What Is Workers’ Compensation Insurance?

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Workers' compensation (workers’ comp, for short) is a government-mandated program that protects workers who become injured or ill as a result of their job. This coverage pays for healthcare costs, lost wages and more. Workers’ comp is regulated at the state level and requirements can vary by location. All states except for Texas require businesses to maintain workers’ compensation insurance if they employ a certain number of employees.

How Does Workers’ Compensation Work?

Workers' compensation protects your workers by paying a portion of their income and medical costs if they were injured on the job, regardless if they were to blame for their injury. An employee must report their injury to their employer as soon as possible and it is the employer’s responsibility to facilitate the workers’ comp filing process.

A workers’ compensation policy will generally cover the following costs for employees:

  1. Necessary medical care
  2. Rehabilitation
  3. Lost wages
  4. Disability
  5. Death benefits

How Is Workers’ Compensation Calculated?

Workers’ comp is designed to pay your workers a portion of their wages. One way to determine the costs is by calculating what your worker would make every week. If they worked five days per week, you would divide their total salary by the total number of days they were paid, then multiply the result by 260 and divide that by 52.

As an example, let’s use a full-time employee’s salary and working hours from the prior year to calculate how much they would be owed in workers’ compensation. Last year, a full-time employee made $60,000 after working 250 days.

  1. Calculate the employee’s average daily wage by dividing $60,000 by 250. This equals $240.
  2. Calculate the amount a full-time employee would make in a year by multiplying $240 by 260 (number of full-time working days in a calendar year). This equals $62,400.
  3. Calculate the employee’s average weekly wage by dividing $62,400 by 52 (number of weeks in a year).
  4. The employee’s average weekly wage is $1,200.

This means the employee would be entitled to $1,200 per week of workers’ comp benefits. However, this is only a simplistic example. The actual figure may be adjusted based on the employee’s number of days worked in a given year and the severity of the injury.

Who Pays for Workers’ Compensation?

Employers pay for workers' compensation. Employees do not have to contribute to this.

How Much Does Workers’ Comp Cost?

The monthly premium for workers’ compensation can be as low as $70 depending on the business and location. The cost is largely determined by several factors, including revenue, the business type and its industry and the business owner’s claims history.

The Hartford provides a simplistic formula for estimating the cost of workers’ comp insurance:

Workers’ Class Code Rate X Claims Experience Modifier X (Payroll / $100) = Premium

Developed by the National Council on Compensation Insurance (NCCI), workers’ comp class codes are three- to four-digit codes that are based on the riskiness of a business and its industry. Business owners can look up workers’ comp codes on the NCCI website.

Higher-risk businesses, like those in construction, will be assigned a higher-risk class code. This will contribute to higher premiums.

Is Workers’ Compensation Insurance Required for All Businesses?

Not all businesses require workers’ comp insurance and requirements will depend on your state’s laws, type of business, number of employees and class of employees. According to your state, regular employees may be eligible for workers' compensation, including full-time, part-time or seasonal.

Almost all states require businesses with employees to purchase workers’ compensation, but there may be some exemptions:

  • Freelancers
  • Independent contractors
  • Sole proprietors
  • Volunteers
  • Railroad workers
  • Government workers
  • Maritime workers
  • Farm workers

Penalties for Not Having Workers' Compensation Insurance

Businesses that fail to provide workers’ compensation insurance could find themselves vulnerable to lawsuits from injured employees. If your business does not have a valid workers’ compensation policy, or is not self-insured or is not legally exempt from workers’ comp, you may be violating your state’s labor laws.

Penalties for not complying may include high fines and even imprisonment.

Below are examples of penalties you may face in California, New York and Florida:

State

Penalty

California

No less than a $10,000 fine and/or up to one-year imprisonment in a county jail.

Additional $100,000 for employers illegally uninsured.

New York

$1,000 - $5,000 fine for businesses with five or fewer employees.

$5,000 - $50,000 fine for businesses with more than five employees in addition to other penalties.

Florida

Fine of $1,000 or double the amount of a workers’ compensation premium.

What Types of Injuries Are Covered by Workers’ Comp?

According to the National Safety Council (NSC), some of the most common forms of work-related injury include:

  • Fractures
  • Muscle sprains
  • Cuts
  • Repetitive strain or stress
  • Slips and falls
  • Electrocution
  • Crushed or stuck between objects
  • Being hit by an object
  • Driving accidents

What Isn’t Covered?

Workers’ comp may not cover the following:

  • Malicious intent
  • Accidents that occurred when the employee was intoxicated
  • Accidents that happen during a fight the employee caused
  • Accidents that occurred outside of the workplace
  • Defamation
  • Discrimination
  • Assault
  • Gross negligence
Get Coverage for Your Employees' Injuries

How To Get Worker’s Compensation Insurance

Workers’ compensation insurance is required in most states. Depending on your state, you can get workers' compensation insurance from the private insurance marketplace, your state’s workers’ comp fund or you can choose to self-insure.

Private Insurance Companies

Similar to buying general liability business insurance or another commercial policy, business owners can buy workers’ compensation insurance from familiar insurance companies, like The Hartford, Nationwide and Cerity.

State-Funded Insurance

State-funded insurance allows employers to pay for their own workers’ comp losses instead of buying from a private insurance carrier. Not all states offer this option.

Some states require that employers get coverage from their state-funded programs, such as Ohio, North Dakota, Wyoming or Washington. This is called monopolistic state-funded workers’ compensation.

Self-Insure

Instead of purchasing a workers’ compensation insurance policy and paying a regular premium, businesses can opt to self-insure. Business owners that self-insure assume total responsibility for providing workers’ comp benefits to their employees.

Self-insuring is only suitable for businesses that have enough cash reserves to pay for workers’ comp claims out of pocket.

Workers’ Compensation Laws by State

Each state sets its own benefits and premium amounts based on how risky the job is and the state’s economy. While most states are similar, it’s a good idea to make sure you know what your state requires for workers’ comp. The National Federation of Independent Businesses (NFIB) compiled workers’ compensation laws by state:

State

Required Number of Employees

Exemptions

State-Administered Fund Available?

Alabama

4 or fewer or more full-time or part-time workers

Construction businesses, farm laborers, household/domestic employees or casual employees

No

Alaska

1 or more employees 

Partners, sole proprietors, nonprofit executive officers, LLC members, babysitters, harvest help, non-commercial cleaners, contract entertainers, sports officials for amateur events, commercial fishers and taxi drivers.

Yes

Arkansas

3 or more employees

Farm laborers and real estate agents

No

Arizona

1 or more full-time or part-time workers

Farm laborers and real estate agents.

Yes

California

1 or more full-time or part-time workers

Independent contractors, working partners, casual workers or domestic servants. Sole proprietors can opt out of coverage if they don’t have employees

Yes

Colorado

1 or more full-time or part-time workers

Domestic workers, real estate agents, brokers, and independent contractors (with no employees)

Yes

Connecticut

1 or more full-time or part-time workers

LLC members, corporate officers and sole proprietors.

No

District of Columbia

1 or more employees

Sole proprietors without employees

No

Delaware

1 or more employees

Farmworkers and independent contractors

No

Florida

Non-construction businesses with 4 or more employees and construction businesses with 1 or more employees. Agricultural businesses with 6 or more employees

Sole proprietors and partners in the non-construction industry 

No

Georgia

3 or more employees

Sole proprietors and partners

No

Hawaii

1 or more employees

Sole proprietors and partners

No

Idaho

1 or more employees, excluding domestic workers

Sole proprietors and household/domestic workers

Yes

Illinois

1 or more full-time or part-time employees 

Sole proprietors

No

Indiana

All employees must be covered

Sole proprietors, independent contractors, partners, and LLC members

No

Iowa

1 or more full-time or part-time employees

Sole proprietors and LLC members

No

Kansas

Any business with a gross payroll over $20,000

Sole proprietors, partners, and LLC members

No

Kentucky

1 or more full-time or part-time employees

Sole proprietors, partners, and LLC members

Yes

Louisiana

All employees must be covered

Musicians and crop-dusting airplane crew members, sole proprietors, partners and LLC members

Yes

Maine

All employees must be covered

Independent contractors, sole proprietors, partners and LLC members

Yes

Maryland

1 or more employees, with a few exceptions

Sole proprietors

Yes

Massachusetts

All employees must be covered

Sole proprietors, partners and LLC members

No

Michigan

1 or more employees

Sole proprietors

Yes

Minnesota

All employees must be covered

Sole proprietors, partners and some managers of LLC 

Yes

Mississippi

5 or more employees

Sole proprietors, partners, and corporate officers

No

Missouri

5 or more employees

 

Sole proprietors, partners, farm laborers, domestic servants, real estate sales, and commercial taxis

Yes

Montana

All employees must be covered

Sole proprietors, domestic workers, newspaper carriers, licensed barbers or cosmetologists, petroleum land professionals, real estate, securities, and insurance sales

Yes

Nebraska

All employees must be covered

Sole proprietors, federal employees, railroad employees, independent contractors and domestic servants

No

Nevada

1 or more employees

Sole proprietors

No

New Hampshire

All employees must be covered

Sole proprietors and partners

No

New Jersey

1 or more employees

Sole proprietors

No

New Mexico

3 or more employees

Sole proprietors, domestic servants, real estate, or farm laborers

Yes

New York

All employees must be covered

Sole proprietors or partners without employees

Yes

North Carolina

3 or more employees

Sole proprietors, LLC members, and partners

No

North Dakota

All employees must be covered

Sole proprietors, partners and family farm corporate officers

Yes

Ohio

1 or more employees

Sole proprietors, family farm corporate officers with no employees.

Yes

Oklahoma

All employees must be covered

Sole proprietors, LLCs, partners and corporate officers

Yes

Oregon

1 or more employees

Sole proprietors can purchase coverage but are not required to

Family member partnerships, corporations and limited liability companies

Yes

Pennsylvania

1 or more employees

Sole proprietors, partners and corporate officers

Yes

Rhode Island

4 or more employees

Employers with three or fewer employees, sole proprietors, partners and independent contractors

Yes

South Carolina

4 or more employees

Sole proprietors, partners, real estate and LLC members

No

South Dakota

1 or more employees

Sole proprietors and partners, part-time domestic servants, farm/agricultural laborers, independent contractors and real estate agents

No

Tennessee

1 or more employees

Family members, part-time employees, corporate officers, sole proprietors, LLC members and partners

No

Texas

Workers’ compensation insurance is optional

 

Yes

Utah

1 or more employees

Sole proprietors, partners, LLCs, agricultural laborers, domestic workers and real estate brokers

Yes

Vermont

1 or more employees 

Sole proprietors, partners, corporate officers, and LLC members

No

Virginia

2 or more employees 

Sole proprietors, partners, LLCs and general contractors

No

Washington

1 or more employees

Sole proprietors, partners, corporate officers, LLC members, domestic servants, private residential gardeners, maintenance/repair workers, musicians/entertainers, cosmetologists and barbers

Yes

West Virginia

All employers must carry coverage

Independent contractors, some agricultural employers and casual employers

No

Wisconsin

3 or more employees

Sole proprietors, LLC members and partners

No

Wyoming

All employees must be covered

Sole proprietors and partners

Yes

FAQs

Does workers’ comp cover me if I’m sued by an employee that’s hurt on the job?

Employees generally cannot sue their employers after a work-related injury if they’ve agreed to a workers’ compensation settlement.

Who is covered under the workmen compensation act?

Workers who become injured or disabled while doing their jobs are covered under the workmen compensation act. Workers who qualify for workers’ compensation can be employed hourly, part-time, full-time, salaried and seasonally.

Does my small business need workers’ compensation insurance?

In most states, you are required to maintain workers’ compensation insurance if you employ one or more workers. This minimum requirement may increase to two, three, four or five or more workers in some states.

Key Takeaways

  • Workers’ compensation helps pay benefits to workers who are injured or become disabled due to their job.
  • The cost of workers’ compensation insurance will vary based on state, industry and the number of employees, among other factors.
  • Every state has its own regulations and exemptions regarding workers' compensation.
  • The compensation often includes partial salary repayment and medical bills coverage.

If you live in a state that allows your business to purchase workers’ comp insurance, you will have to understand your state’s regulations and search for insurance providers who can offer the best workers’ compensation for you and your workers. SmartFinancial can help you narrow down your search, enter your zip code below to view quotes in your area.

Sources:

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