When you're a small business owner, your margin for error is razor-thin. Employee accidents are bound to happen and taking safety precautions alone just won't cut it. And in a worst-case scenario for small businesses, an employee getting hurt on the job could mean having to pay out-of-pocket for their medical costs, lost wages or more.
"Small organizations need to protect what's central to their business," says Angelo Boff, licensed agent at Automatic Data Processing Insurance Agency, Inc. (ADPIA®) and vice president of sales at ADP®. "For most, that starts with their employees and ends with their bottom line."
The good news? Workers' compensation insurance can help protect your employees and your business – without breaking your bank account.
Workers' compensation insurance (also known as workers' comp or workman's comp) is designed to cover employees' medical expenses and rehabilitation or recovery services following a work-related injury or illness. For instance, if an employee is unable to work after a slip and fall in the office, workers' comp insurance can help to replace their lost wages. If their injuries are more severe, some policies even offer disability and death benefits to assist workers and/or their families.
4 tips when considering workers' comp insurance
Handling business insurance can be especially challenging for smaller employers. Here are some helpful tips when considering workers' comp coverage.
1. Do research about your business first.
To date, almost every U.S. state requires business owners to carry at least some form of workers' comp insurance. Where it gets complicated is that workers' comp regulations vary from state to state. For example, for most businesses, California requires workers' comp insurance from the first employee hired, while Virginia requires it once you have at least two employees. On the flip side, Texas does not require the coverage at all. There are also workers' comp exemptions, which vary by state.
"Small businesses are in a tough spot because they often don't have the same resources that larger companies have," continues Boff. "It's hard for them to keep one eye on state regulations and run day-to-day operations, too."
Before purchasing workers' comp insurance, you should gather some data about your company and its employees – specifically where everyone is located. For instance, what state(s) do your employees actually do work in? Depending upon the answer(s), it could determine whether or not insurance is mandated or simply voluntary, as well as where it can be purchased (i.e., commercial carriers or state-run programs).
Boff adds that even though many small businesses may not be required to carry workers' comp insurance (e.g., sole proprietors in some states), it's still a good idea to have it – especially if you are in a high-risk industry.
2. Recognize that trends are going to affect the price.
Beyond location(s), several other factors go into pricing your workers' comp premium, including your number of employees, their industry/work classifications and your prior claims history.
Correctly classifying employees is often critical. For example, an employee operating heavy machinery (i.e., construction worker) will have a higher workers' comp cost because of the risks associated with their job. However, if that employee is only answering phones at a desk in the office, but is classified like a construction worker, you'll be unnecessarily paying more for workers' comp insurance.
Additionally, the age of employees is becoming increasingly important for workers' comp. According to recent data from the U.S. Bureau of Labor Statistics (BLS), the number of employees over 55 is expected to increase to nearly 25 percent of the workforce by 2024. Since health typically diminishes with age, the impact of even minor injuries can be more severe for older workers – taking them longer to fully recover, and increasing coverage costs.
Lastly, all small business owners need to recognize that inflation impacts the commercial insurance market, and experts believe that this trend will continue in the future.
3. There are flexible payment options for your business.
For smaller organizations, time and cost can be dealbreakers with a variety of things, including insurance. What makes workers' comp different is that small business owners have options to help them pay for covering their employees.
If you choose not to invest in workers' comp insurance, it could cost you enormously down the road. For example, while rates will vary by state and carrier, a small business with a payroll of roughly $100,000 should expect to pay between a few hundred to a few thousand dollars a year for workers' comp coverage.
Without insurance, small business owners run the risk of having to pay out-of-pocket for medical expenses and lost wages. Moreover, hurt employees could sue you – driving up legal costs. Small business owners can also face hefty fines, penalties and even jail time for being noncompliant with workers' comp laws and/or regulations.
4. Know that it's okay to ask for help.
Applying for workers' comp insurance can be complicated, especially for a small business owner. You'll want to seek out the best advice you can. Assembling key personnel and seeking feedback is important, particularly regarding your payroll information.
When formally deciding on workers' comp insurance or any business insurance for that matter, discussing your individual business needs with a licensed insurance agent or broker, and other professionals, will help you identify what coverage is right for your unique business.
"One mistake could cripple your small business," concludes Boff. "When so many other things are outside of your control, it just seems logical to invest in what you can…and that includes insurance."
Get best practices for managing your insurance policies to positively impact your business. Download our guide: Business perspectives on workers' compensation administration
To learn more about protecting your employees and your business, check out ADP® affiliate, Automatic Data Processing Insurance Agency, Inc. (ADPIA®), for Workers' Compensation Insurance.
Automatic Data Processing Insurance Agency, Inc. (ADPIA) is an affiliate of ADP, Inc. All insurance products will be offered and sold only through ADPIA, its licensed agents or its licensed insurance partners; One ADP Blvd. Roseland, NJ 07068. CA license #0D04044. Licensed in 50 states. Certain services may not be available in all states with all carriers. Some carriers may charge an additional fee for services. This information is not intended as tax or legal advice. If you have any questions, contact a tax or legal professional. ADP, the ADP logo and ADPIA are registered trademarks of ADP, Inc. Copyright © 2023 ADP, Inc. All rights reserved.