Workers’ Comp FAQ for Startups: What Founders Need to Know

On Day 1 as a startup, you’ll need to pay attention to workers' compensation insurance. Why? Because essentially every employee is required by law to be covered by workers’ compensation, starting with your very first W-2 employee on payroll. Startups often overlook or delay workers’ comp without fully realizing the consequences. Here’s a quick FAQ of what you need to know to ensure you stay compliant with the law.

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What is Worker’s Comp? 

Workers’ compensation insurance is a state-mandated insurance program. It covers medical expenses, lost wages, and other costs if you or one of your employees is injured or becomes ill on the job. It’s important to note that workers’ comp insurance covers injuries and illnesses that occur on the job, while disability insurance covers those that occur outside of work.

Why is it important? 

• Workers’ compensation insurance protects both employees and employers from financial risk due to an injury on the job.
• Employers' liability insurance is included in many private workers' compensation insurance policies. It can help protect your business from financial losses if an employee files a lawsuit against your startup because of a work-related injury or illness.
• Finally, failing to comply with state workers’ comp laws can result in financial penalties and legal issues for your startup. These fines can reach thousands of dollars and accrue exponentially, so it’s important to address workers’ comp right away. Many startups delay obtaining workers’ comp coverage and end up paying a hefty bill.

Who is required to be covered?

• In most states, once you have one non-owner W-2 employee on payroll, your startup is required to provide workers’ compensation insurance.  
• This includes both full-time and part-time workers.
• It includes all employees – whether remote, hybrid, or in-office.
• This also includes founders on payroll, who are considered employees for workers’ comp purposes. (Read below to find out instances where founders are exempt.)

Who is exempt?

• Texas is the only state that does not mandate workers’ comp insurance for W-2 employees. 
• But all other states, including Washington, D.C., require workers’ comp insurance.
• In some states, workers’ comp isn’t required for founder-only startups. For example, New York State exempts startups that employ only one or two founders. 
• In California, an owner/founder is defined as owning at least 10% stock. If your startup is only made up of founders/owners in California, then you don’t have to get workers’ comp coverage. But once a non-owner W-2 is hired, then a policy must be in place for ALL W-2s, with the option for owners to exclude themselves.
• Sole proprietors are exempt from workers’ comp, but still might want to get coverage, as regular health insurance plans usually don’t cover work-related injuries.
• Since state regulations vary, it’s best to check individual state workers’ comp regulations.

What about individual contractors?

• The good news is you don’t have to provide workers’ compensation for individual contractors (1099 workers). 
• The bad news is that a common mistake for startups is misclassifying workers as “contractors” when, in fact, they are actually employees. See this blog post on worker classification for more information.
• Most states use a multi-factor statutory test to determine whether your worker is a contractor or an employee. The level of control and autonomy between employer and contractor is usually a key part of the test. 
• A mislabeled independent contractor can become a costly mistake for your startup. Suppose a misclassified 1099 worker gets carpal tunnel syndrome while working for you; they may go after your business for lost wages, disability, and medical costs, and you’ll be on the hook. 
• It’s recommended that you require your 1099 contractors to carry their own insurance certificate. Workers’ comp audits occur annually, and Certificate of Insurance carriers (COIs) are required to test for 1099 misclassification.
  
  

What are workers’ comp insurance options for startups?

If you have employees working in the State of Washington, Wyoming, North Dakota, and Ohio, you only have one option:

• State-approved workers’ comp insurance plans. The above four “monopolistic” states require companies to purchase an approved workers’ comp insurance plan through the state itself. The entire process is handled by the state, including payroll deductions, premiums, and claims.  Check specific state requirements on the process, as each state varies.

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In ALL other states, you have two types of plans to choose from, which can be a private or a public insurance plan:

• Traditional workers’ compensation plan. In these plans, startups must make an estimated annual lump-sum premium payment at the beginning of the year. This estimate is based on the number of employees on payroll (including any hiring plans). At the end of each year, your insurance company will perform an audit of your premiums based on actual payroll data and settle the difference.
  
  
• Pay-as-you-go workers’ compensation plan. Pay-as-you-go plans allow you to pay monthly or biweekly based on real-time payroll data rather than a lump sum. There still might be an end-of-year audit, but since you’ve been paying regularly throughout the year, there shouldn’t be a balance to settle.

How do I set up workers’ comp for my employees?

• Public state insurance: If you’re looking for simple, standalone workers’ comp insurance coverage and your employees are all in one state, a public state fund might be the way to go.  And remember, if you have employees in Washington, Wyoming, North Dakota, and Ohio, you must sign up for the state workers’ comp plan for those workers.
  
  
• Private insurance: However, if you have employees across multiple states, it might be better to talk to a broker about a private multi-state insurance plan. Private insurers tend to bundle and quote workers’ comp coverage with other coverage, such as General Liability. HR Payroll vendors often offer private workers’ comp insurance directly or through partners, enabling startups to streamline payroll deductions and premiums.
  
  
• Double coverage: Finally, if you have any employees in the above four “monopolistic” states, it’s okay to offer double coverage—both a state and a private plan. 

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Do I need to update my insurance plan continuously?

Absolutely yes. As a startup, you will likely be growing and hiring new employees as you raise funding and secure your first customers.

If you hire employees in new states not initially covered by your private multi-state insurance plan, you need to report this to your insurance carrier. This is to ensure the worker and the state are added to your coverage. Suppose you don’t report it, and an on-the-job accident occurs. In that case, you won’t be covered, and you’ll have to pay for medical expenses and lost wages for impacted employees out of pocket–not to mention you’ll also be liable for penalties and lawsuit risks. Unfortunately, startups often forget to report new hires in new states, and you’ll want to avoid making this rookie mistake.

If you are using a traditional workers’ comp insurance plan, ideally, you’ll want to account for hiring plans in your upfront lump sum. If not, during the annual audit at the end of the year, you’ll have to settle the difference.  And this can impact your startup’s cash flow management. 

Also, note for the above situations, the opposite is true if you fire or lay off employees in various states. You’ll need to report this change to your carrier as well.

How Every can help your startup comply with workers’ comp laws

• Every, an all-in-one solution for HR, Payroll, and Compliance, ensures your startup stays compliant with state and federal labor regulations like workers’ comp.
• Every offers built-in notifications to alert founders when their startup's size triggers specific federal and state labor regulations across all 50 states. So you’ll never be in the dark. 
• As soon as your first W-2 employee is on payroll, Every will send you a notification alert to sign up for workers’ comp, as it relates to the specific state your employee is working in.
• Every offers traditional private workers’ comp insurance coverage for startups through our partner, Coverdash. We also handle all the heavy lifting, including streamlining reporting during annual audits.

‍Find out more about how Every can help your startup with HR, Payroll, and Compliance. [Request demo]