If you run a business in California, you may already know that commercial insurance is a crucial part of running a business. While some types of commercial insurance are optional, workers' comp is one form of insurance that most businesses need to have in place.
Find out if you need workers' compensation insurance and when you should get it if you run a business in California.
What Is Workers Compensation Insurance?
Workers compensation insurance, or workers comp, is a form of insurance that protects your employees in the event they get injured or become ill as a result of performing their job. Most states have workers comp requirements in place, such as mandating that business owners obtain workers comp if they have hired a single employee.
When you hire your first worker, you need to get workers comp.
What do workers' compensation benefits cover? Workers comp coverage provides benefits to your employees in case they are injured or become ill from their work, including:
- Medical care: Prompt and effective medical treatment
- Temporary disability benefits: Payments employee receives if they can't work while recovering
- Permanent disability benefits: Payments employee receives if they don't recover completely
- Supplemental job displacement benefits: Vouchers to help pay for retraining or skill enhancement if the employee doesn't recover completely and doesn't return to work
- Death benefits: Payments to the employee's children or other dependents if the employee dies from a job injury or illness.
How Do I Know If I Need Workers' Compensation Insurance?
In California, every employer using employee labor must purchase Workers' Compensation Insurance. Even family members must be covered by workers comp insurance. For example, if your niece helps out in your business a few hours a week, she is considered an employee. Even though she's family, anyone you engage or permit to work in your business is an employee and must be paid minimum wage and covered under workers' comp insurance.
Do I Need Workers Comp For Independent Contractors?
Independent contractors are different from employees. If you are contracting independent contractors, then you do not need to provide workers' compensation for them, as they are not employees. You also don't have to provide overtime, meal breaks, or payroll taxes to independent contractors.
However, there is a very clear distinction between independent contractors and employees, and if you are misclassifying your actual employees as contractors, there will be penalties for the mistake.
According to the California Department of Industrial Relations (DIR), true independent contractors must meet all of the following conditions:
- The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work, and
- The worker performs work that is outside the usual course of the hiring entity's business, and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
One of the biggest differences between an employee and an independent contractor is the worker has control over how and when the work is done.
Imagine you are bringing in someone to record videos of your business to be used for social media or TV ads. In one scenario, you contract this work to an outside professional video company. They schedule a time to record, bring their own equipment, and edit the video off-site. They provide you with a completed product (the videos), and then the work arrangement is done. This scenario is likely to be considered a legitimate independent contractor agreement.
In another scenario, you bring in someone to create your videos. You give them your equipment to use and ask them to work from 9 a.m. to 5 p.m. from your location. You tell them how, when, and where to shoot the videos, and they use your computers for editing. This person may have video experience, but they do not have a registered business structure in place. When the video project is done, you might have additional work for them to do—work that you are choosing for them and telling them when, where, and how to complete it. In this scenario, you most definitely have an employee working for you. And if you're calling this employee an independent contractor, you are misclassifying them.
In California, workers are automatically considered employees. So don't assume that your workers are contractors just because you're calling them "independent." Misclassifying employees can get you into hot water.
What If I Hire Remote Workers From Other States?
Every state has its own workers comp laws. If your business hires workers from other states, you may need to be aware of the worker's state laws from multiple states. Suppose you are headquartered in one state, and your workers are remotely working from another. In that case, you may likely need to buy coverage based on the state laws where your employees are located.
What Happens If I Don't Have Workers Comp Coverage?
Failing to provide workers' compensation insurance for your employees in California can cost you. First, you may receive a stop order/ penalty assessment that forbids you from using employee labor until you have workers comp in place. This penalty could be $1,500 per employee or 2x the amount you would have paid for comp insurance premiums during the period you were uninsured, whichever is greater.
Do I Need Workers Comp If I Don't Have Employees?
If you are a contractor in California, you are required to carry workers comp insurance even if you don't have employees. As of 2023, roofers, concrete, heating and air conditioning, tree service, and asbestos abatement contractors are required to carry workers comp in order to obtain or renew a contractor's license.
By 2026, all contractor class codes will have the same requirements, whether employing workers or not.
Where Can I Get Workers' Compensation Insurance?
As soon as you hire your first worker, you need to get workers' compensation insurance in place. For contractors in California, you need comp to keep your contractor license in good standing.
California contractors and business owners trust Truckee-based Aegis Insurance Markets for commercial coverage for their businesses. We are an independent broker that finds the best coverage at the most affordable pricing for your clients. Our worker's comp specialists can help you determine how much workers' comp you need for your business and get you covered. Get a quote for workers comp today.