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What Startups Need To Know About Workers’ Compensation Insurance


If you’re the founder of a startup, your top concern is launching and growing your business. But if you’re at the point where you’re hiring employees, your list of concerns just grew bigger. Now, you have to worry about payroll taxes, insurance and workers’ compensation.

If you’ve yet to purchase workers’ compensation insurance, it may be time to change that. Here’s what you need to know about this important coverage.

Do You Need Workers’ Compensation Insurance?

Technically, everyone should have workers’ comp insurance. If you have employees – and that includes yourself – they need to be covered by your policy. In some rare cases, founders with no employees are exempt from needing workers’ compensation insurance.

As a general rule of thumb, you need workers’ compensation insurance if you have people on the payroll.

Why Do You Need Coverage?

Businesses are required to have workers’ comp insurance by law. You have an obligation to provide your employees with protection if they are hurt on the job.

As workers’ compensation attorney Neal Storm explains, injured workers may receive benefits for:

  • Occupational diseases and illnesses
  • Work-related injuries
  • Aggravation of a pre-existing condition
  • Repetitive stress injuries
  • Injuries caused by work-related duties

Most states require business owners to obtain a workers’ compensation insurance policy that will provide employees with financial assistance if they are hurt on the job. Some states also have minimum coverage requirements to prevent employees from suing after a workplace injury.

What Does Workers’ Comp Cover?

Workers’ compensation insurance covers your employees in case of a work-related injury. If you are on the payroll, you may also be covered.

Along with paying medical and hospital expenses, your policy may also offer disability payments while the employee is unable to work, and if necessary, retraining and rehabilitation.

Most on-the-job injuries are covered by workers’ compensation insurance.

Do You Have to Cover Independent Contractors?

If you work with independent contractors, you may be wondering whether you need to include them in your workers’ compensation policy. The answer is: no.

But they must actually be independent contractors (ICs). It’s not enough to call someone an independent contractor. If ICs are treated like employees, the state may deem them employees and you will be responsible for providing coverage.

Most states use a multi-factor statutory test to determine whether an IC is actually an employee.

Here are a few things the state labor board will consider:

  • Whether or not you dictate the worker’s hours
  • Whether your company supplies the materials to perform the job
  • Whether the worker is working exclusively for your company

How Much Does Workers’ Compensation Insurance Cost?

It’s hard to estimate the cost of coverage, as it will depend on a number of things. Premiums are generally determined by a system that classifies employees by their main roles, or class.

The class rate is multiplied by each $100 of payroll designated to that class. Rates will vary greatly for classes, and will depend on the risk-level of the job. For example, computer programmers may have a class rate of .260, while contractors may have a class rate of $13. Location also plays a role. Policies in California are generally more expensive because the state has a high rate of workers’ compensation lawsuits.