How Does a Employees’ Compensation Exemption Work?

In most states, when you employ workers, you must take out workers’ compensation insurance. This is a special type of public liability insurance that covers the cost of workplace injuries. However, most states also have one or more employee exemptions so you don’t need to set guidelines for specific people in the company. Qualifying for an employee exemption can help save the high cost of employee compensation insurance premiums for at least a few employees.

What is an Employee Compensation Exemption?

An exemption from employee compensation means that a company does not have to offer employee compensation insurance to certain employees or partners. The employer can save what the coverage would cost as the price of the employee compensation insurance is based in part on the payroll. Excluding parts of the payroll reduces the overall cost.

However, this is not without risk, and there are certain things you need to know about exemptions from employee compensation insurance. If you do not have employee compensation with you for certain employees, they are not protected by a policy in the event that they are violated at work. While you won’t break the law by not having a policy, if the injured party believes you are responsible for their injuries, you are subject to a lawsuit.

For sole proprietorships, the risk of injury can mean high medical costs and a loss of income. Imagine you are a sole trader working as an electrician with no employee insurance. You trip over your tools, fall and break your leg. You will be unable to work for six weeks, you will lose much-needed income, and your health insurance will deny your claim because the injury happened at work. Since you don’t have employee compensation insurance, you will have to pay the bills out of your savings or run up debts.

Who is entitled to an exemption from employee compensation?

Each state identifies the parties that are exempt from workers’ compensation insurance. Check with your state’s Department of Labor Compensation to find out exactly who qualifies as this varies from state to state.

As a rule, most states exempt those who are self-employed or independent. It is assumed here that the self-employed person is willing to take the risk associated with the job and will not sue in the event of an injury.

Here are some other common types of workers who are eligible for exemption in many states:

  • Government employees
  • Volunteers
  • Entrepreneurs and partners
  • Railroad workers
  • Farm workers
  • Sea workers
  • Domestic and domestic workers

There are also exceptions for certain types of claims. This means that not every injury or illness suffered in the workplace is covered if the injury is exempted.

Bottom line: Certain employees may be exempt from employee compensation insurance. Make sure you know the laws for your state and type of business.

Here are some common exceptions to claims:

  • Injuries from horse play
  • Mental health problems not caused by work
  • Self-inflicted injuries
  • Injuries sustained as a result of violating safety rules, company policies, or laws
  • Injuries from alcohol or drugs

Like the employee exemptions, the exemptions from entitlements vary from state to state.

Examples of employee exemptions in different states

Because state laws are different, the exceptions also apply. Don’t assume you’re eligible for an exception just because you see it listed for another state. Check with your state’s Department of Labor or Employment Compensation Board, as well as your own legal advisor, to make sure you are not breaking the law.

Here are some examples of exception variants by state:

  • California:: Entrepreneurs, officers and directors of limited liability companies are entitled to an exemption.
  • Colorado:: Independent contractors are exempt, unless they are building contractors. In this case, they must either have coverage or formally decline coverage.
  • Florida:: No more than three construction company executives are allowed to apply for an exemption, while non-contractors must own at least 10% of the LLC.
  • Illinois:: Business associates, LLC members, and officers may be exempt from tax unless they are engaged in particularly hazardous activities such as B. Construction work or truck transport.
  • New Jersey:: LLC members and sole proprietorships are exempt, while corporate executives are not exempt.
  • new York:: Companies without employees or with employees working outside the state are exempt from coverage.
  • Washington:: Executives of public corporations, private corporations and family companies may be exempted under certain circumstances.

This is just a selection of the types of exceptions you’ll find under States. When checking to see if you are exempt from coverage, check if your state has a threshold portion of 10% or 25% to qualify for the exemption. Always consult your legal counsel before establishing workplace policies regarding employee compensation, insurance, and waivers.

Bottom lineBottom line: Each state has different rules and exceptions for employee compensation. Make sure you are working with an insurer who is familiar with the regulations in which you do business.

How do I apply for an exemption from employee compensation?

Because laws, policies, and procedures vary from state to state, you should check with your local workers’ compensation agency to find out how you can benefit from the exemption.

In many places, you will be required to submit a form often referred to as an “Employee Compensation Exemption Notice”. Although the name may vary slightly, the form requests much of the same information regardless of your state. Here is some of the information needed to handle the exception:

  • Business entity type
  • Industry
  • Current business licenses
  • Employee details
  • Deed of ownership
  • Information about the insurance company

Fill out the form and submit it to your state’s Workers Compensation Authority. Often times, if you are a sole proprietorship but pay yourself through payroll, the state is informed about employee liability. You will be contacted by the board of directors to provide proof of insurance or proof of exemption.

Once you have the exemption, you will receive a certificate of your choice to be exempted. Keep this with your company’s important documents in case you are ever asked about it.

If you want to take out employee compensation insurance

Even if you are exempted by law, there are times when it only makes sense to take out employee compensation insurance. If you are concerned about being injured at work and you cannot afford to pay when you are injured and unable to work, then you should get a policy.

Remember that just because you are exempt you cannot get workers compensation insurance. The process for getting a policy follows the same guidelines for you as it does for any other employee. The insurance company wants to know what you do in your industry, what you do for your job every day, how much you earn and whether or not you were entitled.

An employee compensation policy also makes it easier to hire employees to work part-time. You may have a big job that you can’t do on your own and you may need extra help for a month or two. If a policy already exists, you’ll know you’re compliant when reaching out to people.

Equally important, sole proprietorships and independent contractors may be eligible for larger assignments and contracts if they have an employee compensation policy. Many government contracts require guidelines to eliminate risk to the government agency offering the contract. This also applies to large private sector contracts where large companies want to be sure that they are not absorbing the risk of compensation from your employees.

If you are unsure whether you need an employee compensation policy or meet the exemption rules, it is a good idea to shop around and compare the plans of the best insurers. They will walk you through the requirements in your state and the pros and cons of this exemption as you qualify.

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