Article Reviewed by a licensed insurance professional: Sam Meenasian (CA dept of insurance license #0F75955).
Estimated reading time: 8 minutes
Key Takeaways
- Many small contractors incorrectly believe they do not need workers’ comp coverage due to their size or type of work.
- Workers’ comp is often legally mandated and provides essential protections for businesses and employees from financial burdens caused by workplace injuries.
- Even temporary or subcontracted workers can lead to costly claims, making it crucial for small businesses to ensure proper insurance coverage.
- Most states require workers’ comp for any employee, regardless of their employment status, and misclassification can lead to severe penalties.
- Having a Certificate of Insurance (COI) is vital for bidding on jobs and protects the business from legal and financial issues related to accidents.
So many small contractors in the arts just assume that they don’t need to have workers’ comp coverage. They believe a lot of incorrect things about their company. They think that they are only hiring people for a few tasks here and there, that they are only using day labor, or that their company is too small to be impacted by issues that require expensive workers’ compensation coverage.
The reality is somewhat different, however. Many small business owners don’t realize just how present the risks are for their industry. Even if you don’t have full-time workers throughout the year, you need to make sure that you are not creating a huge coverage gap by skipping workers’ comp coverage when you do have people working on projects with you.
Workers’ comp is actually often mandated by law, and you should understand the risks that are associated with “skipping over” this coverage for your business. You need to be clear about the very real risks associated with operating without the required insurance coverages so that you don’t make costly errors that cause you to have to close your business for good.
The Law and Workers’ Comp Coverage
In the US, workers’ compensation is managed by each state in its own unique way. Most states require workers’ compensation coverage by law. States like Texas don’t, but that doesn’t mean that you shouldn’t have this coverage in place.
Whether workers’ compensation is mandated or not, and whether it is state-run or not, this policy provides valuable protection for any company. When you have workers’ comp in place for your business, injured staff will get support to pay for medical bills, lost wages, and even retraining to work in other fields due to the severity of their on-the-job injury.
If you cannot afford to pay for all of this out of pocket, you should be sure that you have workers’ compensation coverage in place to protect your company.
There isn’t a specific workers’ comp policy laid out by the federal government, since the states are in charge of this kind of insurance. However, there is federal protection for workers through OSHA, federal contracting rules such as the Davis-Bacon Act, and IRS worker classification rules that affect the premium you pay for your policy.
Why Artisan Contractors Need to Care
You might still be shrugging your shoulders. This doesn’t apply to you. You are too small a company. There are a few things you need to be aware of to truly understand your risks.
One in five deaths on the job happens in the construction field each year. These people were not always working for giant corporations. Sometimes, they are working for small businesses on a temporary basis for a short-term project when they are killed.
Additionally, your small business will have a high payroll, which means high exposure. Your payroll might be a huge part of your annual net profit each year. You cannot afford to pay hundreds of thousands of dollars for claims related to on-the-job injuries.
Last of all, but certainly not least, many small businesses in the US have contractors working for them who are not properly classified to avoid paying workers’ compensation. The government looks for these kinds of misclassifications and penalizes businesses heavily for intentionally misclassifying staff.
If You Have Employees, You Need Workers’ Comp
In most states, the law requires that if you hire a single staff member, you must carry workers’ compensation insurance. This is true even if this person is a seasonal hire, a part-time worker, a family member, or someone who is paid in cash.
California requires workers’ comp coverage for one or more employees, and New York requires all businesses to follow strict payroll and worker protection laws, regardless of size.
You are not automatically exempt if you are a single-owner-operator business. You might be able to file an exclusion in these instances, but not all types of businesses can seek these kinds of exceptions. Construction is one such industry where you will not be able to exempt yourself in most cases.
Subs can create problems as well. They are required to have their own insurance in most states, and you need to see the POI before you allow them to do any work for your business. Make sure that you are declared as an additional insured on their coverage while they are working for your business.
What Causes Workers’ Comp Claims?
Lots of small business owners have never had to file a workers’ comp claim. That is a great thing to be able to say about your business, but you will almost certainly have to file a claim at some point. You need to know what kinds of situations lead to claims so that you understand when it’s time to get a claim opened up.
Common accidents that require claims are things like back injuries, slips and falls, repetitive motion injuries, heat exhaustion, eye injuries, and hand injuries.
The average workers’ compensation claim costs $40,000. Medical bills for these claims can easily reach into the hundreds of thousands of dollars. Most businesses cannot afford to pay for even a quarter of this cost out of pocket.
Remember that a single claim can halt your business operations entirely, trigger audits, increase your premiums for years to come, and lead to missed or canceled contracts.
Real-World Examples
A common situation that can lead to issues is hiring temporary workers. These people often don’t appear on the payroll. There are no hiring documents. If they fall off a ladder and are severely injured, they still count as your employee at the time of the injury. You will still have to pay for their medical bills, and you will probably be sued for negligence. You might also be fined by the state for noncompliance.
Another common problem is subs. Many people hire them and take them at their word that they have the necessary insurance in place. If they do not, you will have to pay for the damages they caused, you could be sued by the person you are working for, and you will probably be audited by the IRS.
You always need to be covered for the worst-case situation, not the most favorable outcomes. While this can feel like a negative way to look at your business, being properly protected can mean keeping it open or having to close it.
Certificates of Insurance Matter
Even small businesses need to be able to show a COI to bid on specific jobs. This is also proof that you can follow the law and value the well-being of your staff and customers. You should be sure that your COI includes the policy number and date of work, the correct class code, and information about workers’ comp coverage and liability protection.
The state can request COI, payroll records, contracts, and proof of payment if a legal case is opened against your business. When you don’t have proper documentation for your staff or proper insurance for your business, you will immediately be opened up to costly legal battles that you might not be able to afford.
State penalties for non-compliance can be as high as $100,000. Different states charge different penalty amounts for different kinds of mismanagement. It is never ideal to take this risk. You should ensure your business is properly covered and protected so you don’t negatively impact your company’s well-being, future viability, or reputation.
Since workers’ comp and proper insurance coverage are almost always required to bid on jobs, you also need this kind of insurance protection in place to be able to grow your business and seek new jobs. Municipal and government work almost always requires COIs to be submitted with your bids. However, many smaller jobs will require this kind of proof as well.
Working on quality jobs means having quality protection in place for your company.
Trades That Are Most Likely to Be Impacted by These Mistakes
Plumbers, electricians, welders, handymen, painters, concrete companies, and HVAC companies are the most likely to be impacted by errors of this nature. When companies are asked why they didn’t have the right insurance in place, they will make many statements that are untrue. They might indicate that they thought their liability coverage would handle workers’ comp. They might say that they had the people working for them sign a waiver. They might suggest that paying in cash means they don’t have to help someone who was injured on the job.
These statements are myths, and believing they are true can put your business in a difficult situation. You will never regret having the proper insurance in place for your business when it comes time to file a claim. Taking the risk of operating without insurance protections is never worth it.
Things to Remember
Workers’ comp coverage is required in most states by law. If you have subs, they need to carry their own insurance, and you need to have a COI on file proving that they have it. You need insurance to protect you against paying out of pocket for on-the-job injuries, being sued, and losing your business. Misclassification or intentional misunderstanding of workers’ status will land you in big trouble with the government and with your insurance company.
USA Business Insurance can help you secure the right insurance protection for your company. You can count on us for transparent, easy-to-access quotes that make it simple to get the workers’ compensation and other business protections you need for peace of mind.
