Workers Compensation Insurance for Small Business Owners

What Is Workers Compensation Insurance?

Workers compensation insurance covers medical expenses and lost wages when employees sustain work-related injuries or illnesses. Workers compensation also pays death benefits to families of employees who pass away as a result. In all states but Texas, most employers are legally required to purchase workers compensation insurance.

As a small business owner, your hope is that you and your team always have a safe working environment. But injuries happen, particularly in high-risk industries like manufacturing or construction. Even in a relatively safe office environment, accidents like slip and falls can occur.

When the unexpected occurs, you can protect your business by ensuring that you have adequate small business insurance coverage. For work-related injuries and illnesses, workers compensation insurance is essential. In fact, in almost every state, most businesses are legally required to have workers compensation insurance.

Find out what workers comp coverage covers, how much it costs, where to buy it, and how to keep your costs as low as possible.

Who Needs Workers Compensation Insurance?

Every U.S. state—with the exception of Texas—legally requires most employers to have workers compensation coverage. No matter what industry your business is in, you must have adequate insurance.

Coverage requirements are typically tied to the following factors:

• Number of employees: Some states require businesses with even one employee to have workers comp coverage. Others require businesses to purchase workers comp only after they reach a certain number of employees. For example, Alabama requires you to purchase workers compensation insurance after hiring your fifth employee.
• Payroll costs: Some states tie coverage requirements to payroll. Kansas requires coverage for all businesses that process over $20,000 in payroll annually.
• Type of business: Sole proprietorships and general partners in a partnership don’t need to purchase workers comp in most states, unless they have employees. They can, however, choose to purchase insurance to cover themselves.

Although sole proprietors don’t legally have to buy workers comp, clients might require it. For example, a firm might require their freelancers and independent contractors to carry workers compensation insurance.

You should also be aware of locational requirements. Some states, such as California, require out-of-state companies to purchase coverage if they are employing people who work in California. Businesses with employees in multiple states have to ensure that their workers comp policy covers incidents in any of those states.

You can contact your state’s insurance department or workers compensation board for more specific details.

What Workers Compensation Insurance Covers

Workers compensation insurance covers an employee’s losses stemming from work-related injuries or illnesses.

Covered expenses typically include all of the following:

• Health and medical expenses
• Rehabilitation and retraining expenses
• Lost wages (disability payments)
• The employer’s legal expenses of defending a lawsuit
• Death benefits for surviving family members

Many business owners assume that only companies in hazardous industries—such as construction or manufacturing—need workers compensation insurance. But retailers and employers with office environments aren’t immune from incidents, as the examples below show.

Examples of Covered Incidents

All of the following are examples of what would be covered under a workers comp policy:

• An employee is involved in a traffic accident while driving a company vehicle.
• An office employee develops carpal tunnel syndrome from poor desk setup.
• A retail employee develops chronic back pain from hunching over to carry books.
• Heavy items fall onto a construction employee’s leg and cause an injury.

Under some policies, post traumatic stress disorder (PTSD) and other mental conditions are also covered. For example, an employee who is diagnosed with PTSD after observing an office burglary might have a valid workers comp claim.

Injuries usually happen on business property, but this need not always be the case. An employee who is hurt while driving a company vehicle or hosting a company event, for instance, might be able to file a workers compensation claim.

What’s Not Covered?

Certain types of injuries are clearly not covered under workers compensation insurance:

• Self-inflicted injury, such as a suicide attempt by a depressed employee
• Injury incurred when the employee was not following company policy
• Injury incurred when not on the job (though injuries during a rest or lunch break might be covered)
• Injury incurred when the employee is embezzling or committing a crime

Remember that workers compensation insurance only covers losses for full-time and part-time W-2 employees. Independent contractors should purchase their own workers comp coverage.

How Much Does Workers Compensation Insurance Cost?

Insurers typically quote workers compensation premiums for every $100 of payroll. Prices vary widely based on industry, from as little as $0.12 per $100 of payroll for clerical employees, all the way up to $9 or more per $100 of payroll for construction workers, painters, and machinists. This base rate is called the classification rate.

In addition to industry, a company’s track record of claims also impacts cost. This factor is called the experience modifier. Newer companies receive a higher experience modifier and have higher premium costs because the insurer has no claims record to assess. If your company has been around for awhile and established a track record of minimal claims, then the insurance company will decrease your experience modifier, thereby decreasing your premium. The average experience modifier is 1.

We can summarize the cost of workers compensation insurance with this formula:

Workers Compensation Premium = Total Payroll (X) Classification Rate (X) Experience Modifier

Here are some examples of workers compensation premiums for different types of small businesses:

Example 1: New Clerical Business

Total Annual Gross Payroll = $180,000

Classification Rate = $0.12 per $100 of payroll

Experience Modifier = 1

Workers Comp Annual Costs = $180,000 X .0012 X 1 = $216

Example 2: Established Clerical Business With Track Record of Many Claims

Total Annual Gross Payroll = $180,000

Classification Rate = $0.12 per $100 of payroll

Experience Modifier = 1.50 (higher experience modifier due to track record of more claims)

Workers Comp Annual Costs = $180,000 X .0012 X 1.50 = $324

Example 3: Established Carpentry Business With Track Record of Few Claims

Total Annual Gross Payroll = $180,000

Classification Rate = $8 per $100 of payroll

Experience Modifier = 0.75 (lower experience modifier due to track record of few claims)

Workers Comp Annual Costs = $180,000 X .08 X 0.75 = $14,400

These examples should give you an idea of the interplay between your company’s industry and track record of claims. Between the two factors, industry has the biggest impact. Workers comp coverage can be a drop in the bucket for your business or a big share of your expenses depending on which industry your company belongs to and the environment in which your employees work.

Remember, insurers might charge additional administrative fees or require a minimum annual premium, which you should also take into account when calculating your final premium costs.

Where to Buy Workers Compensation Insurance

There are many different places to buy workers compensation insurance. Options range from large insurance companies to smaller boutique agencies and even self-insurance in states that allow it.

Here are the best ways to buy workers compensation insurance:

Large Insurance Companies

A big insurer might be the first place you think of to purchase workers compensation coverage. You can contact these companies on your own, or go through a broker. Andy Gastley, an insurance agent at A.G. Roth, says, “Typically, the larger agencies will have the most workers comp markets and can offer the best advice on placement of coverage.” Gastley advises small business owners to start with large insurers to get a general idea of availability and cost. Due to economies of scale, larger companies can often provide lower premiums. Large insurers typically also have online questionnaires that you can fill out to get a quick quote for your business.

Small Insurance Companies

There are several smaller insurance companies that offer workers compensation insurance. Smaller agencies provide more personalized attention, which can be comforting to someone who has a brand-new business or is purchasing workers comp coverage for the first time. Smaller insurers might not be able to compete as well on cost, but service levels are often of higher quality. Plus, if an employee does file a claim, a smaller firm might do a better job of walking you through the claims process.

Professional Employer Organizations

If you belong to a professional employer organization (PEO), consider asking them if they offer workers compensation coverage. A PEO is an organization to which you can outsource your business’s human resource needs. The PEO can handle your payroll, benefits, onboarding, and insurance. Many small businesses pool together to purchase services in a PEO, so businesses are able to secure good rates. The primary downside is that all human resource communications come from the PEO, not from your company. In that way, a PEO can sometimes seem a little impersonal for employees.

Payroll Companies

Often times, payroll services partner with insurance providers to offer workers compensation coverage. Payroll companies have an exact accounting of your payroll, so instead of basing premiums on an estimate, you get a more accurate calculation of payroll and premiums. Like PEOs, payroll companies will reach out to insurers and comparison shop for you, saving you time. Another advantage of purchasing through a payroll company is “pay-as-you-go premiums.” Every time you run payroll, the payroll company will automatically collect your premium and pass it on to the insurer, leaving you with one less item on your to-do list.

State Insurance Funds

Many states run government funds where businesses can purchase workers compensation insurance. In four states—Wyoming, Ohio, Washington, and North Dakota—state-run funds are the only way to purchase workers comp insurance. Private insurers in these four states aren’t permitted to sell workers comp.

About 20 other states allow private insurers to compete with a state-fun fund. A state-run fund might be your only option in some cases if you’re in a high-risk industry, like machinery or carpentry. According to Gastley of A.G. Roth, “The more hazardous type work you do, the more likely a company will have to obtain coverage in the state-run funds as a startup. The state funds have the most expensive rates and should be avoided if possible.” States usually contract with private insurers to review and process claims.

Unless you have no other choice, it’s probably best to go with a private insurer. That said, many states publish insurance rates on their state-fund websites, which can give you an initial idea of cost.

Self-Insurance

Self-insurance is an alternative to purchasing workers compensation insurance. This is an option only for companies that have sufficient money in their bank accounts. Instead of paying a monthly premium, companies that self-insure assume the financial risk of fully paying for claims as they arise.

All states except North Dakota, Ohio, and Wyoming allow approved businesses to self-insure. To self-insure, employers must meet state requirements and receive approval from the state. Companies that self-insure can manage their own claims or outsource claims handling to a third party firm.

Before self-insuring, weigh the pros and cons carefully. Purchasing insurance through an insurance carrier shifts the risk of a claim onto the carrier. If you self-insure, you’ll have to pay all valid claims yourself, which could end up being much more costly than premiums. Usually, only large companies with clerical environments self-insure.

Workers Compensation Insurance: Keep Your Costs Low and Employees Safe

When a business owner or employee gets injured, it can be a stressful time for everyone involved. As an employer, you obviously want to balance your team’s safety against your own costs.

Prioritizing safety at work and being smart when shopping around for coverage are the best ways to keep your costs down. Follow these best practices:

• Have written safety rules, and ensure that your staff understand and follow them. Inform insurance underwriters of your safety policies.
• Give insurers accurate payroll numbers when shopping around for a quote.
• Keep written documentation of any safety incidents that occur on-site and off-site.
• Enroll in state-sponsored programs (such as drug-free workplace workshops) that can earn you discounts on premiums.
• Ensure that your business is properly classified. A wrong classification rating can cost your business hundreds or thousands of dollars.

Ultimately, the cost of your workers compensation insurance will depend on your actual claims history. By prioritizing safety with your team, you can have a happier, healthier workforce and reduce your insurance costs.

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