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A workers’ compensation insurance primer for small businesses

In the past many small businesses avoided carrying workers’ compensation insurance. In the future, more small firms will carry this insurance. This blog post is meant for small employers who are facing this issue for the first time.

This is a big risk facing the smallest unsuspecting employers.

What is changing?

State laws have always pushed for wide coverage of workers compensation coverage. Now, the loopholes that allowed employers to avoid it, like “paying under the table” are closing. It is increasingly difficult to pay workers as independent contractors. Enforcement actions and lawsuits against employers are increasing.

Business advisers like me are increasingly unlikely to assume responsibilities for an employer’s accounting and finances who does not have workers’ compensation coverage where it is required by law.1 In the future I am likely to require a review of workers’ compensation insurance status as a prerequisite to offering other small business services. For all others, I recommend an annual review of operating practices, bylaws and operating agreements.

What about household employees?

Most states require household employers to carry workers’ compensation insurance for their household employees such as a nanny, lawn care helper or housekeeper.

What about part time workers, student intern workers, seasonal workers, ‘under the table’ workers, volunteers, and short term temporary workers?

Yes, all must be covered by workers compensation insurance.

What about nonprofit organizations and unincorporated associations?

Yes, these must carry workers’ compensation insurance if they use workers.

What is the cost?

Premium is based on payroll. For employers with a small payroll, however, a large part of the cost is the policy fee called “expense constant”. In general, the minimum total policy cost is about $500 per year or about $10 per week (if you pay weekly). This is the actual workers’ compensation cost for one of my small business clients who pays weekly through automated pre-authorized ACH bank account drafts:

Description Amount
Workers’ Compensation Premium $5.11
Workers’ Compensation Expense Constant $4.24

What is the expense constant?

It is the administrative cost of your policy charged by your insurance company that covers administration expense including the insurance agent’s compensation. It is generally a flat dollar amount charged on your policy.

Can some employers avoid a workers’ compensation policy?

Some small businesses can avoid workers’ compensation coverage, but the circumstances are increasingly rare. Companies that have “owners only” as workers are the most common example of those who may opt out of workers compensation coverage. We recommend that employers who do not carry workers’ compensation insurance obtain a written opinion letter from an attorney or CPA that coverage is not required in their circumstance.

Are there any other costs?

If your workers’ compensation insurance is tied to your payroll processing service then no, there are no other costs. The amount you pay for payroll processing covers all costs associated with the workers’ compensation policy. However, if you pay for your workers’ compensation insurance separately to an insurance company outside of your payroll processor then you may face an additional cost of an annual policy audit. I typically charge the smallest employers about $250 for this annual audit service if it was billed separately but in most cases this expense is included in the general small business accounting fee.

What are the consequences of not carrying workers’ compensation insurance?

There are two primary risks: 1) state officials can take corrective and punitive action, and, 2) workers can sue for claims that would have been covered by workers’ compensation insurance.

Enforcement actions for not carrying workers’ compensation coverage are increasing. The average fine assessed against an employer is $4,300, according to one publisher who did not provide a data source. In 43% of cases, according to the same publisher, the insurance company and not the employer were found to be at fault. This is why we not see greater emphasis on annual workers’ compensation policy audits.

The consequences of not carrying workers’ compensation insurance vary by state. In New Jersey, failure to carry workers’ compensation coverage is a criminal offense punishable by a fine of $10,000 or imprisonment for up to 18 months. In Pennsylvania, intentional noncompliance is a felony of the third degree that can result in a fine of $15,000 and up to seven years in jail.

What if I have questions?

I suggest first speak with a small business CPA like me since there is typically no cost for this type of general query. If more detailed analysis is required to answer your question, I would consult with an attorney who specializes in this work on a collaborative basis. In this and all other small business management matters, a collaborative team approach is usually best.


1 Representation is available in situations where workers’ compensation failures are alleged. These risks are addressed separately in the engagement agreement.

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