For New Employers or Small Employers

A question is often posed to us by new businesses or small businesses regarding if and when they need to obtain Workers' Compensation coverage, and how they go about doing so.

The specific criteria about when an employer is required to obtain valid and approved Workers' Compensation coverage (usually, but not always, as an insurance policy) can vary significantly from state to state. Remember that Workers' Compensation is an obligation imposed upon employers by state statutes, so there isn't a single national standard. Thus an employer needs to check what the specific rules are in the particular state where the employer has operations.

In general, most states impose Workers' Compensation obligations once a business has employees. Some states exempt very small employers that have only a very few employees, but some of these states are in the process of re-thinking such exemptions, so it can be very important to check what the current rules are in a particular state.

It is also important to keep in mind that, in most states, a business can have Workers' Compensation obligations imposed on them for independent contractors if those independent contractors don't carry their own Workers' Compensation insurance.

So a business can cross the threshold where Workers' Compensation coverage is required without technically having employees, if that business uses independent contractors or sub-contractors that don't have their own Workers' Compensation insurance.

Some states, however, allow sole proprietor independent contractors to opt out the Workers' Comp system, so that companies that use their services do not incur Workers' Compensation responsibilities for such contractors. Such states typically require that those contractors register with the state and obtain a certificate.

Most small businesses, and many new businesses that might not be considered "small" by many yardsticks, have difficulty obtaining Workers' Compensation insurance through what is known as the 'voluntary market.'

Since in almost every state the only practical way for most employers to meet their Workers' Comp obligations is through insurance coverage, this means that if coverage isn't available voluntarily from some insurance company, the employer must use the Assigned Risk system in a particular state.

An Assigned Risk system is the way that states make sure employers can get Workers' Compensation insurance even when insurance companies aren't inclined to accept a particular employer voluntarily.

In most states the Assigned Risk system is a pool administered by the NCCI, the National Council on Compensation Insurance. These Assigned Risk pool programs issue Workers' Compensation insurance policies from participating insurance companies, but the premiums and claims go into the pool. The premiums paid for Assigned Risk policies is often much higher than what would be available through the voluntary market

In those states that operate a State Fund for Workers' Compensation coverage (like California and New York) the State Fund operates as the Assigned Risk system for those states. Take a look at our directory for information about the various states.

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