Who is exempt from workers' comp insurance?
What does a workers’ comp exemption mean?
Workers' compensation insurance protects your employees if they are injured on the job and need medical treatment, ongoing therapy, or time off for recovery.
Most small businesses are required by state law to carry workers' compensation insurance once they hire employees. A workers' comp exemption means a company is not required to carry workers' comp, but such exemptions are rare and typically reserved for very specific circumstances.
Single-person businesses, such as sole proprietors, independent contractors, and limited liability companies (LLCs), typically qualify for a workers' comp exemption.
Certain industries may have state-level workers' comp exemptions, such as agriculture workers and real estate professionals.
Even when workers' compensation isn't legally required, it's often recommended. If you or an employee are injured while on the job or performing work duties, personal health insurance will often deny the claim, potentially leaving you financially responsible for medical bills, rehabilitation costs, and lost wages.
Who is eligible for a workers’ comp exemption?
Some states allow small businesses to obtain workers' comp exemptions under specific circumstances.
For example, there are occasionally state exemptions for employees who work on a temporary basis, work in very low-risk occupations, or who earn under a certain threshold. This includes volunteers, government workers, seasonal workers, and agricultural employees.
Additionally, the following business owner types are often exempt:
- Sole proprietors
- Partners
- LLC members
- Corporate officers who own a specified percentage of the company
Many independent contractors who are hired as consultants are exempt from being added to a company's workers' comp plan, provided they are properly classified as a non-employee and meet state guidelines.
Because workers’ compensation rules vary widely by state and worker classification, it's important for business owners to verify local requirements to ensure compliance.
Find workers' comp requirements in your state
If a business has no employees, does it still need to have workers' comp?
Workers' compensation state law generally does not require business owners without employees to carry this policy for themselves.
However, many single-person businesses choose to purchase workers' compensation insurance coverage because personal health insurance carriers will often deny workplace-related injury claims.
For example, a freelance web designer develops carpal tunnel due to the nature of their work and needs to take time off for surgery.
Their private healthcare provider may deny the claim, stating that the primary cause is likely work-related and falls under occupational injury. A workers' comp policy would cover both the surgery costs and lost wages while the web designer recovers.
In addition, many clients, contractors, and partners may request a certificate of insurance before agreeing to work together. This is to prevent their business from becoming financially liable should you become injured during the course of the partnership or contract.Some states may require single-person businesses in high-risk industries, such as construction, to carry workers' compensation coverage.
How do you qualify for a workers’ comp exemption?
If you or your workers qualify for an exemption, you'll likely need to file a formal exemption with the state.
While not all states require exemption filings, many do. It is important to check your state's workers' compensation laws to determine whether paperwork is required.
For example, your management consulting business consists of you, a corporate officer, and three employees. State law dictates that you and your corporate officer are exempt from workers' comp requirements, but indicates that workers' comp is required for all employees.
In this case, you could file exemptions for yourself and the corporate officer and purchase a workers’ compensation policy for the remaining three employees.
It's important to stay compliant with your state and local laws, as failing to provide adequate workers' compensation protection can result in heavy fines and other penalties.
How do workers’ comp exemptions differ by state?
Exemptions vary from state to state. Whether you and your employees qualify for an exemption will depend on your local laws, industry, and type of employment.
Here are some examples of workers’ comp law variations and exemptions across different states:
California
Generally speaking, workers' comp is required for all businesses with employees in California. It is also mandatory for licensed general contractors and those working in construction, even if you have no employees.
Workers' compensation is typically not required for single-person business owners in California, excluding the construction industry.
Florida
Florida businesses with four or more part-time or full-time employees are required to carry workers’ compensation insurance.
Sole proprietors and partners are typically excluded, and construction businesses can qualify for exemptions for up to three corporate officers who hold at least 10% ownership of the company.
Texas
Texas is one of the few states where workers’ compensation insurance is generally optional for employers. Small businesses that choose not to carry workers’ comp must file a Notice of No Coverage with the Texas Department of Insurance and post a copy where employees can see it.
Businesses that fail to carry workers’ compensation insurance remain financially liable if employees are injured on the job, and employees may choose to file lawsuits to recover medical costs or lost wages.
New York
Under New York state law, employers are generally required to provide workers’ compensation coverage, but there are very limited exceptions.
Coverage is not required if the business is solely owned, a partnership, or a corporation in which the owners hold all stock and officer positions, and there are no employees.
New Jersey
In New Jersey, workers’ compensation insurance is required for all employers with one or more employees.
Part-time and seasonal employees must be covered if they receive wages or salaries and have taxes withheld. Coverage is not required for independent contractors, interns, or volunteers.
How do you obtain a workers' comp certificate of exemption?
In order to obtain a workers' compensation exemption, you'll need to follow the steps outlined by your state's Division of Workers' Compensation.
While the actual steps may vary, it often follows a process similar to the following:
- Check with local state laws to determine exemption eligibility.
- Gather the required documents as outlined by your state.
- Complete the required exemption application form, often called a Notice of Election to be Exempt.
- Submit the form and pay the required fees.
- Await approval, which often takes a few days to a few weeks.
- Save your exemption certificate for your records, and post notices of exemptions if required for your business type and state.
Consult with your local workers' compensation office for the most accurate procedure and to avoid non-compliance.
How can you get affordable workers’ compensation coverage?
Workers' compensation doesn't have to be expensive. Here are some tried-and-true methods to keep your workers' comp costs low:
Correctly classify employees and subcontractors
Ensuring your employees are properly classified is important for paying accurate workers' comp rates and keeping your costs low. Your employees' workers' compensation class codes should correctly reflect their work and risks.
Higher-risk occupations generally carry higher premiums, so correctly classifying employees helps ensure you’re paying the right amount. Accurate classification also helps you avoid penalties and legal issues and ensures that your employees have the coverage they need if they are injured on the job.
Establish safety measures
Creating a safe workplace reduces the risk of employee injuries and helps prevent costly workers’ compensation claims. Businesses that prioritize safety often have lower insurance costs and fewer claims.
Here are some simple steps to reduce hazards and promote a safer work environment:
- Encourage employees to stretch and take regular wellness breaks.
- Host frequent training to ensure all employees follow necessary safety procedures.
- Provide an ergonomic workspace with proper equipment to prevent repetitive stress injuries.
- Minimize tripping hazards by removing loose rugs and securing wires.
Taking active steps to reduce liability claims is essential, as even minor accidents can result in significant medical expenses.
Consider cost-effective premium policies
There are some workers' comp payment structures and premiums that you can consider to lower costs, including:
- A pay-as-you-go workers' comp plan, which uses monthly payroll data to pay accurate costs rather than annual estimates.
- Very small businesses can pay a low, fixed monthly payment through a minimum premium workers' comp plan.
- A ghost policy acts as a technical workers' comp policy to fulfill workers' comp requirements for single-person businesses. As a general disclaimer, this policy does not provide coverage and is not legal in all states.
Consult with a licensed insurance agent to see if there are any ways to save on your insurance policies.
What wages are not subject to workers' compensation?
Because workers' compensation insurance rates are determined by payroll, the higher the wages you report, the higher your premium will tend to be.
Certain wages are exempt from needing to be covered, which can help keep your costs accurate and ensure you’re not overpaying.
Exemptions vary by state, but often include the following:
- Tips and gratuities
- Expense reimbursements
- Employee discounts
- Certain allowances, such as housing and company vehicles
- Severance pay
- Employer contributions, such as retirement plans and health insurance
- Overtime premiums
- Sick pay covered by separate, third-party insurance companies
You can check with your local regulations if you have questions about your specific wage exemptions.
Find workers' compensation insurance for your small business
If you are ready to explore workers’ compensation coverage options for your small business, TechInsurance can help you find business insurance policy quotes with one easy online application.
Start an application today to find the right insurance coverage at the most affordable price for your business.
