You have hired your first employee. Congratulations! Your business is growing. But before they type their first email or lift their first box, you have a legal obligation to fulfill.
In almost every state, if you have employees, you MUST have Workers' Compensation Insurance. Period.
It is not just about following the law; it is about protecting your business from a lawsuit that could close your doors forever. Here is what every business owner needs to know in 2025.
1. What is Workers' Comp? (The "Grand Bargain")
Workers' Comp is a trade-off protected by law. It provides two main benefits:
- For the Employee: It pays for medical bills and lost wages if they get hurt on the job.
- For the Employer: It protects YOU from being sued by the injured employee.
Without this insurance, if an employee gets hurt, they can sue you for millions. With it, their only remedy is the insurance payout.
2. Does it Cover Remote Workers? (The 2025 Reality)
This is the most common question today. Since many teams work from home, what happens if an employee trips over their dog while walking to their desk?
The Answer: Surprisingly, YES. If the injury happens "in the course and scope" of employment, it is often covered by Workers' Comp.
This is why you need a policy that specifically addresses telecommuting risks to avoid gray areas.
3. Who Needs It? (Contractors vs. Employees)
Classification matters. You generally need coverage for W-2 employees.
However, 1099 Independent Contractors are a tricky area. If the state decides you are treating a contractor like an employee (setting their hours, providing tools), you could be fined for not insuring them.
Pro Tip: Always require your contractors to show you their own Certificate of Insurance (COI).
4. How is the Cost Calculated? (Class Codes)
Workers' Comp premiums are based on "Risk Class Codes."
- Clerical (Office Workers): Low risk = Low premium (e.g., $0.20 per $100 of payroll).
- Roofers/Construction: High risk = High premium (e.g., $15.00 per $100 of payroll).
Warning: Never misclassify an employee to save money (e.g., calling a roofer a "clerk"). This is insurance fraud and carries heavy jail time.
Protecting your employees is vital, but don't forget to protect your own income. Check out our guide on Disability Insurance for High Earners.
5. What Happens If You Don't Have It?
The penalties are severe. In states like New York or California, you can be fined up to $2,000 for every 10 days you are uninsured.
Worse, you become personally liable for all medical bills of an injured worker. One back surgery could cost you $150,000 out of pocket.
FAQ: Workers' Compensation Basics
1. Does it cover COVID-19?
In many states, yes. If an employee can prove they contracted COVID-19 at the workplace (e.g., a nurse or retail worker), it is often covered as an occupational illness.
2. Can I pay for the medical bills myself?
No. It is illegal to pay out-of-pocket to avoid filing a claim. All workplace injuries must be reported to the insurance carrier.
3. Does it cover the owner?
Usually, business owners can choose to "exclude" themselves from coverage to save money. However, if you do manual labor, it is smart to include yourself.
4. What involves "Lost Wages"?
If the doctor says the employee needs 2 weeks off to recover, Workers' Comp pays them a portion of their salary (typically 66% of their average weekly wage).
5. Is it tax-deductible?
Yes. Just like General Liability Insurance, your Workers' Comp premiums are a fully deductible business expense.
Disclaimer: Workers' Compensation laws are strictly regulated by each state. Penalties for non-compliance are severe. Consult a licensed agent immediately.