Demystifying Workers Compensation for Small Businesses
PJ Hennessey; CIC, PLCS, SBCS – Risk Advisor, Granite Insurance
One of the most common responses I hear when I ask small business owners about their workers compensation insurance is “I don’t need that, I don’t have enough employees” or “All my employees are 1099”.
In the State of North Carolina, the North Carolina Workers’ Compensation Act requires all businesses that employ three or more employees to obtain workers’ compensation insurance. Most businessowners hear that and say, “Great, I only have 1-2 employees so I can save from having to pay another insurance policy.” A common misconception is that while you’re not required to carry insurance coverage with 3 or less employees, as a business owner, you’re still responsible for your employees’ injuries.
For example, a start up landscaping business owner continues to see their clientele grow to the point they need to hire a part-time helper to keep up with demand. With say a $25,000 annual payroll, they’d be looking at roughly $100 per month of Workers Compensation premium cost. A less risky classified job? Likely half the cost.
Compare the cost of a Workers Compensation policy to the average cost of an overnight hospital stay if a serious injury were to occur to the employee on the job, potentially $10,000 per night! Carrying Workers Compensation for businesses with only 1 or 2 employees can also serve as a benefit for your employees, letting them know that you care for their well-being and have an investment into their safety. Workers Compensation Insurance is simply a way to finance the cost of managing your employee’s injuries in the event a loss occurs.
One of the other common misconceptions is classifying your employees/workers as 1099 contractors. While that is a strategic decision employers can make for tax purposes, from an insurance standpoint, an independent contractor is generally considered an employee if two conditions exist:
- Degree of control
- Economic Dependence
In short, if you as the employer have set an expectation and requirement of the employee or “contractor”, such as total hours worked per week, which projects/roles they’re performing, when they can take breaks, etc… A degree of control is present. Economic Dependence is determined based on when it is possible for the employee to suffer financial loss while on the job or not. For example, a true contractor quotes a project and ends up with a higher profit than anticipated at the conclusion (i.e. fewer labor hours or materials cost). In most cases, this would not impact a true employee as they receive an hourly wage.
To conclude, every business owner should be talking with their Risk Advisor or insurance professional about their options and needs for Workers Compensation and other insurance coverages to ensure their business is properly protected.
