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How does workers' compensation insurance work?

Workers’ compensation insurance pays medical costs and lost wages for an employee's work-related illness or injury, and protects business owners from liability. It's required by law in almost every state for businesses that have employees.

What is workers’ compensation insurance?

Workers' compensation insurance is designed to help cover employee medical expenses and lost wages if they suffer a work-related illness or injury.

In more serious situations, workers’ comp will provide death benefits for family members of employees who are killed while performing job-related duties.

Workers’ comp almost always includes employer’s liability insurance. This policy protects your business from lawsuits that claim a worker's illness or injury was caused by your company's negligence or unsafe work environment.

What are the employer benefits of workers’ comp insurance?

There are two ways that workers’ comp insurance protects business owners. In the event that an employee injures themselves on the job or gets sick because of it, workers’ comp helps you pay for their wages and medical expenses if they are unable to continue working.

Without insurance coverage, you would likely have to reimburse the injured employee out-of-pocket if you were found responsible for the incident. 

Additionally, the liability coverage included with your workers’ compensation policy will pay for your legal fees or settlements if you're sued by an employee after a work-related injury.

How do I know if I need workers’ comp insurance?

Almost every state's regulations require businesses with W2 employees to have workers' compensation insurance. 

Check the laws in your state to find out if it's required. But even if you live in a state that doesn’t require workers’ comp insurance, it’s still a smart investment.

As a business owner, do I need workers’ compensation insurance for myself?

It depends. Some state laws allow business owners (that includes principals and partners) to exclude themselves from their company’s workers’ comp policy.

But remember that business owners are also susceptible to injuries and illnesses at work. Only exclude yourself if you have the ability to pay for medical bills if necessary.

Is workers’ comp required if I don’t have employees?

In most places, workers' compensation laws don't require businesses without employees to have workers’ compensation insurance. But because workers' comp laws vary by location, it’s important to know your state’s specific requirements.

If your business employs subcontractors or temporary workers, your clients may require you to carry workers’ compensation coverage, regardless of the state you're in.

Here’s why: Unless you can prove that your subcontractors have their own insurance, they will automatically be covered under your policy, and you’ll have to cover them financially.

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Do I need workers’ comp insurance if I use contractors rather than employees?

Generally speaking, independent contractors or 1099 workers are exempt from workers’ compensation insurance requirements. That includes freelancers, leased employees, or anyone who is work-for-hire.

But again, the laws are different in every state. A handful of states do require workers’ comp coverage for 1099 employees.

As a best practice, you should require any independent contractors you hire to carry their own workers' comp insurance. If you choose to cover 1099 employees under your business’s policy, be prepared to pay an additional premium.

How does workers’ comp apply if I have employees in different states?

If you have employees in multiple locations, they can all be covered under your workers' comp policy. However, you need to break down your payroll by state and provide that information to the insurance company. If you don’t, your insurer may not pay for claims that happened in unreported states.

Whenever you hire an out-of-state employee, or if an employee moves, make sure to report that information to the insurance company as soon as possible.

When do I need to buy workers' comp insurance? 

If your state requires you to carry workers’ compensation insurance, typically you'll need to purchase a policy as soon as you hire your first employee.

Employee injuries and illnesses are usually only covered once you have a policy, so any occurrence that happens before you get insurance won’t be covered.

How does a workers' compensation claim work?

When an employee gets injured on the job or develops an occupational illness, they need to report the illness or injury to their employer and seek medical treatment.

Their employer should file a claim with the insurance company. Once approved, the employee will receive their workers’ compensation benefits.

Benefits typically include coverage for medical expenses such as doctor's visits, physical and occupational therapy, and rehabilitation services. If employees cannot work due to the injury or illness, it will also cover part of their lost wages.

As the employee recovers, they should work with their employer to transition back into full-time work. Preventative retraining may also be appropriate to help prevent the injury or illness from happening again.

How do I get workers’ comp for my business?

You can purchase workers’ compensation coverage through a number of private insurance companies. It’s also available through some federal government agencies, like the Department of Labor.

However, businesses in the following states need to purchase workers’ comp from their state's workers’ compensation fund:

Before issuing a workers' comp policy, your insurance company may require a premium audit in order to accurately calculate your annual rate.

What is a premium audit?

Insurance providers determine your workers’ compensation premium based on the number of employees you have, and the amount of risk your employees face based on their work.

Every year, the insurance company will audit your workforce to account for an increase or reduction in employees, and assess the level of risk in your workplace. The more risk your employees face, the higher your premium.

For example, a worker at a manufacturing plant is far more likely to suffer a work injury than a software developer. Therefore, the insurance risk for plant workers is higher.

To prepare for those potential payouts, the insurance company will charge the manufacturing business more money upfront to offset future reimbursement costs.

How can I lower my insurance premium?

Depending on the number of employees you have and your business's level of risk, your workers’ compensation insurance cost can be expensive. And if your premium audit isn’t accurate, your insurance rates could skyrocket, or you might lose coverage altogether.

To avoid mistakes, make sure you’re providing accurate and detailed information to your insurance company about your workforce and potential risks. Ensure that your payroll is up-to-date, and clearly separates overtime pay from regular hourly pay.

Also, note the number of hours each employee spends in various workplace exposure categories.

If you work with 1099 employees, provide documentation showing that they hold their own workers’ comp policy so they don’t get added to your employee headcount.

Learn a few other ways to save money on workers’ comp.

What if I want to cancel my workers’ comp policy?

There are a few circumstances when you might want to cancel your workers’ comp policy. You could be closing your business, or maybe you want to switch to a different insurance provider.

Keep in mind that in almost every state, your insurer can charge a minimum premium if you cancel your policy.

For example, if you purchase a workers’ comp policy and cancel it three months later, you might still be responsible for paying the full cost of your annual premium, even though you only had coverage for three months.

The minimum premium could range from a few hundred dollars to thousands of dollars, depending on your rate. If you do decide to cancel your workers’ comp insurance, find out your insurance company’s cancellation policy beforehand.

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