workers compensation 101 Comp
workers compensation 101 Comp

clock May 31, 2019

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Workers Compensation 101: Your Ultimate Small Business Guide

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Workers compensation makes up 1.3 percent of your labor costs, or around $0.46 per hour worked. This number can vary wildly, depending on your industry, the type of worker you’re insuring, and more.

What’s clear is that workers compensation can add up, but it’s a requirement for most businesses in most states. In this guide, we’ll go over the basics, including when and why you need workers compensation.

If you’re new to the subject, this course in workers compensation 101 will help you answer your questions.

Workers Compensation 101 Starts with Why

The history of workers compensation goes back just over 100 years. In 1911, Wisconsin introduced laws for a new form of insurance.

This is what we now know as workers compensation, and it was designed to protect employers. Before workman’s comp insurance, employees would sue their employers for workplace accidents.

This system made it difficult for employees to get medical treatment or to recover lost wages. It also hurt employers, since there was no way to predict the costs of a workplace accident. If an employee won a suit, the employer could end up owing a fortune.

Workers compensation made the costs predictable for employers. By paying insurance premiums, they could protect themselves in case of a workplace accident. Employees were guaranteed timely access to medical treatment.

In short, the new no-fault insurance protected both employers and employees.

When You Need Workers Compensation Insurance

Not all businesses need workers compensation insurance. In most states, though, if you have even one employee, you’ll need to buy a policy.

There are some exceptions. Texas doesn’t require employers to carry workers compensation insurance. A few states make exceptions for businesses that have only a few employees.

In most states, if you have more than three employees, you’ll need insurance. Some states may not require you to carry insurance if you work in certain industries.

If you meet the requirements but don’t carry insurance, the state could penalize you. Moreover, you could end up paying out of pocket if there’s ever an accident or injury at your workplace. If you have an employee, it’s a good idea to have insurance.

Workers Compensation for Self-Employed People

A common question is if there is a workers comp insurance for self-employed people. The answer is yes, but you don’t need to carry workers compensation insurance until you have non-owner employees.

You may not need to cover employees if they are related to you, such as a family member or spouse.

You’ll need workers compensation insurance if a contract requires you to have it. It may be a good idea if you’re working for a client where you may be injured.

Most states treat contractors as employees for the purpose of workers compensation insurance. Some business owners will thus offload the responsibility before they hire contractors.

Where to Buy Insurance

Once you’ve determined you’ll need to have workers compensation insurance, you’ll buy a policy. In some states, you’ll have to buy your policy from a state-funded entity.

These are known as state monopoly funds or monopolistic states. You can only buy from them in the following states with some exceptions under our Cover One Owner Only Program:

  • Wyoming
  • Washington
  • Ohio
  • North Dakota
  • West Virginia

The territories of Puerto Rico and the US Virgin Islands also use a state-funded model.

In other states, you can buy private insurance to meet your needs. Some states maintain state funds, but also allow for private insurance. These include:

  • Arizona
  • California
  • Maryland
  • Montana
  • Oklahoma
  • Utah
  • Florida

In these states, employers are free to shop between private and public. This can help you get the best deal on their insurance.

Large employers may self-insure, but not all states allow this. Smaller employers are usually required to have a policy.

How Does Workers Comp Work?

No workers’ compensation 101 course is complete without a quick review of how it works.

Once you determine your state’s compensation requirements and buy a policy, you’ll pay premiums. When a workplace accident or injury occurs, you’ll make a claim.

Workers compensation usually provides benefits for medical treatment. It may also provide disability coverage and compensation for lost wages. Some policies also include a form of life insurance.

Since states govern insurance, there’s no single set of rules on minimum coverage or calculating premiums. The National Council on Compensation Insurance collects data and issues guidelines.

Some states use these guidelines to develop the rules about calculating premiums. States can make changes to the NCCI rules. Other states use manuals developed by other advisory councils.

To determine how premiums are calculated, identify the advisory board your state follows. You can then look at the rules.

Controlling Workers Comp Costs

If you’re required to get workers compensation insurance, it can add to your labor costs. That’s why you’ll want to make sure you’re getting the best policy possible for your business.

One thing you can do to lower the costs associated with compensation is to look for credits. Some states offer credits for employers with safe workplaces and/or drug-and alcohol-free work environments.

Another thing to do is to make sure you’re getting the right premium. If you have lots of experience, you may be eligible for a lower premium. Certain industries also pay less.

Be sure to ask if you’re in an assigned risk policy. These policies are usually given to employers who can’t get insurance on the standard market. Their premiums are often much higher.

Finally, look for alternatives where they’re available. You could save by buying your policy from a trade organization or a third party like a PEO.

Get the Right Insurance

What you should take away from workers compensation 101 is that having the right insurance protects your business and employees.

If you’re looking for a better policy, get in touch with us today. We could help you save with a better policy for you. Controlling your workers compensation costs has never been easier.

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