Managing overhead costs is a cornerstone of running a successful business. Labor—or wages and benefits—is often the largest line item in a business’s budget. Among the other expenses related to employees, one of the most basic is workers’ compensation insurance. But what is it and who needs it? What Is Workers’ Compensation? Workers’ compensation, or workers’ comp, is an insurance policy taken out by an employer that covers costs associated with accidents or illnesses suffered by employees while on the job. If an employee is injured at work or becomes sick from the work environment, workers' compensation insurance protects both the employee and the employer. The purpose of workers' comp is two-fold: it provides employees with financial assistance for medical bills or lost wages from injuries or illnesses sustained while working, and it protects employers from the financial burden of lawsuits stemming from employee accidents or illness. What Does Workers' Compensation Cover? Workers' compensation covers medically necessary expenses for injuries to employees working in the “course and scope” of the job. These costs may include medical bills, on-going care, retraining, or funeral costs. Coverage can also include a percentage of an employee's lost wages due to an accident or illness (usually no more than two-thirds of their salary). The scope and duration of these benefits depend on several factors, which vary by state. Income replacement is based on the extent of the injury and whether the disability is permanent or temporary. Some states require income replacement to continue until the employee is able to return to work, while others have a maximum number of weeks benefits may be received. Workers' compensation has some exceptions for coverage—injuries sustained while an employee is intoxicated in the workplace, injuries from a fight started by the employee, emotional injuries not accompanied by physical trauma, and injuries intentionally sustained by the employee. Additionally, injuries sustained while on the way to or from work are not covered. Exceptions vary from state to state, so always check your state's specific guidelines. In addition to injuries sustained in the normal course of employment, workers' comp can provide assistance for employees injured due to natural disasters, workplace violence, or terrorist attacks. If an employee works with toxic materials and develops an illness from exposure, workers' compensation would provide coverage for medical treatment. In return, employees essentially give up the right to sue their employers for costs associated with the injury or illness sustained on the job. With the rising cost of healthcare, one bad accident could be enough to bankrupt a small business without a workers’ comp policy. Workers' comp insurance may be an expense, but compared to the potential cost of a lawsuit, it’s necessary for both the employees’ and the employers’ protection. Do I Need Workers' Compensation Insurance? In a nutshell, yes. While the number of employees varies from 1 to 5 depending on state laws, you must have some form of workers' compensation insurance unless you are a sole proprietor or a partnership. Texas is the only state where workers' compensation is optional for employers. Some industries are exempted from being covered by workers' compensation laws—this also varies from state to state. Your employees are only covered in the states listed on your insurance policy, so check your policy and state laws carefully for guidelines if you have employees operating in multiple states. Eighteen states allow businesses to choose between buying insurance from a private carrier or through a state-administered fund. North Dakota, Ohio, Washington, and Wyoming require the purchase of workers' compensation insurance through their state-administered funds only. All other states allow for the purchase of a policy through private insurance carriers. What Determines the Cost of a Workers' Compensation Policy? Workers' comp premiums are determined by several factors, including company size, industry, and payroll. The inherent risks of an industry can drastically alter the premium of workers' comp policies—a logging or mining company could expect higher premiums than a call center. If an employee is injured or becomes ill while on the job, it should immediately be brought to a supervisor’s attention. While reporting and documentation requirements vary from state to state, supervisors should record the date, time, location, and details whenever an employee reports an accident or illness on the job. Check your state's department of labor website for the correct documentation. Because workers' compensation laws vary so much based on location, always check the laws specific to where your business operates for the most accurate information.