has passed laws dictating the number of employees triggering the requirement for workers’ comp insurance, the type of industry or occupation that must be insured, and exemptions to the insurance requirement.

Common exemptions to the workers’ comp insurance requirement include:

  • - Part-time domestic help
  • - Seasonal farmworkers
  • - Casual or day laborers
  • - Family
  • - Minors working on the family farm
  • - Commissioned workers like real estate agents

Again, workers’ comp insurance laws are different in every state, so be sure to research the applicable law in the state or states in which you do business.

Why Should You Consider Having Workers’ Compensation Insurance Even if Not Required

Many states exempt sole proprietors, single-person LLCs, and family-held companies from the workers’ comp requirement. But is it a good idea to do business and be uninsured?

Workers’ Comp for Sole Proprietors or Single-Member LLCs

In most states, sole proprietors and single-member LLCs are not required to have workers’ compensation insurance. You are in business for yourself and of course, you want to minimize expenses, so this may seem like good news. However, it would not be in your best interests to be penny-wise and pound-foolish, so think again.

You want to be insured against risk. What type of risk does your business or occupation poses to you? Workers’ comp insurance for the self-employed is available.

You May Want to Insure Yourself

If you aren’t working, your business is not operating. Workers’ comp insurance on yourself might be a good idea because if you are injured or contract an illness while working, you will have your medical expenses and lost wages paid while you recover.

Consider the type of work you do. What is the risk of you being injured or falling ill and being unable to work? That is an assessment only you can make, but let’s say that a website designer working in her basement has less risk of injury on the job than, say, a horse trainer or a roofer.

Subcontractors Might Be Considered Employees

If you hire subcontractors, you may want to have workers’ compensation insurance because if one is injured and the state Workers’ Compensation Commission determines that the subcontractor is an employee for the purpose of workers’ comp, you will face a stiff fine.

Independent Contractors Might Be Considered Employees

If you have independent contractors working for you, the fact that they are 1099 workers and not W-2 employees for income tax purposes does not guarantee that they won’t be considered employees for the purpose of workers’ comp.

Workers’ Comp for Family-Owned Companies

For the same reasons as a sole proprietor might consider maintaining workers’ comp insurance, a family-owned business might consider it as well.

For example, family farms or commercial fishing operations may be exempt from your state’s workers’ comp insurance requirement. However, if all family members are needed to work on the farm or the boat when someone is injured and cannot work, the operation is one man short and must provide for the injured family member’s needs.

Being insured means that the injured family member is compensated for medical expenses and lost wages while he or she recovers, and your family business has the means to hire a replacement in the meantime.

Avoid Problems and Penalties - Talk with an Attorney

Workers’ comp law is nuanced. You should seek the opinion of a workers’ comp attorney if any of these situations may apply to you. Having workers’ comp insurance is an inexpensive way to take care of your business and your workers, and to avoid possible fines and penalties in the future.

Veronica Baxter is a blogger and legal assistant living and working in the great city of Philadelphia. She frequently works with Larry Pitt, Esq., a busy Philadelphia workers’ compensation attorney.

Related: Coronavirus Could Permanently Change Business