If you have an employee, whether part-time, full-time, or even a relative, your business can be held liable for any work-related injuries or illnesses. This is a gigantic risk that can easily be transferred to a workers’ compensation insurance carrier.

According to the United States Department of Labor, a total of 4,836 fatal work-related injuries were recorded in 2015, which translates into 18.6 deaths per day in a five-day work week. Every death represents significant expenses to the surviving loved ones, and without workers’ compensation coverage, most employers would be held liable for at least a portion of these costs. If for no other reason, small businesses should protect their employees because financially, it’s the right thing to do.

How Much does Workers’ Compensation Insurance Cost?

In almost every state, workers' compensation rates are regulated by the state. Typically, each worker classification, i.e., the type of job, is assigned a rate per $100 of payroll, and then the rate is a multiple of that. Here are some examples from the National Council on Compensation Insurance (NCCI) rating pages that show the significant differences between business classifications:

*The Administration Fee is an annual per policy fee charged by the insurer with the amount determined by the insurance carrier.

The rates listed above are for businesses with no loss history, meaning no losses or previous claims. Businesses with a loss history can be charged up to five times more than the low rate posted by the state. The rates listed are per employee and should be multiplied by the number of employees on the business’ payroll.

An example of the lowest workers’ compensation rates versus the highest rates are as follows:

Tax Preparation Service with 3 employees and a total annual payroll of $140,000:

Class Code: 8810

Rate per $100: $0.12

Rate for $140,000 annual payroll: $168

Admin Fee: $250

Total Cost to Employer: $418

Painting Contractor with 3 employees and a total annual payroll of $140,000:

Class Code: 5474

Rate per $100: $8.99

Rate for $140,000 annual payroll: $12,586

Admin Fee: $250

Total Cost to Employer: $12,836

These policy examples are based on the business not having any previous workers’ compensation claims. The primary factors that will affect your workers’ compensation costs are:

• The state you work in
• The industry your business participates in
• The annual payroll of your business
• The claims history of your business

What is Workers’ Compensation?

Workers’ compensation insurance is a policy that protects both employees and employers when there is a work-related injury or illness. One part of the policy provides financial protection to workers who are injured, become ill, or are killed as a result of a work-related event. The other part protects the employer because employees cannot bring lawsuits against their employer for medical expenses if a workers’ compensation policy is in force. This is referred to as an exclusive remedy.

What does Workers’ Compensation Cover?

Workers’ compensation insurance is a packaged policy that provides several different coverages to provide financial protection for work-related accidents and illnesses.

• Medical Expenses: Workers’ compensation will pay for expenses due to work-related injuries and illnesses such as ER visits, ambulance transportation, diagnostic testing, and bills from health practitioners and hospitals. There is no requirement to provide who is at-fault, and, as long as the injury or illness is work-related, coverage is provided.
• Wage Loss: If an employee’s work-related injury or illness prevents them from working, workers’ compensation insurance will reimburse the employee for wages lost, depending on the state in which they work. Policies in most states will pay up to 66% of the usual weekly earnings, which is typically on a tax-free basis. Some states provide for a “Loss of Earning Power” benefit, which pays for a partial compensation if an employee returns to work on a limited basis.
• Funeral Expense and Death Benefits: When a work-related injury or illness results in the death of an employee, workers' compensation insurance will help pay the funeral expenses and, in some states, they will pay death benefits to the surviving family members.
• Employer’s Liability: In states that do not have an exclusive remedy rule for workers’ compensation insurance, your workers’ compensation policy will help pay for defense costs, settlement expenses, and judgments awarded by the court.

Legal considerations for your business

Depending on the state you do business in, the workers’ compensation requirements can vary significantly. States that are considered an NCCI state have similar regulations and experience ratings but still use their own rate structure. NCCI represents the National Council on Compensation Insurance and was created by the insurance industry to standardize the details for calculating workers’ compensation insurance premiums. Some notable differences between states are as follows:

• States like Georgia allow a single person company (sole proprietor, single member LLC, and Sub S Corp) to purchase a workers’ compensation policy but exclude coverage for the owner. This is called a “Ghost” policy and is used to satisfy workers’ compensation requirements of business owners and general contractors who hire subcontractors.
• Some states, such as Florida, do not require workers’ compensation insurance unless there are four or more employees in a non-construction business and will allow the business to exclude company officers from the policy.
• Many states, such as California, require workers’ compensation for every business and have severe penalties if the state’s Workers’ Compensation Department discovers your business is not actively insured.
• Most states treat part-time and full-time workers the same.
• In Colorado, all businesses must have workers’ compensation if they have one or more employees. There are, however, eight unusual exceptions to this requirement, such as any person who volunteers time or services for a ski area operator.
• Most states will allow a business to self-insure for workers’ compensation, but this is typically only done by very large companies.
• In New Jersey, an employer can still be held liable for significant medical cases if an employee can prove that the employer caused the injury or illness either intentionally or through recklessness.