Small Business Questions & Answers


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Ask About Workers' Comp Insurance

by Hiring in Hartford | May 26, 2012

Subject :Human Resources

Dear Toolkit,

I'm about to hire some employees for my new business. Can you give me some basic info about Workers' Compensation Insurance? Do I really have to get this kind of coverage and, if so, how much will it cost me and where do I go to get it? And by the way, who dreamed up this whole idea anyway?

Hiring in Hartford

Dear Hiring,

History tells us that, as the Industrial Revolution began to spread throughout the world, worker injuries and deaths also started to mount, but there was no way of holding one party or the other responsible for the costs of the consequences. Some camps believed employees should watch out for themselves, and others believed that employers should be responsible for their workers' welfare.

The always-organized and deliberate Germans decided by the 1880s that these incidents were becoming a drain on their society, so they established a cost-sharing arrangement between employees and employers to support injured and disabled workers. England followed close behind in the 1890s with what was then known as the British Compensation Act.

The problem wasn't addressed in the U.S. until 1910, when a group of delegates from various states met in Chicago and created the Uniform Workmen's Compensation Law. This framework was subsequently instituted in one form or another by many states in their individual statutes. Only a handful of states failed to adopt this type of law over the next decade, and the new state of Hawaii was the last one to come aboard with their version in the 1960s.

The laws in almost all states require you to have workers' compensation insurance if you have employees. Workers' comp is a no-fault system designed to protect employees who are made ill, injured or killed on their job--and also to protect employers from financial ruin due to negligence lawsuits.

Benefits such as medical costs, wages and death settlements are paid without regard to determining who was the negligent party. (However, if your employee has six Martinis for lunch and then falls of a ladder at work that afternoon, he probably shouldn't plan on taking any paid time off courtesy of your insurance company.) Employees still reserve the right to sue any third party that might have been negligent in the incident.

Workers' compensation laws are still administered at the state level, and even if your state is one of the dozen or more that doesn't require a very small employer to carry this coverage, beware of the possible consequences of taking advantage of any such exemption. And be particularly cautious if your business is in Texas as that state still has a voluntary (rather than mandatory) workers' comp law. Negligence suits can be a great deal more expensive than insurance premiums.

Although most workers are covered in most states, business owners and independent contractors are often excluded, as are volunteer, farm, railroad, maritime and domestic workers. Federal employees are covered under a special program.

In order to learn more about your particular state's requirements, go to the state-by-state list of workers' compensation officials on the U.S. Department of Labor site.

Premiums are determined by class of employee (clerical employees generally cost less than manufacturing employees, for example) as well as by regional benefit levels. Premiums are based on a "per one hundred dollars of wages" premise. And the kicker in the premium game is the dreaded "experience rating."

This is a factor used to take into account your claims history. If you run an unsafe shop and have a high number of claims, you're going to pay a lot more than someone else in your industry that is more conscientious (or lucky) about safety. If your claims history makes you too high a risk, private insurance firms will refuse to cover you at all and you'll be at the mercy of your state's "assigned risk pool." Avoid this if at all possible.

To give you an idea of how thorough your recordkeeping must be when making claims on this type of a policy, take a look at our Workers' Compensation Claims checklist. Putting emphasis on workplace safety in general and developing a safety program will save you a lot of headaches and big bucks in the long run.

Be sure to do your homework, keep your insurance coverage current and emphasize safety.