Requirements to be comp exempt vary by state, industry, the size and structure of your business and even how you pay for your labor. Companies that fail to carry required workers compensation insurance can face fines, lawsuits, or even criminal charges.
While the number of employees which would enable a business to be comp exempt range from one to four W2 employees, all states require that businesses which hire uninsured 1099 subcontractors carry their own workers comp coverage.
That being said, even if you are in an industry that is fairly safe, as a business owner it would be a mistake to think workers’ compensation insurance isn’t required even if they are comp exempt.
Required by Clients
As I mentioned above, all states require companies hiring subcontracted or freelance labor to carry workers compensation coverage to protect these individuals in the event of a workplace injury. As you may have noticed, nearly all businesses who hire this type of labor require a certificate of insurance be sent over prior to work commencing.
Basically, if someone is working, they need to be covered under someones workers compensation policy. If it is not their own it is going to be yours. Which leads us to three of the main reasons businesses require 1099 laborers to have their own coverage despite being comp exempt.
Reason 1: Any payroll paid to 1099 employees is rated for additional premium on the insureds policy.
Let’s say you are a cabinet installer who generally works by yourself, but you hire a subcontractor to help you complete a large job. You carry a ghost policy which has a percentage of payroll associated with your class code (Read more about ghost policies here) . Lets say that number is 10% for round numbers. What this means is that you will pay $10 in workers compensation premium for every $100 in paid labor. You can do the math from here, but I’m sure you can see how it can get very expensive very quick.
Reason 2: Anyone working under your company is covered by your policy if they don’t have their own.
Using the same scenario from example above, if that the 1099 laborer is injured they are covered under the cabinet installers policy. As we all know claims drive up premiums for years on future policies. One accident today could cost a company 30% or more in increased premium for the next 3-5 years.
Reason 3: Coverage is provided from the top down
For instance, if the cabinet installer is working for a general contractor, and the cabinet installer didn’t have coverage, the general contractors policy covers the cabinet installer and his 1099 laborer. Taking that a step further, lets pretend you own a print shop and you have hired a general contractor to perform some building upgrades, but unbeknownst to you the GC’s policy was recently cancelled for non-payment. You as the print shop owner are now covering the GC, cabinet installer, and the installers 1099 laborer…Do you feel a little like you just went down the rabbit hole in Alice in Wonderland? It’s ok, it can get a bit confusing, which is why you need a really great agent who is willing to take the time to explain what coverage you may need and why.
Protect Your Assets
If you are anything like me you have worked long and hard building your business from the ground up. Or, maybe you are just getting ready to break out on your own for the very first time. Either way, you don’t want to put everything you own at risk to save a few bucks by going exempt status on work comp.
Through the roof is not even an acceptable phrase for where medical bills are these days…they have gone completely haywire. We have a client who runs a 100% clerical based business with only two employees. They had an employee slip on the stairs coming into the office on a rainy day and the claim was in excess of $100,000 for a severely broken wrist. If they had been comp exempt the ambulance chasing attorneys who bombard injured employees, what seems like minutes after entering the emergency room, would have certainly come after our clients business and potentially their personal assets.
“That’s ok” you say, “My 1099’s all carry their own coverage and I require certificates of insurance before they ever see their first minute of labor from me!” Let me pose this question to you then; are you sure they paid their comp premium last month? If they didn’t, and their policy has lapsed, you are on the hook. Is it worth a few hundred bucks a year to make sure that you don’t lose everything because you aren’t able to make sure that everyone else is doing what they are supposed to be doing and you chose to go comp exempt?
Just because you need coverage doesn’t mean that it is going to cost you an arm and a leg. If you are an individual business owner with no employees or 1099 payroll you are able to obtain affordable coverage via multiple channels.
All states have a workers compensation state fund set up, generally referred to as the assigned risk pool. Policies are made available to any and all companies who need coverage and are unable to find coverage in the standard market even if you are comp exempt.
While the minimum premium for workers comp on companies with no payroll run below $1,500 for the year through the assigned risk pools, we even have options available which are generally hundreds of dollars cheaper and provide actual coverage for the business owner who is generally exempt from coverage. To learn more about those programs check out our ghost policy article.
Check out the state-by-state comparison of workers’ compensation requirements below in the states we are licensed. Each section includes a link to the state’s department responsible for workers’ compensation and their comp exempt status guidelines.
– Employers (including individuals, firms, associations, or corporations) of three or more people are required to carry coverage.
– Exempted officers of corporations or members of LLCs are counted as employees.
– Contractors who sub-contract any part of their work might be liable for coverage for the subcontractor’s employees if the subcontractor lacks coverage.
– Sole proprietors and partners are generally exempt, but can choose to be covered as an employee by advising their insurance carrier that they wish to be covered under the policy.
– All employers with three or more employees are required to carry workers compensation for all employees (including minors and undocumented workers).
– Any business in which one or more employees work involves the use or presence of radiation must have compensation insurance.
– Corporate officers may choose to be excluded from insurance coverage, but are still counted in the employee count.
– Sole proprietors, LLC members, and partners are not automatically counted as an employee and may choose to be included.
– Agricultural employers are not required to carry workers’ compensation unless they have 10 or more non-seasonal agricultural workers.
– Domestic/household servants are exempt.
– Employers that employ four or more regular full-time or part-time employees are required to carry workers’ compensation insurance.
– Employees include adults, minors, and seasonal workers.
– Sole proprietors, partners, and LLC members aren’t automatically included in coverage, but may choose to include themselves in their policy.
– Agricultural employees, railroad/railway companies and their employees, and employers with a total annual payroll during the previous year below $3,000 (regardless of the number of employees) are exempt, as are textile hall corporations and some commission-paid real estate salespeople.
– If a subcontractor lacks coverage, their injured employees would be covered under the employer’s workers compensation insurance.
– Every employer in the construction or coal mining business or trades (regardless of the number of employees, including subcontractors) must carry coverage.
– Every employer with five or more employees must carry coverage.
– Family members and part-time employees are included when determining the number of employees.
– Corporate officers are also included in the count (even if excluded from coverage).
– Sole proprietors, LLC members, and partners are excluded but may choose to be included.
– Workers’ compensation insurance coverage is mandatory for all employers with one or more employees (regardless of employee status, number of hours worked per week or whether the employee is a spouse or child).
– Coverage for sole proprietors, partners, and corporate officers is optional.
– Licensed real estate salespeople or brokers, licensed insurance agents who work on a commission-only basis are exempt.
– Domestic or casual laborers and outworkers are exempt.
– Farmers with one employee who works less than 30 days a year or earns less than $1,200 a year, and a spouse or child of the farmer employer under eighteen years of age are exempt.