Workers' compensation (commonly called workers' comp) is an insurance system designed to provide replacement income and pay medical expenses for employees who suffer work-related injuries or illnesses. Let's go over what small business owners need to know about workers' comp.
Workers' comp: A background
Before the first workers' compensation laws were adopted, about 100 years ago, an employee injured on the job had only one recourse: sue the employer in court for negligence. Of course, legal action was a difficult, time-consuming, and expensive process.
The workers' compensation laws changed this by establishing a no-fault system. Although employees can't sue in court, they are entitled to receive compensation without having to prove that the employer caused the injury.
In exchange for paying for workers' compensation insurance, employers are spared from having to defend against lawsuits by injured employees and paying out damages. Workers' compensation benefits are set by state law and are usually modest.
Each state has its own workers' compensation laws and insurance system. No two states' laws are exactly alike. Let's go over the basics about what you need to know.
Who must be covered by workers' comp
You'll need to obtain workers' compensation coverage only if you have employees. You do not have to provide workers' comp coverage to independent contractors you hire to help you in your business. An independent contractor is a person who operates his or her own independent business.
Self-employed sole proprietors, partners in partnerships, and limited liability company members aren't required to purchase workers compensation unless and until they have employees who aren't owners. The same rule holds true in most states for officers of small "closely held" corporations with no employees.
In some states, sole proprietors, partners, LLC members, or corporate officers must file a document (often called a waiver) with their state workers' compensation agency to obtain their exemption from their state's workers' comp requirements.
Also, not all employees must be provided with workers' comp coverage. All states exclude certain types of workers from workers' compensation coverage. The nature and scope of these exclusions vary from state to state.
However, they typically include casual labor (workers who work for a brief time period), and certain types of domestic workers and farm laborers. Several states also exclude employers having fewer than a designated number of employees (anywhere from three to five, depending on the state).