Workers compensation insurance is among the most important types of business insurance. It is a requirement for most businesses and employees across the country. Certain businesses and workers, however, qualify for workers comp exemption, either by choice or by law.
This article will focus on who can qualify for a workers comp exemption. Beginning with an overview of workers compensation insurance, we will discuss the types of businesses and workers who can apply for exemptions, and how to go about submitting an application.
The article will also cover the benefits and risks involved, to give businesses and employees a full overview of the options available to them when it comes to workers comp exemptions.
What is Workers Compensation Insurance?
Workers compensation insurance is a type of business insurance that is required by law for businesses with employees. This applies to all states except Texas, which does not require employers to have workers compensation coverage.
The requirements for workers comp differ from state to state, however, and it’s therefore important for both businesses and employees to take a state-by-state look at those requirements. For businesses specifically, there are also many other factors to consider when it comes to workers compensation costs.
Workers compensation insurance covers a wide range of benefits, including the cost of medical expenses, temporary and permanent disability, job displacement, legal fees due to work-related injury or illness, and in worst cases, funeral costs and death benefits.
In this way, workers comp benefits employees and their families as well as businesses who are protected from paying potentially greater medical and legal expenses through lawsuits.
For businesses, comprehensive insurance coverage will include not only workers comp, but employers’ liability insurance as well. The two policies provide different coverages, but they are complementary. Unlike workers comp, employers’ liability insurance assumes liability on the part of employers when it comes to work-related injuries or lawsuits from employees.
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Although most workers compensation claims are usually accepted, there may be times when employees refuse an offer made by the insurance carrier on behalf of the employer. An employee may hire a lawyer and seek a larger settlement. In those cases, a workers compensation settlement may be required.
Workers compensation insurance is often a kind of safety net for businesses and their employees. But what about those who don’t qualify for workers comp? Or those who don’t want to sign up for that kind of coverage? That’s where workers compensation exemptions come in.
What is a Workers Comp Exemption?
A workers comp exemption means that a business or employee is not legally required to get workers compensation insurance coverage. Companies that apply for such exemptions don’t have to provide workers comp insurance to certain employees, such as independent contractors. For employees, exemptions mean that they are left without insurance coverage when faced with work-related injuries or illnesses.
Businesses can exclude certain types of employees fully from coverage, or exclude some employees in certain situations. Workers comp exemptions can apply to individual employees or groups, or to the business as a whole. Since the price of workers compensation insurance is based in part on payroll, workers comp exemptions can reduce the overall cost of insurance coverage for businesses.
The kinds of exemptions available to businesses and employees are different for each state, since each state has different workers comp insurance laws. The most common types of exemptions have to do with the number of employees that a business has, since most states require insurance coverage for businesses with one or more employees.
Workers Compensation Exemptions State by State
Workers compensation insurance is determined and regulated by state governments. As a result, which businesses and employees qualify for workers comp exemptions is different from state to state.
The first step in learning about whether your business or employees qualify for an exemption is to take a look at the state-by-state differences and review the available options in your state.
While the majority of states (and the District of Columbia) require businesses with at least one employee to have workers compensation insurance, other states have a higher employee threshold:
- 3 or more employees: Arkansas, Georgia, New Mexico, North Carolina, Virginia
- 4 or more employees: Florida, South Carolina
- 5 or more employees: Alabama, Mississippi, Missouri, Tennessee
In addition to headcount requirements, it’s also important to know the types of employees that are exempt state-by-state and any differences based on different industries.
Any business or worker interested in requesting an exemption should consult their state’s insurance or workers compensation board, such as those for California, Florida, New York, and Texas. Embroker provides a resource link for each state here.
Businesses and Employees that Qualify for Workers Compensation Exemptions
Despite the differences between states, there are certain types of businesses and employees that are generally exempt from workers compensation insurance.
Types of Employees:
- Employees with few work hours or small earnings per year
- Employees who only work a certain number of days per year (such as in agriculture)
- Casual employees with irregular work days/hours
- Volunteers and unpaid interns
- Independent contractors
Businesses & Business Owners:
- Sole proprietors
- Business owners
- Executives & managing members
- Members & customers of limited liability companies (LLCs)
- Corporate officers who own company stock above a certain percentage
Employment Categories & Industries:
Depending on the state, workers and businesses in various industries can be exempt from workers compensation insurance. These include:
- Federal government workers (since the federal government has its own workers compensation program)
- Farming & agricultural workers
- Domestic & household workers (including cleaners, cooks, and gardeners)
- Family & private household members (workers employed by their own relatives)
- Railway workers (covered by the Federal Employers’ Liability Act, or FELA)
- Maritime workers (covered by the Longshore and Harbor Workers Compensation Act, or LHWCA)
- Workers in specialized categories, including real estate agents, clergy members, and taxi drivers
Navigating the different laws and regulations on workers compensation insurance and exemptions can be a daunting task. When in doubt, it’s always advisable to consult with an expert you can trust, such as an experienced agent or broker.
Business Owners, Independent Contractors, and Self-Employed Individuals
A business owner who does not have any employees is a sole proprietor. That means that more likely than not, they will not be required by state law to buy workers compensation insurance.
Sole proprietors, as well as partners and LLC members in businesses without employees, can apply for workers comp exemptions that apply to their ownership status.
Applying for an exemption can expose business owners to certain risks, however. Any work-related injuries or illnesses, for example, can lead to medical bills far more expensive than the cost of insurance would have been.
Business owners could also be liable for any injury sustained by temporary or contract workers they employ, who will need workers comp insurance. As well, customers might request proof of the business owner’s insurance coverage so that they will not be held liable in case of any injuries or illnesses.
Purchasing workers compensation insurance is a good idea for independent contractors and self-employed individuals even if they are not required by state law to get any coverage. Expensive medical bills are not the only financial effects of any work-related injuries and illnesses. For contractors and self-employed workers, such downtime also means lost income from lost wages during the recovery period.
For businesses who work with independent contractors, there is a clear incentive to demand that those contractors take out workers comp insurance. Any injuries that contractors might sustain while working with a business could cause them to file a lawsuit against the business, regardless of whether the contractors are exempt from mandatory insurance coverage.
How to Apply for a Workers Compensation Exemption
The process for applying for a workers comp exemption is different depending on the state. Some states automatically categorize non-employees as exempt.
Typically, business owners have to complete a form with their states’ regulatory agency and then pay a processing fee to qualify for a workers comp exemption.
A screening process (different in each state) is initiated for businesses that apply for exemptions. The business owner should fill out and submit a form titled “Notice of Election to be Exempt from Workers Compensation” at the nearest workers compensation office.
The form usually requires filling out the following information:
- Employee information
- Description of company/business type
- Proof of up-to-date business licenses
- Proof of business ownership
- If applicable, contact information (about the company’s workers compensation insurance carrier)
- Application fee
Once the application is submitted, the state will either approve or deny the exemption. If the application is approved, the business will be sent a certificate of election as proof of exemption. The employer will then not be required to cover the exempt individuals.
Should You File for a Workers Compensation Exemption?
Now that you know how to apply for an exemption, the question is: should you?
Small business owners, sole proprietors, and independent contractors may find the idea of not having to pay the premiums that come with taking out workers compensation coverage appealing. The financial effects of any work-related injury or illness, however, could be devastating. In fact, it is likely that the costs from medical bills and lost wages would exceed the cost of the insurance premiums.
Applying for a workers comp exemption can save you some money in the short term, but it could end up costing you much more in the long run if you’re forced to pay for any medical expenses out of pocket.
For businesses that employ exempt workers, it makes sense to offer those workers coverage as well because any injuries they might sustain at work could result in lawsuits if they feel that the business is responsible for their injuries and should therefore be held liable.
For independent contractors, having a workers comp policy in place could make them eligible for more contracts with employers that require coverage. That includes many government and large private-sector corporate contracts, since those organizations will want to minimize any risks in dealing with contractors.
What If You Don’t File for an Exemption?
Anyone who decides not to file for a workers comp exemption is faced with two options. They can look for an insurance provider who can offer them workers compensation insurance coverage. Or, if they fail to do that, they risk incurring non-compliance penalties from their state government.
Since every state with the exception of Texas mandates workers compensation coverage, failure to purchase that coverage can lead to significant fines and sanctions. Although the penalties differ from state to state, non-compliance is taken very seriously across states. In addition to hefty fines, most states also impose civil or criminal penalties.
In California, for example, non-compliance is considered a criminal offense. In addition, many states have the power to shut down a business until employees are offered the mandated insurance protection.
Overview: Who Qualifies for a Workers Compensation Exemption?
The bottom line is that most businesses and employees are required to have workers compensation insurance. For those who qualify for a workers comp exemption, it still makes sense to get insurance in case of injuries or illnesses that could end up being costlier than any insurance premiums.
Whether you decide to file for a workers comp exemption or not, the first step is to be well informed about your choices. Consulting with expert insurers and brokers who can advise you about the ins and outs of workers compensation insurance and exemption will help you make the decision that is right for you and your business.