What is Workers’ Compensation Insurance?
Workers’ compensation insurance is a specific type of policy for companies. It is governed by the state in which you do business and is designed to provide medical coverage when an employee is injured on the job.
First introduced in Alabama and Georgia in 1855 as an act to allow workers to sue for damages if they were hurt while working, workers’ compensation quickly spread throughout the U.S. and expanded to cover medical costs in lieu of lawsuits. Besides medical costs this insurance also covers a portion of a worker’s wages while they are out of work recuperating as well as death benefits to survivors if a person is killed on the job.
Although workers’ compensation (comp) originally covered physical injuries such as occurs with a malfunctioning manufacturing machine it has been expanded to cover repetitive damages such as carpal tunnel. In some cases, it will also cover illnesses that are associated with certain jobs such as mesothelioma, a type of cancer caused by asbestos exposure. It also sometimes covers existing ailments that are worsened by working conditions such as when a worker has emphysema that is made more critical due to airborne pollutants.
Workers’ compensation insurance doesn’t cover employees when they are travelling to and from work but it is in affect if they are travelling during the course of a job. For example, if you have an employee delivering product from one store to another and she’s hit by another vehicle it would be considered a workers’ comp injury.
Because workers’ compensation is governed by each state the laws for your specific company will be determined by the state in which you do business. Each state’s comp laws are different and may have additional criteria covered or not covered under the state law, such as time required to be off the job in order to collect wage replacement.
Workers’ compensation is a no-fault type of insurance, meaning the employee does not have to show the employer was at fault in order to collect benefits from an injury. It is designed to promote safety in the workplace and to give injured workers a dependable source of medical and wage coverage while recuperating.
Why do Companies need it?
The main reason companies need workers’ compensation insurance is because they are required by law to carry this policy in order to employ workers. That being said, workers’ comp protects the employer from lawsuits due to injuries sustained from negligence in the workplace. It also covers your business from wrongful death lawsuits by survivors of an employee who is killed on the job.
Because it is required by all employers each state has specific business classifications in order to determine the rate of your workers’ comp policy premium. This has been found to be the fairest way to determine rates, as some types of work are obviously more prone to on the job accidents than others. A good comparison is truck drivers and accountants; truckers have the highest rate of workers’ compensation claims in the state of Washington. On the other hand an accountant job is virtually risk-free in terms of accidents.
Workers’ compensation coverage is vital to every business in terms of safety, too. Because the state oversees the laws governing coverage there are safety programs available to every business. That way you can promote safe working environments as well as safe working habits among employees and all sides come out ahead. Many states offer incentives such as lowered rates to companies that promote safety and have no accidents; in turn, many companies find giving safety incentives to their workers lowers the rate of on the job accidents.
Many major corporations provide safety training as part of their new-hire training as well as ongoing training for current workers. While training bay be expensive during time of hire the corporations have found that it lowers the job accident rate significantly and reduced time lost due to injuries.
The workers’ compensation insurance laws are perhaps the most successful laws in government because they protect both the employer and the employee in regard to accidents at the workplace.
What Happens if a Company does not have Workers’ Comp?
Because workers’ compensation is a requirement of doing business failure to provide workers’ comp is a criminal offense. For example, in California under “section 3700.5 of the California Labor Code makes it a misdemeanor punishable by either a fine of not less than $10,000 or imprisonment in the county jail for up to one year, or both. Additionally, the state issues penalties of up to $100,000 against illegally uninsured employers.”
That’s just the legal ramifications; you’ll also be held responsible for all medical costs incurred by an injured worker. In addition, they can file a civil lawsuit against you for damages. Since avoiding costly lawsuits was the original goal of developing workers’ comp laws you can probably imagine the outcome: if your employee (or in case of death their survivors) bring civil action against your business for lack of workers’ comp insurance coverage you may lose not just your business but your assets and properties, too.
In a nutshell, if a company has employees and does not have workers’ compensation insurance then the business is operating illegally. If your business is operating without coverage and it is reported or an employee is injured on the job the business will most likely be closed due to its illegal operating status.
That being said, there are certain situations and businesses that are exempt from carrying workers’ compensation insurance for their employees.
Who is Exempt?
Again, exemption from the requirement to provide workers’ compensation insurance will depend on the state laws where you live. The following are general examples from specific states and won’t necessarily cover your business situation:
In Pennsylvania those exempt from workers’ comp include agricultural workers who work less than 30 days or earn less than $1,200 in a calendar year, domestic workers, and employees who have been granted exemption due to religious beliefs. In certain corporations’ exemptions are also granted to executives.
In Oklahoma, independent contractors are not employees and therefore not required to be covered by the business workers’ comp insurance. In addition, licensed real estate brokers, certain agricultural workers, and several other types of employees are also exempt. Business owners such as sole proprietors, members of a partnership, and certain members of a limited liability company are also exempt, as is a business with five or less total employees, all of whom are related to the employer.
In Virginia, a business with two or less employees is exempt from having to provide workers’ comp insurance.
In Massachusetts LLCs, LLPs, Partners and Sole Proprietors are exempt from covering themselves as are independent contractors. Care should be taken to insure the worker is in fact classified as a subcontractor and not a direct employee.
As you can see, the requirements for exemptions vary widely from state to state. In some states, a sole proprietor may be covered by workers’ compensation and in other states they are not.
The main thing to keep in mind is that workers’ compensation insurance is an advantage to your business. You should be well informed on your state policies and make sure your business is compliant because your company’s success depends on it. When it comes to workers’ comp insurance coverage it’s always wise to err on the side of caution, and that is especially true if you employ subcontractors or seasonal workers.
Who is not Exempt?
Again, this will depend on your state so we’ll use examples to give you an idea of business situations where workers’ compensation insurance is not exempt:
Michigan: employers who must carry workers’ compensation coverage:
- All private employers regularly employing 1 or more employees 35 hours or more per week for 13 weeks or longer during the preceding 52 weeks.
- All private employers regularly employing 3 or more employees at one time. (This includes part-time employees.)
- Agricultural employers if they employ 3 or more employees 35 hours or more per week for 13 or more consecutive weeks.
- Householders employing domestic servants if they employ anyone 35 hours or more per week for 13 weeks or longer during the preceding 52 weeks.
- All public employers.
Massachusetts: every employer with one or more employee(s) is required by law to have a valid workers’ compensation policy in effect at all times..
South Carolina: an employer who regularly employs four or more workers either full-time or part-time is required to have workers’ compensation insurance.
Missouri: you are required to carry workers’ compensation insurance if you have five or more employees. If you are in the construction industry you must carry workers’ compensation insurance if you have one or more employees.
Samples of some of the Fines and Penalties
Because workers’ compensation insurance is such a vital part of job safety and employee rights employers who disregard the law can face stiff penalties. In some states, it is a felony to be caught without workers’ comp coverage and in other states it’s a misdemeanor. Regardless of the class of charges it’s considered a serious offense. Here’s a look at the fines and penalties for operating an illegal business without workers’ compensation insurance in three different states:
- The penalty for the first offense is twice the amount of premium you should have paid for insurance, with a minimum of $1,000. The penalty increases to $250 per day with no limit on the total fine.
- If you continue to be noncompliant the Workers’ Compensation Division may request a court injunction against you; you will then face stiffer fines and possibly jail time.
- If a worker is injured while your business has no coverage you will be liable for the full amount of medical expenses. In addition, the worker will have the right to sue you for damages; this type of lawsuit can easily range in the hundreds of thousands and is exempt from bankruptcy
- The failure to cover workers’ compensation for five or less employees within 12 months constitutes a misdemeanor with a fine of not less than $1,000 nor more than $5,000.
- The failure to cover workers’ compensation for more than five employees 12 months constitutes a class E felony. It is punishable by a fine of not less than $5,000 nor more than $50,000 in addition to any other penalties otherwise provided by law.
- A business that has h previously been convicted of a failure to secure the payment of compensation within the preceding five years, upon conviction for a subsequent violation the business owner shall be guilty of a class D felony, fined not less than $10,000 nor more than $50,000. These fines are in addition to any other penalties including fines otherwise provided by law.
- In addition, there are various fines for misrepresenting employment by falsifying records such as payroll, wages, employee classifications, and accidents.
- The failure to provide workers’ compensation insurance is a class A misdemeanor and the business owner may be liable for a penalty of up to three times the annual premium or up to fifty thousand dollars.
- A subsequent violation is a class E felony.
- If a worker is injured the business owner will be held liable for the medical care and expenses.
- An injured worker may also bring an action for personal injury in circuit court against the employer.
As you see, workers’ compensation insurance is a vital cog that keeps industries running smoothly throughout the country. What may seem at first glance an unnecessary expense is in fact an important component of your company’s success. No matter how safe you keep your business premises and how well you train your employees the fact of the matter is this: accidents happen. Workers’ compensation insurance is an important tool you can use to keep your employees healthy and your business running.
While certain types of businesses and workers may be exempt from workers’ comp coverage it’s important that your company conforms to the laws of your state. Failure to do so would be detrimental to your workers and may mean the end of your company, so it’s better to be safe than sorry.