In every U.S. state except Texas, the law requires business owners to purchase workers compensation insurance to cover expenses associated with workplace injuries and illnesses. However, some circumstances may exempt you from this responsibility.
Expectations and Exceptions
First, you should know that state agencies, not the federal government, set the requirements for workers’ comp insurance provisions. While all states (except Texas) generally require employers to purchase a policy, the laws have caveats and exceptions.
For example, some states say that businesses with less than three employees don’t have to offer workers’ comp, while other states set this bar at five or even 10 employees. But aside from these exceptions, companies of all sizes, from family-owned businesses to national chains, have to offer workers’ comp benefits.
The Option to Self-Insure Your Business
In some states, companies that would otherwise have to purchase a workers’ comp insurance policy can choose to self-insure their business. In states that do permit self-insurance for workers’ comp, employers generally need to apply for this status.
What does self-insuring a business entail? As the employer, you would take on the risk of shouldering any costs that may arise from a workplace injury, illness, or fatality. Instead of paying regular premiums to a workers’ compensation insurance provider, the employer would pay the associated expenses out of pocket. In some cases, a group of businesses will come together to create a pool of funds for this purpose.
Even if the state requires you to purchase a workers’ comp policy for your business, you may not be obligated to extend this coverage to everyone who works for you.
Most commonly, employers seek exemption from insuring independent contractors. States generally recognize independent contractors as self-employed individuals. While independent contractors may work under your roof and your direction, you likely don’t employ them directly and thus don’t have to provide them coverage.
States have different processes for dealing with workers’ comp exemptions. Some states automatically exempt eligible businesses. Others require the employer to fill out a workers’ comp exemption form and submit it to the organization in charge of workers’ compensation in your state. The business owner also has to have a current business license, proof of ownership, and relevant employee information.
Next, the agency will screen your business and either approve or deny the application. (Note that this procedure applies in some, but not all states. Some states will automatically qualify your company for an exemption if you have workers who meet the criteria.)
In addition to independent contractors, other types of workers may qualify their employer for a workers’ comp exemption. For example, in New York, businesses do not have to provide coverage for domestic employees who work less than 40 hours a week. To understand your state’s specific rules for exemptions, click here.
Is Filing for an Exemption a Good Idea?
Just because you have the option to file for a workers’ compensation exemption doesn’t mean you should. As a business owner, you have this choice. Tempting as it may be to apply for workers’ comp exemption, you should take the time to weigh the potential risks and benefits of this option.
Ask yourself: what would happen if a worker without workers’ comp coverage sustained a severe injury while onsite or while performing their work-related duties? Would you want that person to have to pay for their own medical expenses? How would this affect morale among your other employees, and what would it do to your company’s reputation? Before filing for an exemption, you want to stop and consider these questions.
Your Insurance Should Work for You
Aside from doing what the law dictates, you, as an employer, have control over your company’s insurance plans. When deciding on an insurance provider, your deductibles, or whether or not to file for workers’ comp exemptions, you should always take the time to research your options and ensure you’ve found the coverage that works for you.
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