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The Small Business Owners Guide to Workers’ Compensation

Small business owners have a lot to worry about: selling products, marketing, product or service development, fulfillment and the list continues. When it comes time to hire someone, these worries will continue to grow.

Do you need insurance? Do you need to provide health insurance? What about workers' compensation?

Workers' compensation may even be required in your state – it depends. If you're a confused small business owner, you're not alone.

What is Workers' Compensation?

Workers' compensation helps protect you, the employer, from risks that are found in the workplace. You have a duty to keep the workplace safe, but accidents can and do happen. What happens if someone is hurt while working?

Workers' compensation will kick in, pending a claim and if you have insurance.

Employees are protected if they suffer from:

  • Job-related injuries
  • Job-related illnesses

The fault of the person doesn't factor into a claim either. You, as an employer, may be at fault, or the employee may be at fault. In either case, the employee is protected with:

  • Medical care
  • Wage replacement

States regulate workers' compensation, so speak with a professional to ensure that you're abiding by your state's laws.

How Workers' Compensation Protects Employers

If an employee suffers from a temporary or permanent disability, you can rest assured that your employee will be taken care of both medically and financially. Employers also benefit from the fact that workers' compensation limits the employee's right to sue if an accident occurs.

You can trace workers' compensation back to 1911, when a "no fault" system was enacted in Wisconsin.

The system, which several other states would go on to adopt, limited:

  • Employer obligations

But you need to have workers' comp if you plan to be protected from lawsuits. The idea is that you provide benefits in the event that an employee is injured or dies while on-the-job, alleviating some of your risks in the process.

Do I Really Need Workers' Compensation?

Legally, it depends on the state. You'll find that the rules and regulations vary greatly. Some states will require you to have workers' comp even if you have one employee. Alaska, for example, requires even businesses with one employee to have workers' compensation insurance.

Failure to obtain the appropriate insurance puts your business at risk of lawsuits and penalties.

Arkansas, on the other hand, will only require that a small business have this form of insurance if they have three or more employees.

Of course, there are exemptions, where certain industries may only need insurance when more employees are hired. There are also exceptions wherein the requirement is less for certain industries. For example, farms may have to obtain insurance when they have fewer employees due to the potential risk of injury or illness.

What About a Sole Proprietor?

If you're the sole employee of your own business, the legal requirements for your business are much lower. In fact, you won't need many of the legal protections that are required when you have an employee.

The quick answer is no: you don't need workers' compensation.

All states, as of writing this article, do not require workers' compensation for a sole proprietor. You're exempt from being required to obtain insurance.

But there is a catch.

Sometimes, companies that contract you to do work will require you to have workers' compensation insurance. This has even occurred to freelancers that work from home. Companies have these requirements in place, internally, to protect themselves from unexpected liabilities.

This is a result of several contractors becoming injured and then stating that they were an employee of a certain contractor.

The result is a contractor trying to claim workers' compensation with the contracting company. When claims are made, insurance premiums may rise, so this is something that even large organizations will try and avoid.

So, what do they do?

These organizations will require that you have workers' compensation if you want to work with them as a contractor.

Courts have decided in favor of contractors in the past, so it's a safeguard that many companies, especially in California, have implemented.

Premiums are based on your industry and will be calculated based on your industry codes. High-risk industries generally have higher insurance premiums. Many payroll providers have integrated workers' compensation payments into their platform to make maintaining insurance easier.