While most small business insurance forms are optional, workers’ compensation insurance is required for the majority of private businesses in the United States. To comply with the law and ensure quality care to your employees, you have to understand the ins and outs of your insurance policy.

If you’re a new business owner dealing with business insurance for the first time, you likely have the same questions about workers’ compensation as other entrepreneurs. Before you start shopping around for a policy, take the time to understand the following common questions and how they apply to your situation.

Are There Any Federal Laws Regarding Workers’ Compensation?

In general, state governments legislate and regulate workers’ compensation insurance, not the federal government.

The U.S. Department of Labor only administrates a workers’ comp program for federal employees, federal employees, longshore and harbor workers, energy employees with occupational illnesses, and coal mine workers with debilitating pneumoconiosis (black lung). Outside of these circumstances, workers receive workers’ comp coverage from private employers.

Private employers must follow the laws in their state. However, they do need to follow the guidelines created by the Occupational Safety and Health Administration (OSHA), an agency within the national Department of Labor. OSHA sets requirements for safety standards in the workplace and for reporting severe injuries and casualties.

If you are a private employer, check with your state’s workers’ compensation board to determine the laws that apply. You can find a list of official state boards here.

What’s the Difference Between Competitive and Monopolistic State Funds?

One aspect of workers comp laws that varies by state is how and where employers can purchase a policy.

Four states—Ohio, North Dakota, Washington, and Wyoming—only allow companies to purchase insurance through a monopolistic state fund. Monopolistic funds limit options; they do not allow employers to shop around and get a better rate at a private insurance company. Furthermore, if you operate in another state but have employees from a monopolistic state, you must purchase an additional policy from that state’s fund to cover them. On the other hand, a state fund can benefit a high-risk business by keeping costs comparatively low. It also provides coverage stability.

Most states, however, offer a competitive fund. Private insurers compete with each other and state-run funds, allowing employers to shop around for the best deal and the right coverage. High-risk industries may struggle to find a policy at a reasonable price from a private insurer but can rely on state-backed insurance or the insurer of last resort for coverage.

Do Employers Legally Have to Cover Out-of-state Employees?

To completely protect yourself and your business, you must have a workers’ compensation policy that covers every employee. This includes coverage for those that live and work in states other than your primary location. You have to follow the laws in those states, including purchasing a policy from a monopolistic state fund.

Employees have a right to file a claim where they work, where they suffered an injury, or where they live. This means that employers may have gaps in coverage if they don’t by state policies covering all workers.

Can Insurance Providers Charge More for Companies with a Bad Record?

Yes, insurers can charge you more if you have a record of accidents and injuries. Insurance companies use a calculation known as the experience modifier to adjust premiums according to an employer’s past losses. The modifier accounts for a three-year history but not the most recent year of operations.

Furthermore, insurance companies set policy rates based on industry classification codes that differentiate the level of risk associated with that line of work. Though some states have their classification systems, most use the codes created by the National Council on Compensation Insurance (NCCI).

What are the Penalties for Non-compliance?

Failing to comply with state workers’ comp laws may cost you not only legal fees if an employee is injured and sues; the state government can also penalize you. Each state has its own penalties for non-compliance, including potential jail time in California, Illinois, Massachusetts, Michigan, and Pennsylvania.

Financial penalties for non-compliance generally start at $1,000. California imposes the most significant fines, up to $100,000. New York may charge a fine of up to $50,000 plus $2,000 per day of non-compliance. Pennsylvania considers intentional non-compliance a third-degree felony, which means you could face up to seven years of jail time.

Ensuring Proper Insurance Coverage

Even with these common questions out of the way, it’s essential that you read your state-specific laws regarding workers’ compensation. States set coverage minimums and have various exceptions and exemptions, so you need to do your research to know all of your options. Once you’ve done that, you’re ready to start shopping around for the best rate and coverage for your employees.

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