In 2014, James Jarrell was training to be a truck driver in Fort Wayne, Indiana, when he sustained a severe injury on the job—but not the type of injury you’d expect. One morning, after his trainer abruptly woke him to conduct a pre-trip inspection of the truck, Jarrell stepped into a pot of hot water, causing severe burns to his feet, for which he was taken to the hospital by ambulance.
At first, this might not sound like a work-related injury—James wasn’t driving, logging time, or even dressed for work yet—but the court found he qualified for workers’ compensation. The trainer had told him to sleep in the truck and he’d been woken up for the work-related inspection.
James’ case is unique. But workers’ compensation claims are not. Nearly all business owners with employees need to have workers’ compensation insurance, including small business owners.
What is workers’ compensation insurance?
Workers’ compensation insurance, or workers’ comp, is a type of business insurance coverage for work-related illnesses and workplace injuries. It can cover a portion of lost wages, medical bills, disability, and death benefits in the case of a workplace accident, and it helps protect employers from any related lawsuits.
“Workers’ comp is a good way to attract and retain a qualified workforce because one of the risks small businesses have to think about is the constant churn of employees,” says Lynne McChristian, senior instructor of finance at the University of Illinois Urbana–Champaign and director of the Office of Risk Management and Insurance Research.
“If businesses guarantee that employees’ medical care and lost wages will be paid for by work-related disability benefits, then workers will be less likely to exit for other opportunities.”
How does workers’ compensation insurance work?
Workers’ compensation is a two-way street: Both the employee and the employer play key roles in case of an incident. The employee has a responsibility to report the work-related injury or illness, while the employer agrees to pay for medical expenses, lost wages, and, potentially, other benefits.
If an employee is injured on the job, there are several steps necessary before receiving workers’ compensation benefits:
1. The employee reports the injury to their employer, typically within a set time period.
2. The injured or ill employee files a workers’ comp claim about the accident or illness with their employer.
3. The employer provides the employee with a workers’ compensation claim form, which varies by state.
4. Both parties fill out their respective sections of the claim. The claim typically includes employee information, details on the circumstances surrounding the incident, and an independent medical examination (IME) conducted by a doctor.
5. The employer files the claim (depending on the state, there may be time restrictions for filings) to the insurance company for review. Depending on the state the claim is filed in, the insurance company may or may not be required to cover expenses while determining the claim’s validity.
What does workers’ compensation cover?
As with other forms of business insurance, the exact coverage provided by workers’ comp varies from business to business. It also depends on the severity of the workplace injury or illness. In general, a workers’ comp policy includes the following:
Workers’ comp can cover the immediate costs of medical care and any subsequent surgeries, doctor visits, and medical equipment if an employee suffers an injury on a job site.
Disability and lost wages
If an employee has to miss work due to being injured on the job or as a result of a work-related illness, workers’ comp insurance covers their lost wages or disability payments.
If an employee dies in a workplace accident or from a work-related injury, workers’ comp often pays their family some of the lost expected wages and funeral expenses.
Rehabilitation and physical therapy
If a work-related injury results in need for physical therapy or rehab, workers’ compensation insurance coverage kicks in.
What isn’t covered under workers’ comp insurance?
There are other situations workers’ comp generally does not cover:
- Injuries incurred under the influence of alcohol or other drugs
- Illness as a result of food brought from home or otherwise prepared by the employee
- Injuries incurred during a commute to or from work
- Injuries or illnesses incurred during workplace wellness or recreational programs
Do I need workers’ compensation insurance?
To protect your business, it’s a good idea to have workers’ compensation insurance. And depending on what state you’re in, you’ll likely need it if you have one or more employees. However, not all business owners are required to have workers’ comp insurance. Sole proprietors, for example, don’t typically need it because they don’t have employees. However, your industry and business structure may influence whether states consider workers’ comp a requirement.
“Knowing the workers’ comp laws in the states in which you operate is vital,” says McChristian.
Most states require some degree of workers’ comp insurance and specific requirements set in as soon as a business hires its first employee. Other states don’t require it until a business has a minimum of two to five employees. Texas is the only US state that does not require most private employers to have workers’ comp.
Even if your business doesn’t meet the employee threshold, McChristian says it’s absolutely a good idea to have this type of insurance. That’s because you still could be held liable if an employee is injured on your property, she says.
McChristian also says some companies attempt to skirt the employee designation by identifying workers as independent contractors. However, she warns, there is a fine line between the two. “Independent contractors typically work for more than one company,” she says.
If your workers are logging a lot of hours primarily for your company, they could be misclassified as independent contractors instead of employees—raising your business’s exposure to legal risks.
Certain jobs may be exempt from workers’ compensation insurance, depending on the state. These include:
- Seasonal workers
- Farm workers
- Real estate agents
- Business owners
How much does workers’ compensation insurance cost?
Workers’ comp insurance costs vary from business to business and state to state. The cost also depends on your company’s line of work. For example, businesses at a higher risk of accidents— like a delivery company—likely face higher premiums than those at a lower risk of accidents, such as a content marketing agency. Other factors include the size of payroll, additional workplace activities, and claims history.
Workers’ compensation insurance FAQ
Is workers’ comp insurance required?
Some type of workers’ compensation insurance is required in every state except Texas.
What is covered under workers’ compensation insurance?
Coverage for workers’ compensation insurance varies, but typically covers medical expenses including any medical rehabilitation and physical therapy, disability and lost wages, and survivor’s benefits in the case of a workplace-related death.
Are contractors covered under workers’ comp insurance?
Typically, contracted workers are not covered under workers’ compensation insurance.