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Workers' Compensation Insurance 101

Workers’ comp is a special form of insurance coverage that protects your employees from the negative impact of an injury or illness that results from their job. If one of your employees trips over a stack of boxes in the storeroom, severely hurting themself as they fall onto a hard cement floor, workers’ comp will pay for the expense of their medical bills and any wages lost as they recover.

And that means your employee won’t need to sue you in order to pay for their treatment or time off.

Workers’ comp helps protect your employees’ health and wellbeing, as well as your bottom line.

Workers’ Compensation Insurance 101

Here’s what you need to know about workers’ compensation insurance: why it exists, what it does, who it benefits, and whether or not you need this coverage for your small business.

A Brief History

Did you know that workers’ comp is one of the oldest insurance programs in our country? In the early 20th century, the industrial revolution was in full swing. Factories were popping up everywhere, and workers faced incredibly harsh work conditions. Workers who were injured needed a way to pay for their medical costs and would regularly sue their employers. Needless to say, trust between employers and employees was at an all time low.

In 1908, the first workers’ compensation law protecting federal employees was passed. From there, individual states began passing their own workers’ comp laws to further protect employees (and employers) from the damaging effects of lawsuits, unpaid medical bills, and a general air of mistrust.

Today, workers’ comp is required in nearly every state.

How it Works

As an employer, you pay into a workers’ comp State Fund. When an employee is injured or becomes ill, they will file a claim for benefits to pay for medical bills and missed time from work.

Even temporary or part-time workers are eligible for workers’ compensation benefits.

What does Workers’ Compensation Insurance Cover?

Workers’ comp coverage generally covers the following for employees who are injured or become sick at work:

  • Medical bills
  • Wages missed during recovery
  • Rehabilitation and ongoing care
  • Employee lawsuits
  • Funeral expenses and death benefits

It does not cover costs to you, the employer, from:

  • Hiring replacement workers
  • OSHA penalties and fines

Workers’ comp primarily benefits your employees. The benefit to you, as an employer, is the form of protection from lawsuits as well as penalties, fines, and even jail time (more on this in a bit).

Who Needs Workers’ Comp?

If you are a business owner or self-employed person who has one (or more) employee, you need workers’ comp.

Even if you work out of a home office, and pay a part-time employee to help you with the occasional filing, you need workers’ compensation. Your employee could easily slam a finger in a filing cabinet, have a run-in with the business end of a stapler, or trip over a pile of contracts left sitting on the floor.

If you have a part-time employee who helps set up your booth at the local Farmers' Market every weekend so you can sell your handmade soaps, homebaked brownies, or garden fresh veggies... you need workers' comp. Afterall, you never know when your helper may trip over a crate of carrots, or be injured setting up your booth.

There is no business that doesn’t pose at least a small risk to the health and wellbeing of an employee.

If you pay a worker to help you do your job or operate your business, you are required by law in nearly every state to carry workers’ comp coverage. And if it isn’t required, it is still a smart business move to protect yourself from lawsuits arising from an accident that leads to a worker injury.

How Much will Workers’ Comp Cost Me?

There are a number of factors that go into determining the cost of your annual workers’ comp insurance premiums. Your insurance carrier will consider:

  • Your industry classification
  • Your company’s history of work-related injuries (aka experience modification)
  • The size of your payroll

An insurance professional who specializes in business insurance can help you understand your specific costs, based on these (and other) factors.

What if I Don’t Carry Worker’s Comp?

You know that you should carry workers’ comp insurance. There is a very good chance that you are even required by law to carry it. But what happens if you don’t? The penalties for not carrying workers’ comp will depend on the specific laws of your state.

Consider the following penalties in the State of California, where failing to provide workers’ compensation coverage is a criminal offense:

  • This misdemeanor is punishable by a fine of not less than $10,000, and/ or
  • Imprisonment in the county jail for up to one year
  • Payment of all bills related to a worker’s injury or illness
  • Subject to civil action on behalf of the injured employee
  • Enforcement penalties of $1,500 per employee up to a maximum of $100,000

Trying to reduce your workers’ comp premiums by misstating an employee’s job duties, or misclassifying an employee, is considered fraud. Fraud of the workers’ comp system is taken seriously, and agencies such as state Departments of Insurance and local district attorney’s offices will work tirelessly to prosecute employers caught violating the law.

When it comes to workers’ compensation insurance, consider it a must-have policy if you pay any person to help you with your business. Workers’ comp not only benefits the employees who help keep your business running, it also protects you from expensive lawsuits, penalties, fines, and even criminal prosecution.

Smiling Female Contractor



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