An Employer's Guide to Workers' Comp Insurance
Everything employers need to know about workers' comp, and more.
Written by
Christine Lacagnina has written thousands of insurance-based articles for TrustedChoice.com by authoring consumable, understandable content.
Reviewed by
Cara Carlone is a licensed P&C agent with 20 years of experience. She has her P&C license in RI and TX and holds CPCU, API, and AINS designations.
As a responsible employer, you want to ensure your employees' safety is taken into account before they ever punch their first time card. Fortunately, having the right workers' compensation insurance can help you achieve this. A workers' comp policy can reimburse injured or ill employees for the cost of medical care and replace a portion of their lost wages if they need to miss work due to the incident.
It's important to know your responsibilities as an employer, as far as offering workers' comp for your crew. An independent insurance agent can help you get set up with enough coverage to protect your business and its employees alike. They'll ensure your policy provides enough coverage to satisfy your state's workers' compensation laws and regulations, too. Until then, here's a look at what you need to know about workers' comp as an employer.
What Is Workers' Compensation Insurance?
Workers' compensation insurance, or workers' comp, is a policy obtained by an employer to pay for medical expenses for employees who get injured or ill while working, or otherwise due to job-related activities. Most states mandate coverage if a business has a certain number of employees, but state workers' comp laws vary.
Workers' comp not only provides protection for employees on the job but also for you as the employer. Having workers' comp is a critical form of liability protection for a business. If a business covers its workers with a workers' comp policy, these employees automatically forfeit the right to sue the business for a work-related accident, injury, illness, disability, or fatality in exchange for these benefits.
When Can an Employee File a Workers' Compensation Claim?
Workers' compensation is designed to cover illnesses, injuries, disabilities, and deaths that occur due to the job environment or job tasks. It can also cover disabilities that develop over time due to repetitive job motions. Employees can file workers' comp claims for any of the following reasons:
- Accidental work injuries
- Occupational illnesses
- Repetitive stress injuries
- Disabilities that develop because of job duties or the workplace
- Time off work necessary for recovery after a covered incident
If the claimant requests workers' comp benefits for a covered incident, they may receive compensation for various types of loss, including:
- Medical bills and treatments
- Prescription medications
- Physical therapy and other ongoing treatment
- Disability benefits
- Partial wage replacement
- Vocational rehabilitation
Workers' comp can reimburse employees up to two-thirds of their typical salary or pay if they must take time off work to recover from a covered illness, injury, or disability.
How Workers' Compensation Protects Employers
Workers' comp is mandatory by state law in most areas by the local Division or Department of Labor or the state's Workers' Compensation Board. Uninsured employers who are also not self-insured can face state-enforced penalties, including fines, jail time, or criminal offenses, for failure to comply with state regulations. It's critical to comply with your state's workers' compensation requirements to avoid harsh penalties that could lead to hefty financial losses for your business or worse.
Having the required amount of workers' comp coverage also protects employers from employee lawsuits or lawsuits filed by employees' family members for covered incidents. Even serious accidents that result in an employee's death are protected by workers' comp.
If a business offers the required amount of coverage, an employee's surviving family members cannot sue the company after a workplace fatality. Without workers' comp, however, your business is vulnerable to not only state penalties but also employee lawsuits for workplace accidents.
Workers' Comp and Owners, Officers, CEOs, etc.
For business owners, members, officers, or CEOs, there's usually an option to exclude themselves from a workers' comp policy. In return for excluding themselves from coverage, they're not required to include their annual payroll, which can save the business a good bit of money on the policy.
But any employer who is an owner, CEO, etc., who chooses to exclude themselves from coverage won't be protected by the workers' comp policy if they get injured or ill due to work-related activities. Though optional, many business owners exclude themselves from coverage to avoid paying the additional premium. Each state has its own rules for workers' compensation exclusions, and it’s important for business owners to be familiar with them.
Workers' Comp and W-2 Employees
The IRS takes both the W-2 and 1099 employee classifications very seriously. An employee should be classified as a W-2 worker if:
- They're required to work certain hours and days set by the employer.
- They're paid on an ongoing continuous basis for a job with no end in sight.
- They're required to be at meetings, events, or other work functions.
All W-2 employees have a portion of their taxes paid by the employer, which is why some employers mistakenly try to classify a W-2 employee as a 1099 subcontractor. Doing this can cost you a lot more in the long run. Be sure to classify all your employees properly to avoid state fines and other consequences.
Workers' Comp and 1099 Subcontractors
A 1099 subcontractor is self-employed, pays their own taxes, and generally doesn't need to be included on an employer's workers' comp policy if they provide a proper certificate of their own insurance. They may opt to purchase self-employed workers' comp insurance.
As the employer, it's your responsibility to ensure that each subcontractor has coverage that's equal to or greater than your own policy's limits. Each state sets its own workers' compensation guidelines for independent contractors.
Not collecting proper certificates from 1099 employees could result in the cancellation of your workers' comp coverage. If your policy gets canceled, it could be harder for your business to obtain new coverage from a different insurance company.
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What You Need to Know About Workers' Compensation Audits
Preparing yourself for a workers' compensation audit is as easy as being prepared ahead of time. Study the following checklist so your business can take appropriate proactive measures.
Workers' comp audits often require:
- Certificates of insurance from any 1099 subcontractors you've hired throughout the policy term
- All W-2 employee tax filings
- Classifications of each worker with job duty descriptions for each
- Payroll for each W-2 employee and 1099 subcontractor for the policy term
- Documentation of all safety procedures implemented and mandatory meetings attended
- All subcontractor agreements signed and dated
- All hold harmless agreements signed and dated by all subcontractors hired*
*A hold harmless agreement states that a subcontractor will hold your business harmless if they get injured while doing a job for you or as a result of doing business with you. An independent insurance agent can help you determine which documents you need as the employer to prepare for a workers' comp audit.
Consequences of Misclassifying Employees Under Workers' Comp
As an employer, it's crucial to classify all employees correctly to avoid penalties from the IRS. Failure to do so can cost your company a ton of money.
One of the most potentially confusing employee classifications is a 1099 worker vs. a W-2 employee. Fortunately, the IRS uses a checklist to determine whether someone is a W-2 employee or a 1099 worker.
The IRS's W-2 vs. 1099 employee checklist:
If you instruct a worker on when, where, and how to perform their job, the IRS would classify them as a W-2 employee, not a 1099 subcontractor.
If you have to train a worker, they would be classed as an employee by the IRS.
If you have similar workers doing similar job duties, this is an indication of employer control over the job and should be classified as a W-2 employee.
If the relationship between the employer and the worker is consistent and ongoing, the worker should be classified as a W-2 employee.
If there are set hours required of the worker, they should be classified as a W-2 employee.
Full-time work indicates control by the employer because it does not allow the worker to obtain other employment, which means they should be classified as a W-2 employee.
If the worker must do their job on your premises, employer control is implied and the worker should be classed as a W-2 employee.
Payment method by the hour, weekly, or monthly implies an employee-employer relationship and should be classified as such. If the worker gets paid from commissions or contracts, they can be classified as a 1099 worker.
The potential for profit or loss by the worker indicates 1099 worker status.
Working for a number of different people at the same time indicates 1099 worker status, not employee status.
Common Workers' Compensation Terms
When reviewing workers' comp coverage options for your business, it's important to be familiar with some common terms used by insurance companies. These can include the following:
- Certificate of insurance: Proof of coverage provided by the insurance company or agent for a policyholder like a 1099 subcontractor.
- Experience modification rate or factor: A number used by insurance companies to gauge the past cost of injuries and future chances of risk by an employer. The lower your business's experience modification rate or factor is, the lower your workers' comp premiums will be.
- Classification code: The codes assigned to each job type or duty per employee or business operation on a workers' comp policy. These codes determine the risk type and premium amount. The riskier the job duty or operation, the higher the premium.
If you have further questions about any of the workers' comp terms used in your policy, your independent insurance agent can help you answer them.
Safety Procedures Can Help You Save on Workers' Compensation Insurance
As an employer, you can require your W-2 employees to go to mandatory safety meetings on a consistent basis. Also, by keeping your work environment up to code and implementing proper safety regulations, you could save quite a bit on your workers' comp coverage premiums. An independent insurance agent can further explain how following safety protocols can reduce your premiums.
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The Benefits of an Independent Insurance Agent
When your business is ready to obtain the proper coverage to comply with state workers' compensation laws and regulations, no one's better equipped to help than an independent insurance agent. These agents have access to multiple workers' comp insurance companies, so they're free to shop and compare policies and rates for you.
They'll get you matched to a policy that offers the best blend of coverage and cost while satisfying your state's coverage requirements. And down the road, your agent will still be there to help update your coverage as your business's needs evolve and can even file workers' comp claims for you.
https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee