Do you need workers' compensation for your small business?
Do you need workers’ compensation for your small business?
Among the many important decisions you make for your small business, one will be deciding what insurance your business needs– including the workers’ compensation policy. Most small business owners consider it to be just another cost and end up avoiding it as much as they can and for as long as possible. They rely too heavily on the safety measures administered or think that their business is too small to have to worry about workers’ compensation due to states not requiring it for some employers (with less than 4 or 5 employees, depending on the state). However, there is more to this valuable coverage than meets the eye.
Here are a few things you should consider before arriving at a ‘yay’ or ‘nay’ on workers’ compensation plan for your business.
Understanding what workers’ compensation insurance is and why it is essential
Workers’ compensation is an insurance policy that provides wage replacement and medical care expense to employees when they suffer injuries while on the job. It benefits the employees, immaterial of who is at fault for the injury. If a worker dies while on the clock, the insurance will pay state mandated death benefits to their dependents.
This policy protects both – the employee as well as the employer. As mentioned, it provides income replacement and pays the medical costs incurred by the employee. On the other hand, the employer cannot be sued for personal injury by the employee and the insurance carrier steps in for the employer and pays not only the financial costs related to the employee’s injury but also for legal defense if a liability suit is filed associated with the incident.
Is it required by law?
Most states in the US require you to have worker’s compensation insurance if your business hires a certain number of employees or if your business is in a certain industry. However, while the specific details around the workers compensation laws may vary from state to state and depend on other factors such as type of business, business structure, number of employees. What doesn’t change, is that the employer will be held liable for the cost of all the statutory benefits due to the injured employee (whether the state required coverage or not).
Suppose your business doesn’t have employees yet. In that case, you may not need to have workers’ comp in place from a legal perspective but you may still want to purchase even for yourself considering the risks. Unlike health insurance, which has a cap on benefits paid, or a disability policy that also has limitations for income replacement, workers compensation benefits have no caps on limits payable.
It is also important to note that the law also allows you to choose if you want to exempt corporate officers, partners or member of an LLC within the realm of workers’ compensation. Sole proprietors may opt to cover themselves, though not required.
Regardless of the legal requirement, investing in this plan can be a wise move.
Do my clients want me to have workers’ compensation?
Not all but some of your clients or certain companies that you may want to work with (like government organizations or large companies) may require your business to have a workers’ compensation in place before you can bid on or be awarded a contract. Some of your clients might even have this point in their list of pre-requisites to bidding on a job. This is primarily because it reduces the legal liability of the organization on a project. In case of a workplace mishap, a contractor would turn to their workers’ comp insurer and not to the client. Having workers’ compensation will not guarantee you win the contract from such clients but at least you will qualify to at least present your proposal. You can’t get the job if you don’t bid on it.
What else do I need to know/consider to decide?
Costs it covers: Workers’ compensation covers claim expenses, rehabilitation costs for the injured worker, payments to the employee for loss of earnings, and some lumpsum payments if a worker is permanently disabled. Sometimes the insurance also covers the cost of re-training the worker for a new profession if he is unable to perform the duties of his old position.
Expense-benefit understanding: It is a fact that buying a workers’ compensation policy will cost you in terms of the premium, but consider what happens if you don’t have it and an employee is hurt. In such a case, you end up paying for the medical costs and wage replacement from your business’s bottom line. These expenses will cost much more than the premium for the insurance policy.
How much will it cost?: The premium on a workers compensation policy is directly proportional to the risks involved in your industry and your annual payroll for your employees. Your business may be eligible for discounts, depending on your state, for good claims experience, management, training and preventative safety measures incorporated. At the same time, a business will be charged more if they have unfavorable losses or don’t have an in-house safety program.
Who to include: Any individual who performs work or service as a W-2 employee, needs to be covered under the workers’ comp. Regardless if your employees are full-time, part-time or seasonal – they should be included. You may not want to include yourself (and your partners) in the coverage, most states will allow the owners to exempt themselves from coverage. Still, if you are equally exposed to the risks of your workplace, as are your employees (which is generally the case), it is wise to have yourself covered too.
Whether your small business legally needs a workers’ comp policy or not depends on the regulations of the state your company operates in. But even if you are not required to have the insurance by law, it is only wise to invest in it as early as possible. Putting your business at risk of potentially unlimited financial liability to save a small premium amount is not worth the risk.
Besides, since the policy offers benefits to you, why would you do more for your employees than you do for yourself? Buying workers compensation could turn out to be one of the best decisions you made.
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