Understand the Basics of Workers' Compensation for Contractors

Build Your Business

Author: Linda Light | May 30, 2023

Accidents happen. And, when they do, they can be expensive and dangerous. When workers get hurt on the job or develop a work-related illness, your company can be held responsible. A workers' compensation plan helps you prepare for those unexpected accidents and protect your business at the same time.

Contractor bending over with lower back pain.
Workers' compensation protects you and your employees.

In most states, every business must have some form of workers' compensation. However, the laws vary, so make sure you know what is required in your state or province.

Protection Contractors Rely On

The employer, not the employee, pays for a workers' comp plan. A plan typically covers:

  • Medical expenses related to on-the-job injuries or work-related illnesses.

  • Lost wages (a portion of what your employee would have earned if they had been on the job).

  • Legal fees if an employee files a lawsuit against your contracting business.

States and provinces that mandate workers' comp generally agree to protect the rights of the employer and the employee. Employees are compensated for their medical expenses and a portion of their lost wages, but they give up the right to directly sue their employer for work-related injuries or illnesses. Employers also agree to cover employees with insurance that provides benefits in the case of a work-related injury or illness, limiting company liability.

Keep in mind, notes Field Pulse, in states where contractors don't have to provide this benefit, their companies are vulnerable to financially devastating lawsuits.

Who is Covered?

If you have four or more employees working for you, either full- or part-time, workers' comp is required and should cover full- and part-time employees, minors and sometimes subcontractors.

Though workers' comp is available in all 50 states, it's best to check with your state agency or insurance provider about the local regulations that dictate which employees may be covered.

If you're the sole proprietor, you may be exempt, but you should weigh your options. If you can show that you are doing the work of an employee of the company as well as owning and managing, you may be eligible for benefits. If you, as the business owner, are injured on the jobsite and cannot work, your health insurance should cover any medical costs. Ask your health insurance provider about this potential scenario.

What Factors Affect the Cost of Premiums?

There is no one-size-fits-all rate. Your premiums will be affected by many factors, such as:

  • Your employees' risk: Riskier contracting jobs usually have a higher rate.

  • Your annual payroll: This is used to calculate your annual insurance costs.

  • Your claims history: The number of claims you've had and the severity of the accidents can raise your premium.

  • Your location: Higher-risk areas usually have higher premiums.

The size of your crew and the overall insurance market at the time you obtain your policy may also influence prices.

What to Do When an Injury Happens

When someone has been injured, the first thing an owner or company should do is to make sure the injured employee receives immediate medical attention. Once the dust has settled, you'll need to complete and file a claim of the injury. Finally, you'll have to provide necessary documentation to your workers' comp insurance carrier.

The amount employees will be compensated depends upon state laws, the severity of the injury and the time spent off work. According to the OSHA Education Center, workers' compensation is typically two thirds of a worker's wages at the time of the incident. No matter how large or small the injury, you may never fire or penalize an employee who has taken advantage of workers' comp.

Safety training and personal protective equipment help keep your worksite safe, but they aren't enough to keep it accident-free. Even the most seasoned worker can fall prey to a work-related accident or illness. Workers' comp insurance protects your crew and your business.