5 Things Every Business Owner Should Understand About Workers’ Comp

By Matthew King | Management and Operations

Nov 14
Workers' Comp

Most small business owners possess a measurable degree of knowledge regarding workers’ compensation insurance. In truth, it would not be possible to travel very far into the world of business without knowing a little on the subject.

Business owners are responsible for providing a safe working environment for the employees that work for them. However, accidents may take place even with the best efforts of the business owner. Business owners need workers’ compensation insurance in case of injuries. Here are five things that every business owner should know about workers’ compensation.

Workers’ Comp Requirements

Most states in the United States have laws on the books that guarantee workers’ compensation of some type. In some states, this is required by employers even when possessing a single part-time employee. Other states require a predetermined number of employees before the insurance becomes mandated for the employer.

Business owners are well advised to learn the requirements for the state in which they reside. A failure to offer the required coverage can subject the owner of the business to fines. In extreme cases, the owner could face jail time in some states.


Cost Variations

Individual states possess the right to determine the coverage amount required by an employer. This fact causes the cost to employers for workers’ compensation insurance to differ from one state to another. Business owners should arm themselves with knowledge regarding the rates in the state they do business.

Proper Classifications Can Save Money

Many business owners would be surprised to know that there are different rates of pay for different worker classification codes. The code attached to a particular job will signal the risk associated with performing the job. A job that is presumed to be riskier to perform will cost more to provide workers’ compensation insurance.

Business owners should be sure they classify each employee under the correct code for their job description. This will ensure that more money is not paid than is necessary to provide coverage to an employee. For example, an owner of a construction company would not want to classify his clerical staff as carpenters.


Lawsuit Prevention

Many years ago, the only way an employee could receive compensation if injured on the job was to file a lawsuit. The problem with this scenario was that injured workers were rarely able to gain a court victory against their employers. The usual result of these lawsuits was the workers themselves were blamed for their injuries. These were dark days for American workers.

Eventually, the workers’ compensation system was established in the United States. Workers were asked to voluntarily give up the legal right to file lawsuits against their employers. In return, they are afforded the right to compensation if injured on the job. The simple explanation for the agreement is that if a worker accepts insurance for workers’ compensation, that employee is agreeing to not sue an employer.


Factors That Affect Workers’ Comp Premiums

Multiple factors are responsible for the premiums paid for workers’ comp insurance. They include:

  • Payroll
  • The type of being work done
  • The company history of claims

The history of claims factor is of utmost importance because the premium calculation for workers’ compensation depends on what is known as an “experience modifier.” This factor is determined by comparing the losses that have taken place to the losses that are expected for all the members in the industry.  The fewer claims that come from a business, then the lower the cost of the premiums.

The Bottom Line

Business owners have a basic understanding of the impact workers’ compensation policies have on the health of their business. However, many of them do not understand the many complexities involved. As a business owner, understanding the five issues mentioned above will prove instrumental to the long-term success of your company.

Workers’ comp is just one aspect of owning a business. For more insight into the business world, sign up for a free Startup Forum account and start talking business with your fellow entrepreneurs.

About the Author

Matthew King is the owner of the Startup Forums, Alkries LLC, and co-owner at TR King Insurance Marketing. Partner at Independent Life Insurance Agent Association, Medicare Training 101, and Final Expense 101. When he's not creating content about running successful businesses here. He's most likely developing processes, diving into SEO, or gaming with his friends and wife.

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