Workers’ compensation insurance for small businesses

Automatic Data Processing Insurance Agency, Inc. (ADPIA), an ADP affiliate, can help obtain workers' compensation insurance for small and mid-sized businesses. Licensed agents can help you find workers' compensation coverage that meets your state requirements while protecting your company and employees if there is an injury at work. Contact us for help securing a policy with one of our top-rated carrier partners.

Small business workers’ compensation insurance is a strategic investment that helps protect business owners and their employees in the event of a work-related incident. If your insurance is compliant with state law, an employee who receives workers’ comp benefits typically can't sue you for their injuries or lost wages.

In exceptional cases where a lawsuit proceeds, a workers’ comp policy with liability coverage can help pay your court costs and legal fees. Lawsuits filed by both employees and third parties adversely affected by an injury to a worker are generally covered.

Additional benefits offered by some insurers include fraud prevention support, workplace safety tools and managed care services to help injured workers get back to work faster. You may also gain access to benefits administration tools and a pay-as-you-go program for more accurate premium payments.

The key differences between workers' compensation and health insurance are:

• Workers' compensation covers workplace-related injuries and illnesses
• Health insurance generally covers medical expenses and preventative care not related to work

In most states, workers' compensation insurance is required for companies with one or more employees. States typically enforce penalties for employers who do not have workers' compensation insurance. Contact us for help determining your state's requirements.

Nearly all states require employers to carry workers’ compensation insurance as soon as they hire an employee, though each jurisdiction is unique. In some states, employers that don’t provide the required coverage face severe penalties, including fines, jail time or both. They may also be responsible for covering their injured employees’ medical bills.

Requirements further differ for self-employed workers, single-member LLCs and independent contractors. Unless your state says 1099 contractors aren’t required to have coverage, it’s a good idea to include them in your policy.

In states where coverage is optional, small businesses can still get coverage from an insurance company or state-funded account to help protect the organization and its employees. However, in “monopolistic states” (North Dakota, Ohio, Washington and Wyoming), employers must purchase coverage from their state’s workers’ compensation insurance fund. An ADPIA-licensed agent can help you learn more about the laws in your state.

Workers' compensation insurance coverage typically includes full-time and part-time employees (W-2 workers), but the specific requirements can vary by state. Independent contractors may also need coverage depending on contractual requirements or state laws. The necessity for coverage can depend on factors like the size of the business, the type of work being performed, and state-specific legislation.

Each state has specific exemptions for those who don't need to carry workers' compensation insurance. Still, common exemptions include agricultural employees, domestic workers, real estate employees, and coaches for children's teams. ADPIA can work with you to check your state's workers' comp requirements, as they vary widely and may include more specific exemptions or stipulations.

Workers' compensation insurance pricing is based on: carrier defined rates, your payroll, the number and job classifications of the employees, classification of your business and past loss experience. As the employer, you are responsible to pay for the cost of workers' compensation premiums.

Workers' compensation insurance generally pays for the rehabilitation, recovery or medical bills of employees' work-related injuries, as well as lost time due to a work-related injury. Workers' compensation insurance is not a substitute for health or medical insurance — employees are only covered for on-the-job injuries.

With workers’ compensation insurance, employees are covered if they get hurt or sick on the workplace premises or elsewhere while they are acting in the course and scope of employment. The injury or illness does not have to result from a single incident. For example, work-related repetitive stress injuries are generally covered by workers’ comp.

Additionally, workers’ compensation insurance covers injuries employees may sustain due to workplace violence, terrorist attacks and natural disasters that occur while they are working.

Accidents driving to and from work are not covered. Also, benefits may not be available for employees who hurt themselves on purpose while on the job or suffer an accident while intoxicated at work.

Workers’ compensation insurance provides workers who are hurt or sickened on the job with all medically necessary and appropriate treatment. However, many states have adopted measures to help control expenditures. They may enforce utilization management guidelines describing which treatment protocols and diagnostic tests are acceptable for specific injuries.

If employees are injured on the job or suffer a work-related illness, workers’ compensation insurance generally covers:

• Medical treatment and care, such as emergency room visits, necessary surgeries, prescriptions and physical therapy
• A substantial part of lost wages if they need time off during recovery
• Disability benefits, which help pay medical bills and replace some of the wages lost if work-related injuries cause temporary or permanent disability
• Funeral expenses in case of a work-related death

Workers’ comp income replacement benefits (also known as “lost wage” or “indemnity” benefits) are calculated based on an injured or sick worker’s degree of disability. The various levels include temporary total disability, permanent total disability, temporary partial disability and permanent partial disability. (A distinction is made between disability and impairment, with impairment generally defined as a reduction in earnings capacity.)

Once the degree of disability has been determined, injured workers receive a percentage of their average weekly wage (actual or state average) for the previous year. Most states require that benefits be paid for the duration of a worker's disability, but some specify a maximum time period. Also, most states enforce a waiting period before benefits for a temporary disability are distributed, though these vary by state, and there are exceptions.

Workers' compensation insurance does not cover business interruption. It is designed specifically to cover employee-related injuries and illnesses that occur due to or in the course of employment. A business owner's policy (BOP) is a separate type of policy that provides coverage for lost income and additional expenses when a business is affected by a covered event.

The answer to this question is complicated and depends on several factors. Contact us, and a licensed APDIA agent will be able to help you.

Workers' compensation insurance generally does not automatically cover subcontractors, though that may vary based on your state. Employers usually need to take additional steps to ensure coverage for subcontractors, which might involve specifying coverage terms in the contract or purchasing separate policies. Work with ADPIA to understand your specific obligations and options regarding subcontractors and workers' compensation insurance.

Direct billing is an option for clients that prefer to receive a bill for their workers' compensation premiums that comes directly from their insurance carrier.

Additional insureds are third-party entities that were not originally named on your workers' compensation policy, and cannot be added. This is because your workers' compensation policy is intended to cover your employees only. However, additional insured endorsements can be included in general liability policies.

Please notify ADPIA about any modifications made to your business operations, including (but not limited to) changes to:

• Your authorized contacts
• Operating locations
• FEIN
• Entity and ownership status
• Employee status

All workers' compensation policies are subject to audit by the carrier as per the terms of your policy. You may be required to participate in an end-of-policy term audit to confirm the accuracy of your premiums and coverage. If so, your carrier will contact you within 30-60 days of your policy expiration to arrange the audit. Rest assured that ADPIA is here to help you through the audit process. Prior to contacting us for assistance, please have the following documents handy:

• Quarterly reports or 941s
• Payroll journal/master payroll file
• Federal tax records
• State unemployment reports
• Overtime pay by employee
• Payments to subcontractors (if a subcontractor provides materials as part of a job, be sure the invoice specifies payment for work and materials separately)
• Certificates of insurance for each 1099 and/or sub-contractor who maintains their own workers' compensation policy
• CA clients with dual wage classifications: You may be required to provide timecards

The audit must be completed by an authorized representative of your business. ADPIA can help by providing copies of reports and answering questions related to the audit process, but ADPIA does not perform the audit.

A workers' compensation claim can have a significant impact on a small business, primarily through increased insurance premiums. Insurers assess a business's claims history, payroll figures and industry averages to determine premium rates. When a small business files a claim, it can lead to higher costs, sometimes equal to or even exceeding the amount paid in claims. This situation can be particularly challenging for small businesses, which typically have fewer financial resources to absorb the increases compared to larger companies.

Laws and regulations regarding workers’ compensation vary by state and circumstances. Employers should consult a licensed insurance agent to understand specific coverage requirements.

Generally, workers' compensation insurance requirements apply to businesses that have employees. If you are a sole proprietor without employees, you are not typically required to carry workers' compensation insurance. That said, sole proprietors should consider obtaining coverage, especially if they operate in a high-risk industry. Many personal health insurance policies do not cover work-related injuries, leaving sole proprietors vulnerable to significant medical expenses in the event of an accident or injury while working.