Who Qualifies for a Workers' Comp Exemption?
Workers' compensation is a crucial safety net for employees who suffer job-related injuries or illnesses. It provides medical care, wage replacement, and other benefits that help them through tough times.
But only some businesses are required to carry workers' comp insurance. In some cases, you might qualify for a workers' comp exemption, which means you won't need to have this insurance for yourself or the people working for you.
Let's learn more about a workers' comp exemption, who qualifies, and when to apply.
What Is a Workers' Compensation Exemption?
A workers' comp exemption refers to people or businesses that don't have to provide workers' compensation insurance coverage for themselves, their workers, or both.
Generally, a workers' compensation policy is mandatory for most businesses with one or more employees because it protects workers from injuries or illnesses they get on the job. And it protects businesses from getting sued.
In many places, you'll need coverage to get a business license. However, specific rules and qualifications for exemptions vary by state and industry.
It's always a good idea to double-check your state's criteria. Some people you can talk to include an attorney (workers' compensation, employment, labor law, or insurance law), your state's workers' comp division or agency, or an experienced insurance agent or broker.
Who Can Get a Workers' Comp Exemption?
Some common criteria for being exempt from workers' compensation insurance include being an independent contractor, a sole proprietor, or a business partner.
But as we'll see below, other groups may qualify too. To see if you're eligible for a workers' comp exemption, you'll need to consider various factors, such as your industry, role within a company, employment status, and state laws.
Here's a general idea of who may qualify for an exemption:
Businesses and Business Owners
- Businesses with a limited number of employees or smaller payroll sizes
- Self-employed individuals
- Independent contractors
- Sole proprietors
- Limited Liability Company (LLC) members
- Officers of a corporation
- Executive and corporate officers (CEO, CFO, COO)
- Board of Directors members
- Business partners
Employees
- Part-time employees working only a few hours per year
- Casual workers (irregular work hours and days or no guarantee of ongoing employment)
- Seasonal workers (hired for specific events or projects or a certain number of days annually)
- Family members working for you
- Volunteers
- Unpaid interns
- Commission-based salespeople
Jobs and Industries
- Domestic workers (housekeepers, gardeners, nannies, cooks)
- Railroad workers covered by the Federal Empoyers' Liability Act (FELA)
- Farm and agricultural workers
- Maritime workers covered by the Longshore and Harbor Workers' Compensation Act (LHWCA)
- Agricultural workers
- Federal employees (the government has its own workers' comp program)
- Real estate agents and brokers
- Religious workers (ministers, priests, rabbis)
- Professional athletes
- Taxi and truck drivers
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Which States Have Unique Workers' Comp Exemption Laws?
Most states require workers' compensation insurance if you have a single employee. However, some states have lower or higher thresholds:
Workers' comp optional: South Dakota, Texas (needed for government contracts)
3+ Employees: Arkansas, Georgia, New Mexico, North Carolina, Virginia, Wisconsin
4+ Employees: Florida, South Carolina
5+ Employees: Alabama, Mississippi, Missouri, Tennessee
Exceptions for Construction Industry
But these states mentioned above go back down to the one-employee threshold for construction businesses:
- Florida
- Missouri
- New Mexico
- Tennessee
There are a few more states worth singling out for their unique workers' comp laws:
California: Roofers and the licensed contractors listed below must all carry workers' comp insurance, even if they don't have employees.
- Concrete
- Heating
- Ventilation
- Air-conditioning
- Asbestos abatement
- Tree service
Florida: The state has different exemption rules for corporations and LLCs in and outside the construction industry. For example, at most three officers or members in a construction business can be exempt from workers' comp.
New Jersey: Seasonal workers paid wages or salaries with tax deductions need to have workers' comp insurance.
New York: LLC members are treated as employees, and unless they specifically waive coverage, they're entitled to workers' compensation insurance.
Tennessee: Up to five corporation, LLC, or partnership owners can qualify for an exemption. Business owners in the construction industry with at least a 20 percent ownership also qualify.
How Do You Get a Workers' Comp Exemption?
If you want an exemption, the most important to-dos are to contact your insurance company or broker and follow the appropriate steps to submit your notice of election.
Here's what to know in more detail:
Step 1: Talk to Your Insurance Agent or Broker
Your insurance agent can provide valuable advice on the steps you need to get a workers' comp exemption. They'll also tell you if you need to fill out a notice of election form and let you know of any important additional information.
Step 2: Submit a Notice of Election Form
If you need to submit this exemption form, you'll hand it over to the appropriate authority, typically the division of workers' compensation in your state.
Some insurance carriers are involved in the process and may charge a small fee to handle the form.
Step 3: Tell Employees About the Changes
As you wait for your submission to be processed, give your employees a heads-up that the company no longer has workers' comp if they're losing coverage.
Your workers will appreciate the transparency and likely feel more comfortable knowing what's happening with their workers' compensation coverage.
Step 4: Wait for Approval
Once your state's division of workers' compensation approves your exemption, they'll issue a certificate of election.
This certificate is important, so store it in a safe place with your other important business documents.
Should You Take the Workers' Comp Exemption?
Deciding whether to take the workers' comp exemption is a personal decision that depends on factors like injury risks in your industry and your ability to pay out-of-pocket if someone (including you) gets hurt on the job.
The construction industry, for example, is one of the most dangerous by number of deaths. Transportation and warehousing come in second, and government contractors come third.
If a worker is fatally injured due to a job-related accident, the average cost is $1.34 million. These costs include wage and productivity losses, medical expenses, and administrative expenses. Workers who pass away may have severe injuries and receive intensive care for a short or extended period before succumbing to their injuries.
For those who get hurt on the job but only have minor injuries requiring a doctor's visit, the average cost is $42,000 per worker.
And personal health insurance won't cover medical care for workplace injuries, so employers can't count on that.
No matter how you look at it, workplace accidents are expensive and can easily wipe out a small business owner's company and personal bank account.
Exempting yourself from workers' compensation insurance can save your business some money in the short term. But it's crucial to carefully weigh the risks of not having a workers' comp policy. You want to make sure that it's a good long-term financial strategy.
Don't Go At It Alone
Complicated workers' compensation laws can make getting the answers you need harder than it has to be. Whether you have questions on workers' comp coverage, exemption eligibility, or how to apply, Hourly's agents can help.
You get more than just an insurance policy with us. Our pay-as-you-go workers' comp insurance premiums keep cash flow predictable.
Monthly workers' comp payments are based on real-time payroll data, not estimates, so you pay exactly what you owe. Not a penny more. And that also means that audit bills are next to zero.
