Is workers’ comp required? A guide to state rules for business owners

As an employer, you know you have a responsibility to run a safe workplace. But even with the best safety precautions in place, accidents still happen. In almost every state, businesses are required to buy workers’ compensation insurance for these exact situations to both protect your company from lawsuits and provide care and compensation for injured workers. 

Here at Complete Payroll Solutions, we help thousands of businesses navigate the maze of workers’ compensation requirements. We advise clients from self-employed individuals and small businesses to large companies with workers in multiple states on what they need to do to be compliant with state laws regarding coverage to avoid fraud charges, stop work orders, and fines.

To help you understand – and meet – the requirements for workers’ compensation coverage in your state, we’ve summarized the general rules and how to get more detail so you know what type of policy you need to have. 

Does every employer need workers’ compensation insurance?

In every state except Texas, businesses are required to carry workers’ comp insurance – separate from general liability coverage – once they hire a certain number of employees. Depending on where you’re located, even sole proprietors may need to purchase it or companies with just one employee whether they’re part time, full time or temporary. 

Since the rules for workers’ comp coverage vary widely by state, you’ll want to familiarize yourself with your local laws. To learn the rules for your state, you can check your division of workers’ compensation, labor department or similar state agency that governs workers’ comp. 

If you’re required to have insurance but don’t have coverage, you risk a range of consequences depending on the state. That’s because not purchasing workers’ comp in a state that requires it constitutes fraud. So do some other activities. 

For example, let’s say you misclassify an employee as a contractor to avoid having to pay a workers’ comp premium for them or you misrepresent the number of employees that you have. Any employer found to have committed fraud like this can face varying penalties. The severity will vary by state and on a case to case basis, but can include jail time. At a minimum, there will be financial consequences for your business.

Potential problems like fraud are typically revealed during your insurance company’s annual audit. Each year, your insurer will estimate your workers’ comp premium upfront at the beginning of your policy period. They’ll then audit the policy at year’s end to compare it against your payroll to determine your actual costs. If you intentionally supply false information to your insurer, you could be investigated for fraud. 

Are any employees exempt from workers’ comp coverage requirements?

Most states require you to cover employees, no matter their status. Be aware that the definition of “employee” is pretty broad in many areas. The term refers to virtually anyone hired to perform services for pay. However, there are exemptions from the coverage requirements in many states. Here are some common approaches that you’ll see to exemptions. 

• Small Number of Employees: In many states, workers’ comp is required for every employer with at least one employee. But some states have a higher threshold. For instance, in Alabama, if you regularly employ less than five employees, you’re not required to carry workers’ compensation insurance.
• Roles: Most states like Maine have exemptions for certain types of employers or employees like sole proprietors, partners and LLC members. However, these individuals can generally opt to include themselves in the coverage. On the other hand, in places such as Louisiana, sole proprietors, partners, corporate officers and LLC members are included but can choose to be excluded.  
• Independent Contractors: While independent contractors are exempt in most states, if you’re located in a state like Montana, you’ll need to require independent contractors to purchase workers’ comp insurance on themselves or obtain an exemption. In situations when you use independent contractors, it’s a good practice to request a certificate of insurance – a document that shows their policy information and proves they’re insured –  from them before you engage. 

How are workers’ comp costs calculated? How do I purchase it?

As an employer, you’ll pay the full insurance premium for workers’ comp. In most cases, except for some like Massachusetts, the cost for coverage isn’t set by states. Rather, most states are competitive and the workers’ comp carriers file their rates with the state department of insurance or similar agency for approval.

In these cases, the rates can vary based on several factors like:

• your industry
• the type of work employees perform
• number of employees
• past injury/claims history 
• credits you may qualify for
• what it costs the carrier to offer a policy in your state
• other small fees

Since there are so many variables, you’ll want to shop around. Generally speaking, you’ll purchase the coverage through a broker or, in some cases, from a commercial carrier if they sell directly to businesses. In some states like Ohio and Washington, you actually have to buy it directly from the state. 

Certain approved businesses can self-insure and have the option to administer their own workers’ comp claims or contract with a third-party administrator. And in some states, like Rhode Island, you may have the option to purchase coverage from the state-administered fund.

One thing that can make workers’ comp easier to afford is a pay-as-you-go policy This simply means that you’ll pay for your coverage with each payroll based on your actual numbers. That way, you have accurate figures and no surprise premium due at the end-of-year audit.

What you should do next

State laws about workers’ comp coverage can be confusing. More than that, they can change, which makes it even more challenging to stay on top of – and compliant with – the requirements. The bottom line is that workers’ compensation insurance is generally a must. But the specifics will vary so make sure you’re familiar with your state’s rules. If you operate across state lines, you’ll also need to make sure you’re meeting the workers’ comp requirements for those states as well since you may trigger interstate requirements even if your employees are only there temporarily. 

With Complete Payroll Solutions’ expertise in workers’ compensation requirements, we can help you understand the laws in your state and secure coverage that will keep you penalty-free. For specifics on the rules in your area, our listing of state departments can be a useful starting point.