Workers compensation is a type of insurance coverage purchased by U.S. employers to protect their business as well as their employees. The coverage is mostly obligatory throughout the country, but laws regarding which businesses are required to carry the insurance (as well as which employees are covered) can get incredibly complicated.
The goal of workers compensation is to protect employers and employees in the case of a workplace-related injury, illness, or death. In the event of a successful claim, the workers comp insurance will reimburse the claimant for lost-wages and medical expenses. In return, workers comp payments preclude most types of employee lawsuits. In other words, when an employee claims workers comp, they largely forfeit their right to sue the employer.
For employers, understanding workers compensation laws can be challenging because the regulations are enforced on multiple levels. First, workers comp laws are principally established state-by-state. Each state legislator has a different policy in terms of which businesses are required to carry the insurance. Typically, this comes down to the size of the business (namely the number of employees or the gross payroll) and/or the type of work it does. Unsurprisingly, high-risk industries like construction and agriculture are more likely to be required to carry workers comp insurance, while lower-risk workplaces may be excused.
Finally, even businesses that are obligated to have workers comp may be able to “exclude” certain employees from the coverage. Historically, higher-level employees—such as directors, LLC members, or corporate officers—were excluded from coverage. Today, these positions are largely included in workers comp policies, but can be excluded so long as the employees are qualified and file the correct documentation. For these individuals, the question then becomes: is excluding myself a good idea?
The Advantages and Disadvantages of Excluding Yourself from Workers Comp
Like any other type of insurance, employers must make regular premium payments to maintain their workers compensation coverage. These premiums are determined by a number of factors, including the type of work (high-risk vs. low-risk workplaces), the number of employees being covered, and the employer’s previous record of worker injury/illness.
If a high-ranking employee is unlikely to get injured on the job, what’s the point of including that individual in the coverage and the subsequent premium calculations? In other words, workers comp can be a business expense with no foreseeable benefit for certain types of workers. This is the strongest—and perhaps only—argument to excluding yourself from your business’s workers compensation policy.
The amount of money saved by excluding yourself will vary. For low-risk workplaces, workers comp premiums are so nominal that excluding yourself from the coverage might not be worth the time or effort. However for higher-risk industries, premiums are markedly higher and the premium paid per-employee can be a notable expense. In these cases, excluding yourself from the premium calculations could save a significant amount of money, especially if multiple high-level employees are excluded over a long period of time.
Before making this important decision, individuals must weigh the positives and negatives associated with workers comp exclusion. Although it may conserve business funds, what would happen if an employee without coverage was injured on the job?
Many believe that their personal insurance will cover work-related injuries; this is often not the case. Owners considering exclusion must first ensure that their personal health insurance covers work-related incidents. If not, they should consult their agent to modify the policy. Even if their personal insurer agrees to cover workplace injuries, the workers comp policy may in-fact be the better coverage.
Before making this decision, both your personal insurer and an experienced attorney should be consulted. Whether the money saved from excluding yourself is worth the changes in insurance coverage is completely up to you, but advice should be sought first. Importantly, only certain types of employees are able to withdraw from workers comp. Before even considering workers comp exclusion, ensure that you are able to do so.
Who is Capable of Exclusion?
As stated earlier, most workers compensation regulations are mandated at the state-level. One thing that states tend to disagree on is which types of employees are excluded (or able to exclude themselves) from coverage. Generally, if an employer is required to carry workers comp insurance, they’re usually required to cover all of their workers. This might change, however, when it comes to high-ranking employees like LLC members or corporate officers.
Some states automatically exclude these high-ranking employees but give them the option to include themselves in the coverage. Other states automatically include them but give them the option to exclude themselves. These stipulations can get incredibly nuanced, and an attorney should be consulted to decipher your state-specific regulations. Many states have special rules for sole proprietors, partners, and general contractors as well.
The bottom line: only a small minority of employees are able to exclude themselves from workers compensation coverage (and just because they can, doesn’t necessarily mean they should). For individuals considering exclusion, it’s important to review your personal health insurance policy for language on work-related injuries or illnesses. Whether the increased risk of exclusion is worth the decreased premium costs will depend on your current workers comp premiums, your personal insurance policy, and your risk for a workplace injury. In any case, the decision should be made with help from an insurance professional and an experienced attorney.