It’s hard to imagine it in today’s world, but there was a time when employees had very little-to-no rights at all, even in this country. But as labor became more organized and forceful about a hundred years ago, certain compromises and understandings came to be.
One of those was workers’ compensation, designed to protect the employee no matter whose fault the accident/incident was and to protect the company from being sued. So, since it was something that benefited both the employee and the employer, it stuck around, evolved over time, and became one of the fundamental aspects of doing business today.
But as a business owner or manager, what type of employer’s insurance do you need? How do you get it? How much does it cost? Here is a rundown of the basics:
How Does Employer’s Insurance Work Regarding Workman’s Comp?
There are two different types of businesses, particularly small ones; those that have employees and those that don’t. The requirements for each differ. Let’s take a quick look at both to get a better understanding of each:
Small Businesses with Employees
Forty-nine states require that companies carry workers’ compensation for their employees. The only exception is Texas. However, even there, the costs associated with reimbursing lost wages, covering medical expenses, and even possibly life-long benefits can crush a small business.
Although the laws vary from state to state, in most cases you will be required to cover your employees at the minimum, if not yourself, as well.
Small Businesses without Employees
Even small businesses without employees may still benefit from having coverage for injured or sick workers. Having it on yourself could save your family from tremendous hardship should something happen to you on the job.
Additionally, it can cover you in cases where you are working with a sub-contractor or third party. There are four main professional situations where you should consider employer’s insurance, even if you aren’t legally obligated to have it:
- You Are the Sole Proprietor of a Company or You Own a Small Business with No Employees or Contractors (if not, you may have to submit an exemption form and pay a fee)
- Another Company Would Like to Use You as a Contractor but Requires Workers’ Comp Coverage from You
- You Want Coverage to Protect Yourself in Case You Are Injured While Working
- You Are a Sole Proprietor or Small Business Owner and You Use a Contractor(s)
Additionally, before you can secure any type of coverage, there is certain documentation, as well as other information that you will need to collect beforehand. It includes:
- Name/Description of business
- Social Security Number (SSN) or federal employer identification number (FEIN)
- Business structure such as a corporation, partnership, or limited liability company (LLC)
- Preferred start date of coverage
- Location of business
- Number of locations
- Number of employees
- Applicable class codes
- Annual payroll based on job type and location
- Workers’ comp claims history
As you can see, that’s quite a list, with some requiring specialized knowledge, such as the class codes. That’s why it’s best to work with providers that can help smaller-sized businesses gather the necessary information to get coverage for their employees and company.
Cost Range of Coverage
The scale for this type of insurance ranges from $0.57 (Texas) to $2.32 (Alaska). Where you fall within that range depends on four factors:
1. The Location of Your Business
Worker’s comp laws and regulations are determined at the state level. Therefore, state legislation will determine the costs and payouts. And beyond that, the local area that you operate in within the state will also affect your rates. If you do business in a dangerous area, that would most likely increase costs.
2. The Type of Work Your Company Provides
As you recall, we mentioned class codes in our list of documents and info you would need as a business owner, to start an employer’s insurance policy. These codes indicate the type of work that an employee does. This identifies the level of danger associated with their job and is calculated into the rate.
3. The Size of Your Companies’ Payroll
The size of your workforce is also part of the equation when it comes to determining your insurance costs. This is why it is critical to keep precise and accurate payroll books. If you accidentally under or overestimate your payroll, it would likely impact your cash flow. The best way to avoid this is with audits that reconcile your books with actual receipts and tax forms.
4. Your Companies’ Claims History
Your previous history of claims will also be a factor in the final rate you pay for coverage. It is determined by using what is referred to as an “experience modification factor”. It is a way of measuring your workplace safety against other similar businesses.
How You Can Mitigate Costs
As an employer, there are also many ways that you can reduce the costs of your premiums. Having a strong safety culture is a good start, as is a solid training and foundational program to teach new employees how to do things the proper and safe way.
These are the best ways to reduce the cost of your long-term employer’s insurance.
It is worth noting that businesses that have the highest instances of claims are small businesses where there is perhaps not enough manpower/resources to devote to safety, as well as new businesses which are perhaps not yet fully staffed or do not understand the necessity of safety culture.
A Few, Final Things Business Owners Should Know
Most of the time employers don’t have the proper types of insurance, it is due to a lack of understanding about their obligation, some type of bookkeeping or financial mistake, or some other reasonable issue.
However, that will be of little comfort to either your employee or you, should something unfortunate take place. Working with quality providers makes sure that your business and workers will always be covered in the case of an accident.
