When Do Entrepreneurs Need Workers’ Comp Insurance?

Workers compensation insurance was originally designed to reduce the strain on the legal system by requiring injured employees to file an insurance claim to recover compensation for their injuries. In most cases, workers’ comp protects employers from lawsuits, but there are exceptions.

In the United States, workers’ compensation insurance was first adopted in 1911 by nine states. By 1921, 44 states had workers’ comp insurance requirements for businesses, and today, all 50 states have their own laws in place. 

While many employers are required to carry workers’ compensation, it’s not across the board. If you’re an entrepreneur wondering if you need to carry workers’ comp, the answer depends on a variety of factors. 

Here’s how to determine if you should have a policy.

1. The law states you are required to carry a policy

The easiest way to figure out if you need to carry workers’ comp is by checking your state laws. For example, in South Carolina, employers with at least four employees are required to carry workers’ compensation insurance. If you employ a minimum of four people, you’ll need a policy. One exception is businesses with an annual payroll of less than $3,000. There are other exceptions, and you should talk to an attorney to see if any apply to you.

If you’re required to carry a workers’ comp policy, but don’t have one, you’re at risk of being sued by an employee who becomes injured on the job. Injured employees have the right to sue when their employer doesn’t have the proper workers’ comp coverage.

2. You want to avoid lawsuits

Even if you aren’t required by law to carry workers’ comp, you might want to get a policy if your goal is to avoid lawsuits. For most entrepreneurs, there may not be a big risk in not carrying a policy, but if your employees engage in certain activities, it could be helpful. For example, if your team consists of a few people who come into the office Monday through Friday and work on the computer, there’s not much risk.

However, if you’re running a business that has employees working with machinery that can cause injury, even if you only have two employees and are exempt from the law, it might be wise to get coverage. All it will take is one injury and you could be facing a lawsuit that will cost you tens of thousands of dollars. The judgment an injured party can get from a lawsuit can be vast compared to the cost of a policy.

3. Your contractors are actually misclassified employees

As an entrepreneur, it’s important to save time and money however you can, and contractors are considerably less expensive than employees. However, confusing employees with contractors can get you into trouble. All too often, entrepreneurs hire people as contractors to do employee work. The problem is that you don’t get to determine their status – the law does.

If you think you’re exempt from workers’ comp requirements because you don’t have any employees and all you have are contractors, that can come back to bite you if someone gets injured and sues you. You might believe you’re protected because contractors can’t sue you for injuries, but if a court determines they’re actually an employee, their lawsuit will proceed.

You can’t afford to misclassify employees as contractors. If you’re wondering whether or not you need workers’ comp insurance, talk to a lawyer first about whether or not your contractors are legally contractors. If you find that they are, and you don’t meet any other requirements for carrying workers’ comp, then you have nothing to worry about. If a lawyer tells you they’re misclassified, and as employees you’re required to carry a policy, get workers’ comp as soon as possible.

4. You’re in a high-risk profession

Some states require sole proprietors to have workers’ compensation even if they have no employees or hire independent contractors based on the profession. Because of this possibility, it’s imperative that you talk to a workers’ comp attorney to find out what you need.

5. A contract requires coverage

Since most health insurance policies exclude work-related injuries and illnesses, some contracts require a business to carry workers’ compensation insurance. These contracts will assume the employer is properly covered. If you enter into such a contract, you are required to carry a policy even if you are exempt by state law.

Talk to a lawyer before making your decision

Whether or not you need to carry workers’ compensation insurance is first a matter of legal requirement and in some cases, personal preference. If you aren’t sure what to do, talk to a lawyer to get expert advice.