There are around 32.5 million small businesses in the US and more launching on an almost daily basis. Many of these businesses consist of a single person wearing all of the hats, which means constantly shifting priorities.
For example, they must worry about everything from inventory and advertising to bookkeeping and website management. In the middle of all of these competing needs and goals, it’s not shocking that many of them never consider workman’s compensation insurance. In fact, they may not even know if their business is subject to workman’s compensation requirements.
If you’re wondering if workman’s compensation insurance coverage is something you need for your business, keep reading. We’ll shed light on some of the key factors you must keep in mind.
What Is Workman’s Comp?
In essence, workman’s comp is insurance that will help cover medical costs, rehab, and lost wages if an employee gets hurt while on the job. The same typically applies if an employee gets ill from their job.
For example, let’s say you have an employee who injures their back while lifting something in the stockroom. As long as they report it when it happens and seek medical care right away, workman’s comp will generally provide coverage. If an employee gets exposed to something on the job and gets ill, the same deal applies.
Who Set Workman’s Compensation Rules?
Each state sets its own rules and regulations for workman’s comp. That also means that workman’s compensation state requirements can vary considerably from state to state.
Some states set very strict rules. For example, California has extremely strict rules about coverage for all employees, included chief executive officers. This is unusual, as many states let CEOs opt-opt of coverage.
Other states set looser requirements about when a business must purchase worker’s compensation coverage. Some states require worker’s compensation with as few as one employee, while other states require it when you have three or five employees.
You must check your state regulations for guidance on how many employees trigger the requirement. The only state that doesn’t require any private employer to secure workman’s compensation is Texas.
The federal government has its own programs for federal employees.
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Most states offer a few common exclusions to the workman’s compensation rules. In most cases, a sole proprietorship can take a pass on workman’s comp coverage.
Since you are the only employee, your personal health insurance should typically cover medical care and rehab. However, you’re on the hook for making up the lost income.
This exclusion typically applies to freelancers, artists, contract entertainers, and similar occupations. The same would conceivably apply in cases like a one-person startup, which you commonly see in e-commerce situations.
Farm workers and taxi drivers are often excluded from coverage requirements. Individuals who conduct construction activities or subcontracting work are typically required to carry worker’s compensation regardless of the number of employees they have.
Workman’s Comp Classes
Something you may run across in relation to workman’s comp is the term class or class code. Some occupations and types of businesses are more hazardous than others.
For example, people who work for a custom woodworker are likely exposed to a wide range of power tools. Those employees face a higher risk of injury than someone who works for a bookkeeper.
Insurance coverage providers need a way that they can set rates for the workman’s comp policies. It doesn’t make sense that the bookkeeper should pay the same rates as the woodworker or a general contractor.
Insurance providers deal with this problem by dividing businesses into different classes based on a set of risk factors. They essentially compare the risks for different occupations and types of businesses, then group types of businesses into classes.
Each class gets a class code. Any business that falls under that class code pays the same rate per employee for coverage.
Where Do You Get Workman’s Compensation Coverage?
The source for your workman’s compensation coverage will also vary by state. There are a few main approaches to providing workman’s comp.
A small handful of states are what are called monopolistic states. These states maintain a state-run fund for worker’s compensation. Any business that carries workman’s comp in those states gets it through the state fund.
These funds handle things like setting classes for the businesses.
The majority of states rely on the NCCI or National Council on Compensation Insurance to manage much the administrative work for worker’s comp in those states. The NCCI handles things like:
- Creating a classification system
- Creating standard forms
- Calculating policy rates
- Creates reports based on statistical analysis
That states that use the NCCI let private insurance companies offer workman’s comp policies. The caveat is that those policies must conform with the NCCI’s recommendations.
Non-NCCI states also allow private insurance companies to provide workman’s compensation insurance coverage to businesses. These states typically maintain bureaus that perform similar functions to the NCCI.
Selecting a Coverage Provider
If your business does need workman’s comp coverage, the next challenge is picking a provider. Assuming you don’t live in a monopolistic state, that means picking from all the private insurance companies.
Look for a reputable provider that has a track record with workman’s comp coverage. Take a close look at coverage offered and any limitations.
Make sure they offer coverage for your industry. Not every company will cover things like contractors. You can head over here for some tips on choosing workers comp insurance.
Worker’s Compensation Insurance and You
There is goods news on the worker’s compensation insurance front if you run a sole proprietorship or work as a freelancer. Odds are good that your state doesn’t require coverage.
If you have even one employee, though, you must dig into your state requirements. You may well need coverage for that one employee to stay on the right side of the state regs. Looking for more tips on running your business more efficiently or more profitably? Check out the posts over in our Business section for more helpful information.