Managing What is Mandated: Workers' Compensation Insurance
Keeping your employees safe at all times is a non-negotiable. However, accidents can and do happen, no matter what workplace safety programs are put into place — especially in businesses with many potential hazards, such as construction companies and restaurants. That’s why workers’ compensation insurance is important, since it protects both you and your employees in the case of a workplace injury.
What is workers' compensation insurance?
Workers' compensation insurance provides wage replacement and medical/rehab benefits to employees injured in the course of employment. This is different from disability insurance, which pays benefits to workers who become injured or ill due to non-work related circumstances.
Before workers' comp laws were put into place, many employees either couldn't afford to take legal action against their employer, or would run out of money as they waited for the case to be tried. As a result, individual states stepped in and created workers' comp insurance to pay for qualified expenses, and ultimately to avoid having to determine who was at fault.
What does workers' compensation insurance cover?
Workers' compensation helps employees pay for qualified expenses related to workplace injury or illness. Depending on state laws, these may include:
- Medical services
- Rehabilitation services
- Lost income
- Vocational training
Each state determines the amount and duration of workers’ compensation benefits and how those benefits are administered.
Is workers' compensation insurance mandatory?
Currently, every state in the union except Texas requires employers to carry workers’ comp coverage. Most employers are now required by state law to carry this type of insurance. However, some states have their own plan, which discourages competition from private insurers. Several other states require workers' compensation insurance only for employers with more than a certain number of employees.
Not having workers’ compensation insurance is a criminal offense, and the penalties can be severe. Fines can reach thousands of dollars per day for non-compliance, as well as any loss of revenue due to business closure until coverage is in place. In the event of an accident, the penalties can be even more, as the employer is responsible for all medical bills, lost wages, and potential litigation.
What other types of insurance are recommended?
Along with workers' compensation insurance mandates as described above, you may need several other insurance types, which are highly recommended when operating a business.
- Liability insurance protects employers against claims of negligence that can be costly to your business.
- Property insurance ensures your commercial properties are covered in the case of disaster or crime. This not only protects the building itself but also the lost income, assets, and any interruption to business.
- Commercial auto insurance is required to cover vehicles registered under the name of the business.
- Disability insurance covers part of an employee’s salary if they become disabled and are unable to do their job. This type of insurance is required in New York state, California, New Jersey, and Rhode Island.
Can workers' compensation be purchased as part of a package policy?
While many forms of business insurance may be sold as part of a package, state laws require workers' compensation to be purchased as a separate policy.
What are the difficulties of managing workers' compensation?
Workers' compensation insurance can involve large payments that could potentially cause serious cash flow problems for your business.
That's because payments are often based on an estimate of wages paid to employees based on risk (e.g. it's more expensive to cover electricians than to cover clerical workers). Because premiums are based on estimated payroll and not on actual wages paid, insurers may require a large upfront payment. And if the estimate is found to be low at the end of the year, you'll have to pay the difference in one lump sum.
However, a licensed insurance agency can provide you with competitive quotes, possibly secure you with discounts when purchased with other types of insurance with the same carrier, and help you manage your plan more efficiently. Furthermore, integrating your workers’ compensation policy with payroll services can provide increased benefits such as no up-front deposits, billing based on actual payroll instead of estimates, and minimized risk of paying additional year-end premiums.