The requirements and responsibilities of workers’ compensation laws are important for both all employers and employees to understand. The laws in each state may vary slightly, but protections for workers and employers are essentially the same. One aspect of workers’ compensation is the misconceptions and myths that confuse people about how the process is supposed to work. A few answers to five common myths can help clear up many of these misconceptions.
Myth #1: Only Large Business Need to Purchase Workers’ Compensation Insurance
In most states, all employers who have five or more employees are required by law to have a workers’ compensation policy in force. One exception to this requirement is for an employer who has a business in the construction industry. If an employer is in the construction industry, then they will need a workers’ compensation policy if they have one or more workers on their payroll. Most states require a business in any industry to have workers’ compensation insurance if they employ one or more workers.
Myth #2: Part-Time Employees Don’t Count Towards the Employee Requirements
The status of an employee does not matter when applying workers’ compensation laws. Any employees on the payroll are counted in the total number for a business. This includes any employees classified as full-time or part-time. A business is required to have a workers’ compensation policy if they have at least five employees. One or more employees will still be a requirement for any business that operates in the construction industry.
Myth #3: Family Members Do Not Count Towards the Employee Requirement
This is one aspect of workers’ compensation laws small business owners may overlook. Small business owners who think having four employees may preclude them from having workers’ compensation. The one thing that they may not understand is that any family member, such as a wife or daughter, performing as a bookkeeper is considered a fifth employee. A workers’ compensation policy will be required. Most businesses will not be able to get around the law using this line of thinking.
Myth #4: We Do Not Need Workers’ Compensation Because Most Employees Are Located Out of the State
The physical location of an employee does affect the employee requirement for workers’ compensation insurance. Employees who work in other states are still employed by the business. If a business has more than five employees on their payroll, then workers’ compensation is necessary. The geographic area where they physically reside will not make any difference. All businesses in the state need to adhere to all workers’ compensation laws.
Myth #5: Workers Receive 1099 forms and Not a W-2 So They Are Not Employees
A business cannot simply give their workers a 1099 at the end of the year and classify them as an independent contractor. There is a 20-factor test that was created by the IRS for this purpose. The test is used to determine if any employees actually are independent contractors or an employee. Any employers with workers who have met the standards for being an employee means employers will need a workers’ compensation policy. A business will still need to meet the requirement of having five or more workers.
Employers have many options for workers’ compensation. Most will purchase a policy from a local insurance carrier, or much the same way automobile or other insurance is purchased.
If this is not preferred, then another option is to self-insure. This is done using a group trust or individual trust. If an employer is considering this option, then certain requirements will apply.
However, most businesses in the state typically choose to purchase a workers’ compensation policy from a local agent or directly from the insurance carrier. A business can contact their state insurance department for more information.