Workers Compensation Exemption: Do You Really Need It?

If you own a business, workers’ compensation insurance probably feels like just another expense eating into your profits. It’s designed to protect your employees (and you) if someone gets hurt on the job. But here’s something many business owners don’t realize – you might not actually need to include yourself in that coverage.

What’s a Workers Comp Exemption Anyway?

Simply put, a workers compensation exemption lets certain business owners or officers opt out of being covered by their company’s workers’ comp policy. If you qualify for an exemption:

• You won’t have to pay premiums to cover yourself
• You’re agreeing not to file for workers’ comp benefits if you get hurt at work
• You’ll still need coverage for any non-exempt employees

Think of it as saying, “I’ll take personal responsibility for my own work injuries instead of using the company insurance.”

Who Can Actually Get an Exemption?

While rules vary by state, exemptions typically apply to:

• Solo business owners with no employees
• Partners in a business partnership
• Corporate officers owning a decent chunk of the company (often 10% or more)
• LLC members

The key thing to remember: regular employees almost never qualify. This is primarily for the people who own and run the business.

Getting an Exemption: The Process

Getting an exemption isn’t complicated, but you need to follow your state’s specific rules:

1. Submit the right paperwork to your state’s workers’ comp board or labor department
2. Pay any required filing fees (anywhere from nominal to several hundred dollars)
3. Provide proof you actually qualify (ownership documents, partnership agreements, etc.)
4. Remember to renew if your state requires it (many do)

Skip any of these steps and you could face fines or other penalties. Not exactly what you need when you’re trying to run a business.

State Rules Are All Over the Map

Since workers’ comp is handled at the state level, requirements differ dramatically:

In Florida, construction business owners face serious penalties if they don’t properly file for an exemption.

California allows corporate officers and directors to exclude themselves under certain conditions.

New York generally doesn’t require workers’ comp for sole proprietors without employees, but you still need to notify the state.

Always check what your specific state requires – assumptions can be costly here.

The Good and Bad of Going Exempt

Benefits

• Lower insurance costs – The main reason most people do this
• Less paperwork for small businesses
• Freedom to choose your own level of risk

Drawbacks

• You’re on your own if injured – All medical costs and lost income come out of your pocket
• Some clients won’t work with you unless everyone has coverage
• Mistakes can be expensive if you improperly claim an exemption

Common Misunderstandings About Exemptions

“If I’m exempt, I don’t need workers’ comp at all”

Wrong. You still must cover any employees who don’t qualify for exemptions.

“Once exempt, always exempt”

Not usually. Many states require regular renewals. Miss one and you could be non-compliant.

“Exemptions protect me from lawsuits”

They don’t. You might still need liability insurance for other types of claims.

Should You Get an Exemption?

An exemption might make sense if:

• You’re the only person in your business
• You’re a corporate officer who mostly sits at a desk
• You understand and accept the risks
• You have good health and disability insurance to cover you if something happens

But think twice if you work in a high-risk industry like construction or manufacturing. The premium savings might not be worth the risk of a serious injury with no coverage.

Bottom Line

Workers’ comp exemptions can save you money and simplify your business insurance. But they also shift all the risk of workplace injuries onto your shoulders.

Before deciding, make sure you understand exactly what your state requires and what you’re giving up. When in doubt, talk to an insurance broker or workers’ comp attorney who knows your state’s rules.

Sometimes saving money upfront can cost you much more down the road.