Most states require employers to carry workers’ compensation insurance in case any employees suffer a work-related injury or illness. In some cases, however, employers may be able to apply for workers’ compensation insurance exemption. Doing so might reduce the overall cost of business insurance, but it also poses risks.
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What is workers comp exemption?
Workers’ comp exemption means that employees won’t receive benefits while recovering from work-related illnesses or injuries. Before considering if an exemption is possible or suitable for them, employers must weigh the risk factors relevant to their business. Workers’ comp reports and statistics – by state or worksite – are available from the Department of Labor.
Who may qualify for workers' compensation exemption?
Workers’ comp exemption largely depends on employee classifications, number of employees and business structure, though it may not be an option for businesses that operate in high-risk environments.
Number of employees
Most states require businesses with at least one employee to have workers' compensation insurance. A few states raise the threshold to as many as five employees. Employers should always check their state’s requirements.
Workers’ compensation exemption based on employee classification
Under certain circumstances, states may issue workers' compensation exemption certificates to businesses that work with independent contractors. Additional exceptions may be available for employees based on how much they earn and how often they work.
Workers' compensation exempt forms are commonly filed for the following roles:
- Real estate agents
- Shop owners
- Agricultural workers
- Railroad employees
- Maritime workers
- Domestic and household staff
- Federal employees (the government has its own employee compensation program)
As always, employers should check their specific state requirements.
Workers’ compensation exemption based on business structure
A sole proprietor, partner or member of a limited liability corporation (LLC) with no employees may be eligible for workers’ compensation exemption. In larger businesses, exemptions may also be granted to executives, managing members and corporate officers who own company stock above a certain percentage, but don’t physically work on-site.
How to apply for a workers’ compensation exemption
The application process for workers’ compensation exemption depends on business location. For instance, some states automatically categorize non-employees as exempt, but this is not always the case.
Generally, employers need to file an official waiver for workers’ compensation exemption with their state’s regulatory agency. The application may request the following details:
- A company description
- Business type and structure
- Proof of business ownership
- Employee information
- Up-to-date business licenses
- Contact information
- Current workers' compensation insurance carrier
- Application fee
If the application is approved, the employer will receive a workers’ compensation exemption certificate. It may only be valid for one or two years, so employers must file workers’ compensation exemption renewal forms as needed.
Pros and cons: should employers file for workers’ comp exemption?
Whether workers’ compensation exemption is right for a business requires careful consideration of the pros and cons. On the one hand, not having to pay for workers’ comp should reduce the overall cost of business insurance coverage. On the other, employees may be able to file lawsuits if they feel their employer is liable for their injuries, even if the employer has an exemption certificate. In addition, sole proprietors aren’t always covered by their health insurance for workplace injuries and may pay out of pocket for medical care.
This article is intended to be used as a starting point in analyzing how to file for workers’ comp exemption and is not a comprehensive resource of requirements (specific state requirements may vary). It offers practical information concerning the subject matter and is provided with the understanding that ADP and/or its affiliates are not rendering legal or tax advice or other professional services.