A startup founder’s guide to worker’s compensation insurance

Workers Compensation Insurance

Worker’s compensation (“WC”) insurance is one thing that founders seem to stress about quite a bit. I thought it would be useful to do a very basic guide to WC coverage to ease the tension. Here we go:

Do I Need To Have Workers Compensation Insurance

Who needs worker’s compensation insurance?

The short answer: technically everyone.

If you have employees (including yourself), your employees need to be covered by your policy. There are very limited instances where founders with no employees may be exempt. However, these instances vary by state, as the respective state’s Department of Labor sees fit. For example, New York allows a for-profit corporation, with two or less officers to be excluded from WC requirements, but only if they are the sole shareholders.

As a general rule, remember this: if you have anyone on payroll, it’s pretty safe to say you’ll need WC coverage.

What does it cover?

You probably already know the answer to this one.  It’s a little obvious right? Worker’s compensation insurance covers your company’s employees in the event that they get injured and can’t perform their job. This coverage really benefits the employees rather than the company, because it compensates the injured employee for medical, indemnity, and death benefits owed to the employee by law.

What about independent contractors?

You don’t have to cover independent contractors (“IC”) with your WC policy, as long as they’re actually independent contractors. Just calling someone an IC isn’t enough.

Most states have a multi-factor statutory test used to make the IC/employee distinction, but generally a state labor board will look at the level of control the employer exercises over the IC. Are there set work hours determined by your company? Is the IC using materials provided by you company to perform his/her job? Is the IC working exclusively for your company? If the answers to these questions are “yes,” it’s likely that your IC is an employee for WC purposes.

How much does it cost?

The short answer: it depends.

Worker’s compensation premiums are determined by a system that classifies employees by their primary job function. The “class” rate is multiplied by each $100 of payroll allocated to that class.  Class rates can vary widely, from $0.26 for computer programmers, $5 for hospital nurses, to $13 per $100 for some types of contractors.

Rates will also vary from state to state.  For example, California is one of the most expensive states for WC coverage, because it’s one of the most litigious (fancy word for “everyone loves to sue each other”).

One other thing to mention: the audits. Typically, when you get a WC quote, it’s be based on the payroll-per-class information you provide. Usually the state board will step in at the end of the policy period and audit your payroll classes and total payroll. Depending on whether you’ve hired, fired, or misclassified, you may get money back, get another bill, or get slapped with a fine. Make sure that your WC is set up properly and know that if your company grows throughout the year, so will your bill.

How do I get it?

Talk to a broker or go through the state insurance fund. If you’re looking for simple standalone WC coverage, the state fund is probably the way to go. Prices don’t vary too widely between insurance companies and many private insurers won’t quote WC coverage without any other lines of business (General Liability, Errors and Omissions, etc.).

This piece touches on all of the major questions founders ask about Worker’s Comp insurance, but if you have any questions of your own, feel free to reach out at any time for help.

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