How to properly insure your employees

Mitch Strohm

Maintaining proper insurance coverage for your employees - whether you have one or 100 - not only benefits your workers, it protects your business as well.

Running a business without mandatory insurance coverage leaves employers open to liability if their employees are injured or die, according to Dave Howell, a licensed insurance agent and a mentor at SCORE, a nonprofit group that counsels small businesses.

Business owners are required by law to pay unemployment taxes in all states. States use those funds to provide benefits to those who are unemployed through no fault of their own. Workers' compensation is a legal requirement in all states but Texas and provides benefits to employees injured on the job. Disability insurance is a requirement if your business is in California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico. It provides employee benefits for sickness or injury that occurs outside the workplace.

If a worker is injured on the job and the business doesn't have workers' compensation insurance to cover the injury, the costs could run you out of business, Howell warns. Depending on the type of injury, medical bills and legal fees could easily run into the millions of dollars, he says.

Here's how to protect your business and your employees.

Carry workers' compensation insurance

Workers' compensation generally applies to businesses with more than three to five employees, according to the nonprofit Insurance Information Institute. This type of insurance pays for medical care, including rehabilitation, and replaces a percentage of lost wages for an employee who's injured on the job.

States differ on the cost of workers' compensation insurance and on the amount of benefits that injured workers receive. Each state also has different rules on how claims, disputes and injury evaluation are handled.

While every state's requirements are different, workers' comp is no-fault insurance, which means benefits are paid to an employee regardless of who's to blame, says Lenny Sanicola, benefits practice leader at WorldatWork, a human resources association.

However, benefits don't last forever. "Workers' comp lasts as long as the medical certification is there," Sanicola says, "but there are coverage limitations."

Most states will pay benefits for the duration of the injury, but some will specify a maximum number of weeks. To get medical certification, you'll have to file a "first notice of injury" for your employee with the state agency, which is a form that provides basic information necessary to trigger the claims process, according to the Insurance Information Institute. Workplace accidents must be reported to the state workers' compensation board and to your insurer within a certain number of days.

Policies can be found through a commercial carrier or through your state workers' compensation program, according to the Small Business Administration. You also may self-insure - set money aside for potential losses instead of buying an insurance plan.

The premium for workers' comp is based on experience modification rate - a number that insurance companies use to compare your workers' compensation claims history to employers of similar size in the same type of business. Typically, if you don't have a claims history of at least three full years, premium payments are based on the type of workers you have. For example, a construction company probably will pay higher premiums than a software company, because construction employees face greater risks of getting hurt on the job than employees in desk jobs do, Sanicola says.

Pay unemployment insurance taxes

Businesses with employees are required to pay unemployment insurance taxes in all states. The taxes they pay go into a state pool that provides temporary aid to all unemployed workers who meet their state's requirements.

In a majority of states, you're considered an employer if you pay $1,500 in wages in one quarter or have at least one employee during 20 weeks in a calendar year, according to the U.S. Department of Labor. However, it's regulated differently in each state, Howell says, so you'll need to check your state's requirements.

Like workers' compensation, the amount you pay is based on claims history and the type of workforce you have, Howell says.

To qualify for unemployment, past employees must meet state requirements for wages earned or time worked during a set period of time, referred to as the "base period." In most states, the base period is the first four of the last five completed quarters before the claim was filed. Employees also must be unemployed through no fault of their own - for example, they were laid off, not fired, according to the Department of Labor.

Carry disability insurance

Disability insurance provides coverage for employees who are unable to work because of an injury or illness that's not related to work. It replaces a percentage of their pre-disability income, and may cover rehabilitation, travel assistance and counseling services.

As an employer, you may offer short-term and long-term disability insurance. Short-term disability provides temporary benefits to employees with a maximum benefit period of two years, while long-term disability may provide lifelong benefits, according to the Insurance Information Institute.

States that do require employers to buy disability insurance typically only offer short-term benefits up to 26 weeks, according to America's Health Insurance Plans, a trade association for the health insurance industry. California, however, offers up to 52 weeks of coverage.

Generally, short-term disability coverage maxes out at six months. During that time, a temporarily disabled employee gets a percentage of replacement income, often 60 percent of pre-disability wages.

"Often, short-term disability is self-funded, which means the company doesn't necessarily go through an insurance company, but funds the program through their payroll," Howell says. In self-funded plans, a business puts aside a certain amount of money instead of paying a premium to an insurance company. Benefits are paid out of that fund.

Long-term disability is purchased separately from short-term disability. It can be paid by the employer or employee; it also can be a shared cost. Often, an employer will pay for a basic plan and employees will buy supplemental coverage. Long-term benefits begin when short-term benefits end. Coverage typically replaces 60 percent of pay and could last up to the remainder of an employee's life.

While most states don't require employers to buy disability insurance, it might be wise to buy coverage anyway. "It's all about maintaining good health and safety to get a productive employee," Howell says.