Small businesses will need to understand worker’s compensation insurance, what it covers and why they need it.
Worker’s compensation insurance requirements vary from state to state, but it is a legal necessity in most areas if you are a business with at least a few employees. Some states require a company to carry worker’s compensation insurance even if they have just one person on staff.
The goal is to protect employees by providing wage replacement and medical expenses if they are injured in the course of their job. Small businesses investigating their insurance options will need to understand worker’s compensation insurance, what it covers and why they need it.
What is Worker’s Compensation Insurance?
Worker’s compensation insurance, or worker’s comp, is a state-mandated program that compensates employees who suffer an injury while on the job. Each state has its own program and requirements regarding worker’s compensation insurance, but in general, it covers any employee with a work-related illness or injury. It also protects employers from lawsuits by employees regarding the injury. By accepting worker’s compensation insurance payments, the employee relinquishes his or her right to a lawsuit.
Do All Small Businesses Need Worker’s Compensation Insurance?
It depends on the state, but not all small businesses must meet this legal requirement. Some states only require you to carry worker’s compensation insurance if you have a minimum number, such as at least three, employees. Others will expect you to have coverage if you hire even one. A licensed insurance broker can decipher the labor regulations in your state and tell you whether you need to budget for worker’s compensation insurance costs.
Whether you need it legally or not, worker’s compensation insurance does offer some benefit to even small businesses, because it covers expenses if an employee gets injured. These are costs the company may still be liable for whether they purchase worker’s compensation insurance or not. It also protects the business from litigation by an injured employee.
What Does Worker’s Compensation Insurance Buy?
Worker’s compensation insurance can cover:
- Medical costs to treat an injury or work-related illness
- Temporary disability payments to replace lost wages
- Permanent disability payments for injuries that prevent any future work
- Death benefits for survivors in case of fatality
- Legal representation for the employer if necessary
- Protection against lawsuits for on the job injuries or illnesses
How Much Does Worker’s Compensation Cost?
The costs of worker’s compensation insurance will vary by provider and your business rate classification. Rate classifications identify industries with a higher risk of injury like construction. They are assigned by the National Council on Compensation Insurance and vary by state.
Worker’s compensation premiums are not federally regulated, but many states have agencies that recommend rates. Carriers usually have to file their rates with the state’s department of insurance, as well.
Once you determine your rate classification, you multiply the percentage listed by your average annual payroll to get an idea of how much your worker’s compensation insurance will cost. For example:
- Annual payroll is 250,000 dollars
- Rate classification requires a 10 percent premium
- Worker’s compensation insurance will cost around 25,000 dollars a year
As an insurance consumer, it is your responsibility to shop around for the best policy and rate based on the needs of your business. Some states like New York offer a State Insurance Fund to help employers find affordable worker’s compensation insurance. The state fund is a non-profit agency that competes against private insurance companies.
A licensed insurance broker can help you compare the costs and benefits of many different companies to find the right one and to look for ways to bring down your expense. The broker will assess your small business needs and create a strategy for making worker’s compensation insurance costs more affordable.