Employers purchase workers’ compensation insurance to provide financial support to employees for work-related injuries and illnesses. It covers medical expenses, rehabilitation, a percentage of lost wages, disability benefits, legal costs, and funeral costs. Private health insurance plans do not cover injuries that happen at work, so workers’ compensation insurance is needed in these situations. In case of a work-related death, family members of the deceased can receive the benefits.
Most states require employers to carry workers’ compensation (comp) insurance, and employers will face hefty penalties for not having it. Workers’ comp helps protect employers from work-related lawsuits and sometimes provides benefits even if employees were negligent. It does not cover intentional employee misconduct or injuries that happen outside of work, including while commuting.
However, there are some cases where you may be eligible for a formal workers’ compensation exemption to your state’s legal requirement to carry it. This means that certain employees or owners will not receive benefits, lost wages, or covered medical care when dealing with work-related injuries or illnesses.
Who May Qualify for a Workers’ Compensation Exemption?
Qualifications for a workers’ compensation exemption vary depending on each state’s specific requirements. The most important initial step is to correctly determine whether your workers should be classified as independent contractors or employees in accordance with IRS rules.
Workers who are not employees are often exempt. The following workers are typically exempt from workers’ comp policies unless the company seeks a special endorsement: seasonal workers, undocumented workers, real estate agents, agricultural, domestic, railroad, and marine workers. Federal government workers are covered by the Federal Employees’ Compensation Act (FECA).
Qualifications for exemptions are impacted by employment classifications, the number of employees, and business structure.
Classification of workers: Exemptions may be available for non-employees, including volunteer workers, self-employed professionals, and independent contractors.
Number of employees: Employers without at least one employee may qualify for an exemption. In a few states, employers with fewer than five employees or whose employees are family members may be eligible.
Business structure: Corporate officers who work off-site and own company stock above a certain percentage may qualify. A sole proprietor, partner, or member of a limited liability corporation (LLC) without any employees may also be eligible.
Do Business Owners Without Employees Need Workers’ Compensation?
Business owners without any employees may be exempt depending on several factors. However, you may have difficulty working with clients or fulfilling contract terms if you are unable to provide a certificate of workers’ compensation insurance, even if you are exempt. This is because of liability issues. Many states mandate professionals with a high risk of injury, such as construction contractors, to have workers’ compensation insurance, even if they work alone.
State Workers’ Compensation Exemption Requirements
States set their own workers’ comp laws and exemptions, which vary significantly. To see a state-by-state guide to workers’ compensation laws, penalties, and who may be exempt, use this interactive map from Embroker.
Texas is the only state that does not require employers to provide workers’ compensation insurance, but they can still be held liable and face penalties. Four monopolistic states provide employers with workers’ compensation insurance policies: North Dakota, Ohio, Washington, and Wyoming. In all other states, employers can purchase policies from private insurance companies or possibly from state funds.
How To Apply for a Workers’ Compensation Exemption
To apply for a workers’ compensation exemption, complete a form and pay processing fees to your state’s office. The form to complete is called a “Notice of Election to be Exempt.” You will need to provide the state-specific requested information, including details on your business and employees, ownership proof, and contact information for your workers’ compensation carrier.
Once approved, you will receive an exemption certificate. You will also need to submit renewal forms with updated information in accordance with state requirements.
Benefits of a Workers’ Compensation Exemption
The main benefit of an exemption is reducing your insurance costs. The number of workers impacts the cost for workers’ compensation, so each exemption will lower your cost. The exemption also prevents employees from potentially filing unnecessary claims. It also gives employers more flexibility on how they can handle workplace accidents and allows them to negotiate directly with employees.
Risks of a Workers’ Compensation Exemption
Without workers’ compensation, there are significant financial and legal risks, as employees may file lawsuits against you. In addition to the time, expense, and reputation damage associated with lawsuits, employers may be found liable for injuries, resulting in fines and penalties.
In most situations, when employees collect workers’ compensation, they give up the right to file a personal injury lawsuit against the employer. “This is due to a legal concept called ‘exclusive remedy,’ which means once a worker has received workers’ comp benefits from a provider, they waive their right to seek benefits in other ways from that same provider,” explains Handler, Henning & Rosenberg LLP. If employers fail to provide adequate workers’ comp coverage, if employees can prove intentional harm, or if an OSHA violation occurred, then employees may be able to collect workers’ comp and also file a lawsuit.
Without workers’ compensation, employees and sole proprietors will have to pay high out-of-pocket medical care costs for work-related injuries and illnesses since they are not covered by health insurance. They will also have a significant loss of income while recovering.
To help weigh risks, employers can refer to the U.S. Bureau of Labor Statistics annual reports on workplace injuries, illnesses, and fatalities, as well as the Incidence Rate Calculator and Comparison Tool. In 2023, there were over 2.5 million nonfatal injuries and illnesses in private industries, resulting in a median of 10 days away from work.
Penalties for Noncompliance
Employers will face significant penalties and fines for noncompliance with workers’ compensation laws. Many factors impact the severity of the penalties, including location, whether it was intentional or accidental, business size, and length of noncompliance.
Embroker highlights states with severe penalties. In some states, including California, New Jersey, and Pennsylvania, noncompliance is a criminal offense that can result in jail time. Noncompliant businesses could be fined $50,000 in New York and Virginia.
Employers must comply with the workers’ compensation insurance rules specific to the states where they operate. For workers in multiple states, employers must carefully follow rules in all the states where they have employees. Even when it is not required, it is in the best interest of employers to provide workers’ compensation insurance instead of seeking an exemption.
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