What is workers' compensation insurance and why do you need it?

Workers' compensation is insurance designed to protect both employee and employer in case of a workplace accident, injury, or occupational illness.

Should an employee be injured on the job, workers' comp will provide insurance benefits that cover any hospital or medical expenses that are required to treat the injury. In addition, it can provide disability payments (typically two-thirds of the employee's regular salary) for lost wages if the employee is unable to perform their duties. It may also pay for any retraining, rehabilitation, or other benefits.

In exchange for this benefit, the employer is protected from legal liability since by accepting workers' compensation benefits the employee gives up their right to sue for damages.

Workers' compensation is required by law to be provided by the employer under specific circumstances (see below). Failure to provide workers' comp coverage will result in a fine being levied upon the employer. In addition, it is illegal to require employees to pay for all or part of the workers' comp insurance; employers are responsible for the entire amount.

What you should know about workers' comp in Tennessee

Not only does workers' comp protect you and your employees, it is the law for any Tennessee employers who:

  • Are in the construction business or trades who provide construction services who have one or more employees, including owners of the business (unless they are listed on their Exemption Registry)
  • Employ five or more workers in any industry other than construction.
  • Employ one or more workers in the coal mining industry.
  • Employ five or more workers INCLUDING family members, part-time employees and corporate officers.

Buying workers' compensation in Tennessee

If your company meets the employee requirements as outlined above, you should purchase workers' compensation as soon as you meet the threshold for the requirement. Workers' comp insurance is not provided through the State of Tennessee, but rather through the private insurance market.

You may purchase a workers' compensation policy from any private broker who is licensed to write workers' comp policies in Tennessee.

How much does workers' comp insurance cost?

Workers' comp insurance rates are calculated by first assigning class codes to specific employees that reflect the work they perform. Types of jobs with more risk will result in higher costs, which are associated with that specific class code. For example, the class code for a construction worker carries a higher rate than that of an office worker.

The workers' comp premium rate is indicated in dollars and cents per $100 of payroll for each class code.

Factors that impact coverage

Three factors are weighed when determining an employer's workers' comp premium. These are:

  • Employee job codes/classifications
  • Size of the employer's payroll
  • Number of past claims

A formula taking all three of these components into account is used to calculate your workers' compensation premium.

Take steps to lower your cost

Many factors go into the cost of workers' compensation; as an employer, there are certain things you can do to help reduce your costs. These include

Prevent workers' comp claims: Since your insurance payments are tied not only to the type of worker you employ but also how many claims you have had in the past, reducing claims will help lower your rates. The very best thing you can do is to prevent accidents from happening in your workplace. This can be done by learning about the most common safety hazards in your industry, providing employee training on safety measures, and reviewing processes for dealing with potential hazards. Establishing specific safety or first aid routines can also help you obtain a "safety credit."

Review and revise your class codes annually: Because premiums are tied to class codes, you should check to see if your class codes accurately reflect the work your employees currently do. If the nature of the work your employees perform changes even slightly from the previous year, you may be eligible for different class codes, which may provide lower rates. In addition, reviewing your payroll numbers and reporting them accurately may result in cost savings as well.

Use caution when trying to economize: If your business sometimes falls below the threshold of workers' comp being required from time to time (for example, if you periodically hire contractors), it may be tempting to cancel your insurance as a cost savings. Although this appears to save money in the short term, you may be better off keeping your coverage; insurers may charge you higher premiums for inconsistent coverage, or they may even deny coverage. Carefully review your situation so that you aren't "penny wise and pound foolish."

Don't underinsure: Your cash flow may suffer if you underestimate your payroll and you have an audit that requires an unexpected adjustment. You could also have a claim that results in insufficient coverage. Be sure you have comprehensive coverage if you have employees who work in multiple states or if you have employees who cross state lines to work; check to see that your policy covers those states as well.

Apply for an experience mod: If you have been in business for more than three years, you can apply to the Tennessee Department of Labor & Workforce Development for an Experience Mod (experience modification factor). This rate will be based on the claims you have had over the past three years and can result in significant savings over time. The average MOD is set at 1.0; those companies with fewer and less serious claims will have a MOD rate of below 1.0 and thus may see premium reduction.

Where to Get More Info

Although providing workers' compensation may be an additional expense, it provides a valuable benefit for both employer and employee alike, and it is in your best interests to be fully insured and compliant with Tennessee law.

For more information on required coverage and employee exemptions, see The Tennessee Department of Labor & Workforce Development

If your employee is injured at work, what steps should you take? Use this Beginner's Guide to Workers' Comp to help you navigate the process and ensure timely reporting and payment of benefits.

If you are having difficulty and need help, you can contact the Tennessee Department of Labor & Workforce Development for assistance in Reporting a Claim