What are the penalties for not having workers’ compensation?

Small business owners are often looking for ways to cut costs and improve their bottom line. However, one area where they shouldn’t skimp is workers' compensation insurance.

Some business owners may be tempted to think of workers' comp insurance as an unnecessary expense, especially if none of their employees have experienced a serious work-related injury. But business owners who don’t carry workers’ comp coverage risk facing fines, or even jail time, depending on the laws in their state.

Almost every state requires businesses to carry workers’ comp insurance once they hire a certain number of employees. The threshold varies by state, but the majority of states require employers to purchase coverage as soon as they hire their first employee. However, in some states employers may not have to obtain workers’ comp until they’ve hired as many as five employees.

Business owners should check the laws for their state to make sure they are in compliance with local workers’ compensation laws. A business found in violation of workers’ comp laws could face charges of fraud as well as other penalties.

Not only could employers be fined or jailed for violating workers’ comp laws, they could also be sued. If an employee is injured at a company that is required to have a workers’ comp policy – but doesn’t – the employee could file a lawsuit against the employer to recoup the cost of medical expenses.

Normally, workers' compensation insurance contains an exclusive remedy provision that protects businesses from civil lawsuits over employee injury as long as workers' comp benefits cover the incident. Without that coverage, business owners could easily find themselves on the receiving end of a lawsuit from an injured employee.

Some businesses can operate legally without workers' compensation insurance. Typically, these businesses:

• Are sole proprietorships with no employees
• Are located in Texas or South Dakota (where workers' compensation is voluntary for most employers)
• Only employ members of the business owner’s immediate family, depending on the state
• Haven’t reached the minimum number of employees before workers’ comp coverage is mandatory

Of course, there are always exceptions to these rules.

Even though most sole proprietors are not required to purchase workers’ comp coverage, they may need to purchase a policy if they work in a high-risk industry, like construction.

Also, since workers' comp laws vary by state, a business that is legally operating without coverage in one state may be operating illegally in another.

For example, if a business has employees based in other states, they will need to follow the workers’ comp law for each state where an employee works. That means if a business is based in Texas, where workers’ comp is not typically required, but an employee works in New York, where coverage is mandatory for all employees, the business owner would need to purchase coverage for the New York employee or potentially face legal repercussions.

The penalties for not carrying workers’ comp when legally required to do so can have a profoundly negative impact on a business. Fines deal a financial blow to any company’s bottom line. In extreme situations, they could even force a business to close.

The stakes are high for businesses without proper workers’ comp coverage in place. To avoid lawsuits, fines, imprisonment, or a business closure, business owners should talk to a licensed insurance agent to ensure they are in compliance with local laws for workers’ compensation.