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Small businesses: A guide to workers' comp insurance

Your employee throws out his back while stocking shelves. Or comes down with carpal tunnel syndrome after typing a long report. Or falls off a ladder while painting a house. All of these scenarios would be covered by workers' compensation insurance -- if you have coverage.

What is workers' compensation insurance?

Workers' compensation insurance is a policy that pays an employee's medical costs and wage replacement after a workplace injury, says Elizabeth Milito, senior executive counsel with the National Federation of Independent Business (NFIB).

workers comp insurance Almost all states require most employers to buy workers' comp insurance, with the goal of controlling costs for businesses and helping injured employees recover, Milito says. Only one state -- Texas -- doesn't require workers' comp insurance.

To receive benefits after an injury, an employee must agree not to sue the employer, a requirement that helps keep workplace injury cases out of the courts, Milito says.

"Injuries do happen, and you certainly don't want employees suing you every time they get hurt on the job," she says.

In 2012, the most recent year for which numbers are available, there were more than 1.1 million workplace injuries that required time off work, according to the U.S. Department of Labor.

The median amount of time required off work after an injury was nine days.

Workers' compensation laws vary by state

Each state has different workers' compensation requirements, so small-business owners should check the law in their state, experts say.

You can learn the laws in your state by checking out’s workers compensation insurance laws by state table.

In most states, sole proprietors -- business owners with no employees -- don't have to buy coverage, Milito says.

In some states -- for example, California, Minnesota and Washington -- a business owner with any employees must buy workers' compensation insurance. Many states count part-timers and seasonal workers as employees, while others don’t.  

Other states only require coverage for employers with a certain number of employees. For example, Arkansas requires employers with three or more employees to buy coverage, while the threshold in Mississippi is five employees.

Workers comp insurance exceptions

Almost all states that require workers' comp insurance also have a list of exceptions. For example, many states allow employers to skip coverage for agricultural workers, volunteers, real estate professionals, part-time household domestic help, and casual employees, such as gardeners or maintenance workers hired to do occasional work.

Some exceptions are unique: For example, Maine exempts employers with six or fewer aquacultural laborers -- fish, mollusk and crustacean farmers -- if the employer has at least $100,000 in liability insurance for each full-time employee and $5,000 in medical payments coverage.

How much will workers' comp insurance cost me?

Premium costs are set by states per $100 of payroll annually and are based on the number of employees, how much they earn, the type of work they do, and how your workplace stacks up against similar businesses for safety, says Andy Gebhard, director of communications and social media for SFM, a large workers' comp insurer in the Midwest.

For example, 2014 rates in Florida range from 21 cents per $100 of salary for a worker in an attorney's office to $5.18 per $100 for a florist to $46.14 per $100 for a painter of metal buildings taller than two stories.

So, for an employee who makes $50,000 a year, you’d pay a yearly premium of $105 for the office worker, $2,590 for the florist and $23,070 for the painter.

If you fail to get workers' comp insurance as required by the state, you could get hit with stiff fines and possibly jail time.

In New York, for example, a business owner who flouts the law for five or more employees could get hit with a fine as high as $50,000.

Employees and former employees can report state employers who lack workers’ comp insurance, according to the California Department of Industrial Relations. The state department of labor or other agency that oversees workers’ comp might then request that the employer provides proof of insurance.

For example, in New York, if an employer fails to provide insurance documentation within 10 days of a request, it’s assumed they’re violating the state workers’ comp law.

After an injury: How does workers' comp work?

If an employee is injured on the job, you need to report the incident to your insurer immediately, Milito says.

In some cases, the employee won't need medical treatment or time off from work. In other cases, the employee needs one or both, Gebhard says.

Treatment could run the gamut from prescription medication to surgery to physical therapy, he says. If needed, insurance also typically pays for vocational rehabilitation, he says.

Vocational rehabilitation can consist of counseling and a variety of other services to assist an employee with a health condition or disability in returning to work.

Employers should stay actively involved in the claims process. "Check in with the carrier or claims person and find out what's going on," Milito says.  

If the treating doctor contacts you with the employee's permission, ask which parts of the job the employee can or can't do, she recommends. You might be able to create a temporary light-duty job for the employee, she says.

"You want your employees back to work so they're not a drag on the business," she says.

Workers' comp know-how for business owners

Experts say you should take steps to make sure you're properly covered at the best price. Here are some workers' comp tips for small-business owners.

1. Consider coverage even if it's not required.

Even if you're exempt, you might want to buy insurance, Milito says. But first talk to your insurance agent to find out if any coverage would be offered under your general business policy, she says.

2. Shop around for coverage.

In a few states -- Ohio, for example -- employers are required to purchase workers' comp insurance through a state program. But, in many states, business owners can choose a carrier. Talk with other business owners and any trade associations you belong to, Milito says.

"It really pays to shop around," she says.

3. Take advantage of discounts.

"Make sure you're taking advantage of all credits available to you," Milito says. "Just like auto insurance has safe-driver programs, it's the same with workers' comp." For example, maintaining a drug-free workplace might get you a break on rates, she says.

4. Be careful with contractors.

If you hire an independent contractor or a subcontractor, require a certificate of insurance to show they have workers’ compensation coverage on their employees, Milito recommends. If you don't, you could be on the hook for medical costs, lost wages and even state penalties if one of their employees gets hurt, she says.

And, finally, create a safe work environment to prevent claims, which can cause premiums to go up. Emphasize safety by using safety equipment and training programs, Milito says. "You want to stop workplace accidents before they happen."

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