If you are a large employer it is impossible (and also illegal) to fail to carry workers compensation insurance. Most states maintain a database of employers in their state. The states compare the information reported to them by insurers and approved self-insurers on who is insured against:
- information reported to them by the department of labor (list of employers paying unemployment insurance)
- information reported to them by the department of state (list of corporations and partnerships). (WCxKit)
- information reported to them by the department of commerce (businesses collecting sales tax)
If you are a large employer, you will quickly get a notice from the department of insurance if for any reason your workers comp coverage expired and you did not replaced it.
[The State of New York’s database contains 800,000+ employers in New York compiled from these and other sources].
But what if you are a very small employer, not incorporated or a partnership, and you do not collect sales taxes? Each state sets its own requirements for when an employer is “big enough” to be required to purchase workers comp coverage. In most states, excluding limited exceptions noted in various state statutes, an employer must carry coverage once their small business meets the state specific requirements for number of employees. The number of employees needed to require a business to carry workers comp insurance varies by state from one to five employees, with three employees being the most common threshold for requiring workers compensation insurance.
Let’s consider the small business in a state where three employees is the threshold for requiring workers comp coverage. The owner of the business started out with just himself doing everything related to his business. As time went on, he became more established and hired an assistant. Soon the business reached the point where he had to hire a part-time secretary. He never thought about having workers compensation insurance for his assistant and his part-time secretary. Then the big break comes. In order to handle the new business he hires two additional employees to work with him and his assistant. With the pressure to handle the new business plus training the two new employees, workers compensation insurance never crosses his mind.
A few months later, one of the new employees suffers a workplace injury, tripping, falling and breaking an arm. Now the owner of this small business realizes he needs workers comp insurance. As the business owner cannot buy workers comp insurance retroactively, he has unknowingly joined the ranks of the self-insured. His small business will need to pay all the medical bills his employee incurs as a result of this accident, plus the business will need to pay at least two-thirds (higher in a few states) of the employee’s wages while the employee is off work. [The owner of this small business might be better off to pay the employee’s wage the entire time he is off work and arrange for the employee to return to work on modified duty as soon as possible].
The business owner after paying for the employee’s medical bills and wages realizes he should have had workers compensation insurance, and wonders what can he do to get legitimate? First, he should contact his business insurance agent and report he needs workers comp coverage as he has hired two additional employees. The insurance agent will be glad to write the coverage for the business, but can only write with an inception date in the future (hopefully the next day).
Depending on the state where this hypothetical business is located, the business owner may have problems besides paying the workers comp claim of his employee, such as:
- Criminal prosecution for non-compliance with the law.
- A civil fineor penalty imposed on the business by the state (some states have hefty fines in the thousands of dollars).
- The employeeobtaining an attorney when he realizes the business owner has no workers comp insurance, and the attorney exercising the option to pursue a tort claim and suing the business owner.
Let’s assume the insurance agent for the business elects not to ask too many questions and is able to place the small business with a workers comp insurance carrier. Other than the expenses of paying the workers comp claim, and buying workers compensation insurance coverage for the future, the business owner gets out of this problem with no further cost. But, he still will probably lay awake at night wondering if the state will find out and prosecute him and/or fine his business. (WCxKit)
Another example of a small business getting into trouble by not knowing the workers comp laws could be a Canadian business expanding into the United States. At first they check the laws of the first state they expand into and learn you must have two employees to be required to buy workers comp coverage. Since they only have one salesman in the state, they elect to not buy workers comp insurance.
Then the Canadian company has a change in the risk management department. The new risk manager sees they do not have workers comp coverage for their United States salesman, so he concludes it is not required. The Canadian company is successful and they add additional salesman to the same state. Within 5 years they have six salesmen working from their homes. Then someone in the Canadian company asks about workers comp coverage for the six salesmen.
They wish to be legitimate, but what can they do? They cannot buy workers comp coverage in arrears — no carrier will sell them a policy covering a time frame in the past. They can buy workers comp coverage going forward. Depending on the workers comp statutes of the state they are in, they may be fined for their failure to have the coverage. Their best bet is to talk with a knowledgeable insurance broker who can guide them in obtaining coverage and address with the state any penalty they may have to pay. (WCxKit)
If you need assistance in obtaining workers comp coverage for your small business for the first time, please contact us and we will be glad to provide you with assistance and guidance in the selection of your workers comp insurance broker.
Disclaimer: This article is not intended to be legal advice. If you have questions of a legal nature about failing to comply with the workers comp statutes of your state, please consult with your attorney or legal adviser.
Author Rebecca Shafer, J.D./ Consultant, President, Amaxx Risks Solutions, Inc. has worked successfully for 20 years with many industries to reduce Workers’ Compensation costs, including airlines, healthcare, printing/publishing, pharmaceuticals, retail, hospitality and manufacturing. Contact: RShafer@ReduceYourWorkersComp.com or 860-553-6604.
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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker or agent about workers’ comp issues.
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