When Should Small Businesses Obtain Workers' Compensation Insurance Coverage?

hand filling out workers compensation form with a pen

Small start-up businesses understandably want to limit their initial costs. Is workers’ compensation coverage required? And even if it is, do owners have to be covered or can they opt out? This is an important question because owners’ compensation can make the policy premiums expensive.

Generally, businesses with 5 employees must have coverage. Businesses in the construction industry must have coverage if they have at least one employee, so all businesses in the construction industry must have coverage. The 5 workers may be traditional employees or merely persons who regularly work on behalf of the business. These persons are “statutory employees”. Missouri law counts these statutory employees to discourage businesses from “contracting out” or “subbing out” work to avoid required coverage.

What about those small businesses where including or excluding the owners makes a difference when making the count toward 5? Sole proprietors and partners are not included unless they elect coverage under a specific procedure of notification. However, members of limited liability companies are included when making the count toward 5. The popularity of limited liability companies makes this an important consideration. Further, officers in corporations are typically included as employees, but not mere shareholders.

One exception concerns Subchapter S corporations. Shareholders with at least 40% or greater interest in the corporation can reject coverage (and not count toward the number of 5) if they notify the corporation and, if applicable, the insurance company. This means these shareholders cannot receive benefits even if they work as employees.

Business owners need to think through whether to have coverage for their business and themselves. If they do not insure and should have done so, they can be sued by employees, not just reckon with a workers’ compensation claim. They can also be subject to criminal prosecution. Owners should also decide whether they want to cover themselves as employees. For example, would it be important for them to be covered if they were seriously injured themselves?

Knowing one’s duties, and options should be part of the start-up of the business. Avoiding the subject until after an accident happens can leave the business in a real bind. There is no substitute when evaluating this subject for a careful interview and evaluation. We encourage you to contact us about this.