Workers' compensation insurance

What it covers

Workers' comp is the policy that responds when one of your own people gets hurt on the job: a tech who falls from a ladder, slices a hand on sheet metal or hurts a back carrying a water heater down basement stairs. It generally pays for their treatment and replaces part of their wages while they recover, under benefit rules your state sets.

It is not general liability insurance. General liability is for injuries and damage you cause to people who don't work for you, like a customer who trips over your hose. Once you have employees, you need both.

When you need it

State law decides, and the rules differ widely. Texas, for example, lets private employers choose whether to carry it, but an employer that doesn't must post a notice of no coverage, give written notice to new hires and file notices with the state ¹. Don't assume your state works that way. Before you hire, ask your state's workers' compensation agency or a licensed agent:

• Does coverage start with my first employee, including part-time, seasonal or family help?
• Are construction and trade businesses treated differently?
• Am I responsible for a subcontractor's workers if the sub has no coverage?
• What proof of coverage do I need to keep, and what happens if I go without it?

Your own coverage as the owner

Owners are often handled differently from employees. Depending on your state and how the business is set up (sole proprietor, partnership, LLC or corporation), you may be required to cover yourself, allowed to opt in, or allowed to opt out. If you're not on a policy, workers' comp won't pay for your own injury, so check what your health and disability coverage would do if you couldn't work for three months.

Working alone doesn't always settle it, either. A general contractor, property manager or commercial customer may ask for a certificate of insurance before you start, whatever your state requires.

How the premium works

Carriers generally price a policy from your payroll and the kind of work your people do, so a roofer and an estimator with the same pay cost very different amounts to insure. Many policies are priced on estimated payroll, then audited after the policy year against what you actually paid.

Example: You hire a technician at $25 an hour for about 2,000 paid hours, or $50,000 a year. Suppose your agent's quote for that payroll and type of work comes to $4,000 a year. That's $2 for every paid hour, on top of payroll taxes and benefits. If you price labor from the $25 wage alone, every hour you sell leaves that $2 uncovered. The numbers are made up for illustration.

Common mistakes

• Waiting until day one. Get a quote before you post the job, so the cost is in your prices and the policy is active when your hire starts.
• Calling an employee a sub. A 1099 doesn't settle it. States apply their own tests for who counts as an employee, and they can differ from the IRS test. See independent contractor.
• Not checking subs. Collect a certificate showing a sub's workers' comp before they start, and check the dates. Ask your agent how your policy treats payments to subs who can't show coverage, since a carrier may count them as your payroll at audit.
• Describing the work loosely. If the quote assumes service calls and your crew spends the year on roofs or in trenches, expect the premium to change at audit.
• Leaving it out of your prices. Premium for field crews belongs in your labor cost; premium for office staff belongs in overhead.

How it connects

Safety habits such as fall protection on roof work prevent the injuries that turn into claims. To build the premium into your hourly price, see how to set your labor rate.