Workers' Compensation: What You Need to Know as a Business Owner
Workers' compensation is a system that provides benefits to both employers and employees if injury or illness occurs as a result of the job. These benefits can include medical care, lost wages, and vocational rehabilitation. Workers' compensation is designed to help injured workers get back on their feet and return to work as soon as possible.
In the United States, workers' compensation is governed by state law. Each state has its own workers' compensation system, so the specific benefits and requirements vary from state to state. However, there are some general principles that apply to all workers' compensation systems. In this post, we will dive into the basics of workers’ compensation and what you need to know as a small business owner.
What does workers’ compensation cover?
Workers’ compensation insurance covers the expenses of an employee for job-related injury or illness. The benefits of workers' compensation vary from state to state, but they typically include:
Medical care for work-related injuries or illnesses
Lost wages if you are unable to work
Vocational rehabilitation services to help you return to work
Death benefits for the survivors of workers who are killed on the job
When and where is workers’ compensation required?
Most states require businesses with employees to cover workers’ compensation insurance. It is the business owner’s responsibility to determine their coverage requirements as each state has slightly different rules and regulations. It is important that you determine the requirements for each state in which you employ people, including remote workers.
Some factors to consider when determining your workers’ compensation plan are the number of employees, the type of employment, and the role or responsibilities of the employees. For example, some states allow you to exclude officers or owners of the company, family members of the owner(s), or some specific types of business operations.
What are the penalties and sanctions for not having workers’ compensation insurance?
Failure to carry workers’ compensation insurance can result in sanctions in the form of significant fines or potential imprisonment. Fines can go as high as over $10,000 and some states can include felony charges and even imprisonment for failure to comply with workers’ compensation insurance.
An example of this is in New Jersey, the fine is $5,000 for the first 10 days and an additional $5,000 for each subsequent 10-day period where your business is not compliant. Illinois, Pennsylvania, and Florida are among the states that consider violations a felony, punishable with prison time. Failure to comply with workers’ compensation laws will result in serious penalties for your small business - these laws must be taken seriously.
There are other logistical reasons that your business may require workers’ compensation. For example, if your services include sending employees to work on a customer’s property, the customer may require that you provide a certificate of workers’ compensation coverage in order to reduce their risk if one of your employees is injured on their property. You can potentially lose out on business if you cannot provide that certificate.
How is workers’ compensation cost calculated?
Traditional payment policy
When using a traditional workers’ compensation payment policy, the insurance company will take the following factors into consideration is quoting a premium:
Payroll wages
Industry
Claim history
Employees’ type of work
Workers' compensation premiums are typically calculated by multiplying the class code of the job by the wages per $100, and then adding an experience rate based on the employer's insurance claim history.
The class code is a four-digit number that is assigned to each job type. It reflects the risk of injury or illness associated with the job. For example, a job in roofing would have a higher cost class code than a job in clerical work.
The experience rate is a number that reflects the employer's past claims history. If an employer has a history of high claims, they will have a higher experience rate, which will increase their premiums.
In general, the higher the cost class code and the experience rate, the higher the workers' compensation premium will be.
Pay-as-you-go policies
Workers' compensation policy costs are typically quoted based on your anticipated gross payroll for the coming year. At the end of the policy period, an audit is conducted to determine how the payments relate to the actual payroll gross. If the payments were too low, a bill will be generated for the shortfall. If the payments were too high, a refund will be issued for the overpayment.
A pay-as-you-go policy calculates premiums on a per-payroll basis rather than an estimate. This type of policy can help you manage cash flow more effectively and reduce the differences at the time of the audit by basing periodic payments on actual payroll figures. You may want to consider a pay-as-you-go policy if:
Your payroll costs are not clearly defined or are in flux. This could be the case if you are growing your workforce, winding down, experiencing seasonal changes, or anticipating significant changes in wage rates.
You need to more closely manage your cash flow. A pay-as-you-go policy can help you avoid unexpected audit shortfalls that could put a strain on your budget.
As a small business owner, it is absolutely essential to ensure that your business is compliant with workers’ compensation policies. Workers' compensation is required by law in most states and can protect your business from financial liability if an employee is injured on the job. It can also help you attract and retain employees by providing them with peace of mind that they will be taken care of if they are injured.
It is important to do your research and choose a workers' compensation insurance policy that is right for your business. By taking the time to ensure that your business is compliant with workers' compensation policies, you can protect your business from financial liability and help your employees get the benefits they need if they are injured on the job.
Schedule a free consultation today with PayWorks to better understand workers’ compensation for your small business.
Pay Works is not providing legal or tax advice. The information on this website is for informational purposes only and should not be relied upon as legal or tax advice. You should consult with your own legal and tax advisors before making any decisions about your financial situation.