Do All Small Businesses Need Workers Comp Insurance?

Workers compensation insurance protection can be essential for some employers who conduct business physically in potentially dangerous situations. It is the law in most industries for companies with as few as three employees. However, the current economy has also included many digital service companies that have little need for workers’ compensation protection

Many workers are independent contractors participating in the “gig” economy. These workers face little to no danger while working outside of potentially breaking a fingernail, so the practicality of the law does not apply.

In the worker’s compensation system, the employer is shielded from tort liability. Employers are actually exempt when they hire contracted workers. However, there are still many employment situations where the workers’ compensation law does indeed apply to a very significant degree, and here is why.

Purpose of the Workers’ Compensation Insurance Program

There was once a time in U.S. history when employees were not protected by insurance programs like workers’ compensation. When they were injured, many of their injury claims were denied due to contributory negligence legal doctrine. Many workers could not even afford legal representation. This is problematic because employees were required by law to prove the injury claim.

This was remedied by workers’ compensation implementation with the purpose of providing quick medical attention through an insurance policy for those who happened to be injured while working.

Exemptions by Company Size

States have authority under federal law to implement the type of workers’ compensation insurance system they feel is best suited for the particular state. This can include the types of businesses that are excluded from compliance. Some states exempt only sole-proprietorship businesses with no employees, while others allow for small companies with fewer than five employees to be exempt as well.

Certain workplaces, such as construction companies, are required to protect all workers. This is done for the protection of both actually, and all business owners should consult with a workers’ compensation legal professional when making the decision to purchase coverage. For some, coverage may not be optional.

How the Workers’ Compensation System Works

Workers’ compensation protects employers just as it does employees with consideration on both sides. The problem with workers’ comp insurance is that many employees carry the insurance only to fight when claims are filed. They often deny claims based on arguments that injuries did not happen at work or some other form of reasoning.

Insurance companies likewise can be very difficult, even when they are exempt from additional legal action based on general damage claims for ongoing problems in life due to the injury. This includes damages like pain and suffering or loss of consortium.

Employers are exempt from general damage claims unless they have failed to comply with all OSHA rules and regulations for their particular industry. In addition, unreasonable work conditions can also result in standard general damage lawsuits.

The Dilemma for Small Businesses

The issue for small businesses is usually one of expense versus protection. The general damage insulation is very important for small businesses who must comply with the law, but the cost of maintaining insurance can be a major portion of a small business operational budget.

The additional expense actually often keeps many businesses from even opening, and also contributes mightily in decisions to close an operation when input cash flow is down. This business requirement alone influences many decisions to contract employees and set up structural legal firewalls between workers and employers.

There are indeed many business models in the digital age that can avoid the need to carry workers’ compensation insurance. But for those who are required, it is always important for either side embroiled in a workers’ compensation issue to have solid legal counsel when claims are being settled.


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