When procuring workers’ compensation for your client, there will be cases where not everyone on the company payroll needs coverage. In other words, those employees (or non-employees) are “exempt” from workers’ comp.
Understanding workers’ comp exemptions can help your clients find substantial savings by making sure workers that need comp are covered, and workers that are exempt have their own insurance. However, just because the state allows an exemption for a handful of employees, doesn’t always mean it’s smart for your clients to take it.
Here’s what you need to know to understand when to use a workers’ compensation exemption (and when to skip it).
Which employees typically qualify for a workers’ comp exemption?
The most important thing to know about workers’ comp exemptions is that they are extremely limited in scope—unless you live in Texas, where you can “opt out” of workers’ compensation altogether. The good news is that workers’ comp exemptions are easy to understand. Why? In part, it’s because they apply in a very limited set of circumstances. The bad news is that for many businesses, there’s no money to be saved. Your clients are unlikely to have many, if any exempt, employees.
Although there are differences between states, you can think about exemptions this way: workers’ comp exemptions only apply to specific employee/worker types (e.g., contractors, business owners, directors, or LLC members) or workers in specific industries (i.e., agriculture, railroad, maritime, and domestic/household workers).
There is a big caveat to the exemptions by employee type. Exemptions are less likely to apply in safety-critical industries, like construction, where both state regulators and the wider industry require coverage for everyone.
Why do these exemptions exist? For employee types like business owners, exemptions allow flexibility for very small businesses, permitting business owners to take a certain amount of risk. For example, if your client runs an LLC with three members and two employees, the owner only needs to cover those two employees. This saves the client money while also protecting the few workers they have.
However, industry exemptions are different, and the underlying rationale often comes down to federal and state labor laws. We’ll dive deeper by industry below.
Farm worker exemptions
Agriculture is the perfect example of a safety-critical industry. In 2020, there were 11,880 injuries in agricultural production serious enough to require days away from work, and there were 410 fatalities in private, crop, animal, and aquaculture production in 2019.
So why are there exemptions?
It’s a matter of law. Federal labor laws often don’t extend to farm employers, and farms are also not regularly named in state workers’ compensation regulations. Even at the state level, the statutes don’t apply evenly to all farm employers: they might have exemptions for only casual or seasonal labor or only family members. And in some jurisdictions, employers need to reach a certain number of employees or average wage on payroll to trigger the need for workers’ compensation.
Railroad and maritime worker exemptions
Once again, railroad and maritime industries are safety critical. Again, why grant a workers’ comp exemption to these groups? To start, there is a different workers’ compensation system set up for maritime and railroad workers.
- Those workers who aren’t seamen get their benefits from a federal workers’ compensation fund under the Longshore and Harbor Workers’ Compensation Act.
- Railroad workers get their benefits from the Federal Employer’s Liability Act (FELA), which accounts for the extra hazardous working conditions.
Domestic and household exemptions
The domestic and household workers exemption is very different to the railroad and maritime workers exemption. There’s no special federal benefits from domestic workers. Instead, this exemption is more akin to the agricultural workers exemption in that federal and state laws often don’t touch these types of workers.
Like all workers’ compensation regulations, these exemptions vary on a state-by-state basis. However, you can start to understand the nuances by breaking these employees up into categories:
- Casual workers, including relatives and neighbors performing labor around the house and property
- Part-time or full-time workers with regular hours and income
In the first group, you will often find that casual workers generally get coverage for any injuries or illnesses that occur on your property under your homeowners, condo, or renters insurance policy. In California, the coverage comes through the HO 0090 endorsement, and covers casual workers injuries up to $100,000.
The second group becomes complicated. Some states require coverage for any domestic worker outside of a babysitter or other transient help while others require you to cover anyone who looks like a full time employee (40 hours per week).
The bottom line: if you have clients in a state where coverage is mandatory, you’ll want to work with a good carrier to craft a workers’ comp program that suits your needs. However, even in a voluntary state, you’ll want to make sure their homeowners policies or other coverage grants what they need. If your client still doesn’t have workers’ compensation insurance, they are still at risk of not only paying for an injury but also for liability, depending on their other types of coverage.
|State||Voluntary or mandatory workers’ comp coverage for domestic workers|
|California||Mandatory for any domestic worker employed 52 or more hours or earning $100 or more during 90 calendar days prior to injury|
|Oklahoma||Mandatory for any workers in a home with a gross annual payroll of more than $10,000 for all workers|
What’s the rule on workers’ comp exemption for sole proprietors?
Sole proprietorships have the most difficulty in sorting out their workers’ compensation.
Not only are sole proprietors largely exempt from workers’ compensation, they also have fewer choices available if they do decide to purchase a policy.
First, let’s be clear. Who is a sole proprietor? It’s largely a tax status. The IRS says you run a sole proprietorship if you have an unincorporated business and you are the sole owner. Colloquially, sole proprietors may also be known as freelancers, contractors, or small business owners.
Typically, sole proprietors have two options:
- A ghost workers’ compensation policy for a one-person business
- A workers’ compensation policy covering any part-time employees, full-time employees, or sub-contractors you hire (and excluding you, if you prefer)
Things get more complicated when their business grows, they take on new clients, or they need additional help to get work done.
Here are a few times when an owner needs to buy workers’ compensation even if they are a sole proprietor:
- If they work in a safety-critical industry with other contractors, like construction, they may need to provide a certificate of insurance to bid on jobs. Contractual requirements protect their business partners from them claiming against their insurance if they get injured on their job site.
- If the owner hires part-time or full-time employees or subcontractors to help with the main activity of business, they will need to start thinking about workers’ compensation for their employees.
Risk vs. reward
Remember: just because an exemption exists doesn’t mean that it’s wise to skip coverage for exempt employees.
The lure of saving an expensive business cost may make exploring the workers’ comp exemption tempting for some business owners. Usually, the people who qualify for the exemption have significant salaries, so cutting those salaries from the payroll calculation can lead to savings.
However, it always comes with risk. Without workers’ compensation for those employees, there’s no employee benefit in the event of a workplace injury or illness. It leaves your client’s business on the hook for any injury costs outside of what their other policies might cover. Additionally, as another protection, when an injured or ill worker accepts workers’ compensation benefits, they usually lose their ability to sue. Contrarily, a general liability policy won’t protect them from employee lawsuits stemming from a workplace injury.
Is your client considering a workers’ comp exemption?
Workers’ compensation exemptions cater to groups that federal law provides special (or no) provisions for. In addition, they add flexibility to policies for very small business owners, like LLCs. But in general, very few employees and businesses are truly exempt from workers’ compensation coverage.
The best way for your clients to save on workers’ compensation premiums is to run a strong safety program to prevent worker injuries and illnesses. Foresight insures safety-critical businesses with a technology-first workers’ compensation program that helps your clients lower their risk and reduce your incidents and claims.
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Are you a business owner? Ask your insurance agent about Foresight or find a broker near you to learn more about our technology-driven loss control service.