Why do you need Workers' Compensation Insurance?
Because it’s the law! Depending on your state, you are bound by specific obligations designed to protect your employees if they are hurt on the job.
The states go about enforcing this idea in different ways but most require employers to purchase an insurance policy that can help an employee who is hurt on the job and can’t work. Many states also set minimums to insure against lawsuits from employees following a workplace injury.
Companies are generally required to have workers compensation insurance in place for all “employees.” Founders: if you’re taking payroll, this could mean you too! Depending on state law and the structure of your company, there may be no distinction between the workers comp requirements for managerial vs standard employees. Anyone on the payroll would have to be covered.
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Only a handful of states (known as “monopolistic” states) administer their own mandatory workers comp program in which employers automatically participate. This means that, odds are, you’ll have to obtain the coverage yourself from the private market.
Workers’ Compensation Insurance - Summary
Workers compensation insurance covers your company’s employees in the event that they get injured while at work and can’t perform their job. This policy really benefits the employees rather than the company because it will compensate the injured employee for lost wages and medical expenses.
Employer’s liability coverage is required in some states and is often built into the policy alongside workers compensation coverage. This provides a specified limit to pay for the defense and settlement of employee’s lawsuit against you after they are hurt in a workplace accident. (Not to be confused with employment practices liability insurance which is focused on employment disputes unrelated to bodily injury)
How much does Workers Compensation Insurance cost?
Premium amounts for workers compensation insurance typically vary from business to business. But calculating workers’ compensation insurance is exceptionally unique because it depends heavily on the state. Although classification codes are standardized throughout the US, workers’ compensation rates are established by each state.
The basic estimation is:
Premium = (Payroll/$100) x Class Code Rate x Experience Modification Rate
For example, at a workers’ compensation rate of $1.35, a business with $100,000 in payroll can expect to pay around $1,350 in annual premiums. However only an exact quote from an insurance carrier will grant you a final figure.
How much Do costs vary by state?
While each state sets workers’ compensation requirements, three types of states exist that influence premium cost:
- NCCI states use codes and rates the National Council on Compensation Insurance (NCCI) establishes.
- Independent bureau states develop their own separate rating bureau.
- Monopolistic states prohibit private insurance coverage, but instead, use a state fund to provide workers’ compensation insurance.
Additionally, local laws and regulations create higher rates too, mostly because of the number of high-risk jobs in the area. For example, New York doubled the claim payout in the last few years, undoubtedly impacting its workers’ compensation rate.
Of the 50 states, 38 of them have rates lower than $2 per $100 in employee wages. The lowest rate is in North Dakota, coming in at $0.82. Following closely behind are Indiana, Arkansas, West Virginia, and Utah. Conversely, New York has the highest rate of $3.08, trailed by California, New Jersey, Alaska, and Delaware.
Who needs workers compensation insurance?
Researching your state’s workers’ compensation laws is essential, because they vary across the US. Each state follows its own requirements and penalties. For example, nowhere is workers’ compensation insurance optional for employees but in Texas.
That said, the number of employees typically determines when a company needs workers’ compensation insurance. A general rule is to obtain this coverage as soon as you hire your first employee. Two employees are the required starting point for businesses to purchase workers’ compensation insurance in states other than Texas.
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