The Small-Business Owner's Guide to Workers' Compensation Insurance

Chapter 2: How Workers' Comp Insurance Works
Part 5: How Does Workers' Comp Protect a Business?

B. What Happens If I Don't Have Workers' Compensation Insurance?

When a small-business owner decides not to carry Workers' Compensation Insurance, they pay the price. Not only are they fined, but also they are still responsible for the costs of workplace injuries and illnesses. Plus, they might have to foot the litigation expenses if they are sued over the accident.

Let's take a look at these expenses in more detail.

Workers' Compensation Insurance Fines in New York

As you know, every state (except for Texas) requires that employers carry Workers' Compensation Insurance for their employees. But because each state's laws are different, the fines for violating these laws vary, too.

To give you an idea of the nature and cost of these fines, we'll look specifically at one state: New York. Here is a selection of Workers' Comp noncompliance fines, as outlined in the state's Employer's Handbook [PDF] New browser window icon.:

  • Not carrying coverage. This is considered a criminal offense in New York. If you have five or fewer employees and fail to secure coverage within a 12-month period, your fine will fall between $1,000 and $5,000. If you employ more than five employees, your fine will be between $5,000 and $50,000. It's also a felony, so you could be on the hook for "other penalties otherwise provided by the law."
  • Getting busted again. If you've already been caught once without Workers' Compensation Insurance and fail to carry proper coverage a second time, you're looking at a class D felony with a fine between $10,000 and $50,000.
  • Misrepresentation. This offense deals with inaccurate recordkeeping, such as misrepresenting how many people you employ, their wages, their classifications, or their workplace injuries and illnesses. Basically, any inaccuracies that could affect your Workers' Compensation premiums are considered "misrepresentation." For a civil offense, the fine is $2,000 for every 10 days of noncompliance or two times the cost of compensation. For a criminal offense, the fine falls between $1,000 and $50,000.
  • Not maintaining an accurate payroll. If you don't keep accurate records of your employees, their classifications, their wages, and their accidents as outlined by the law, you are subject to a fine between $5,000 and $10,000. This also goes for employers who don't provide records when asked by authorities. If you've already been found culpable once and get caught again in the next 10 years, you'll be slapped with a class E felony and a fine between $10,000 and $25,000.

Additionally, New York employers who fail to secure coverage are responsible for all legal expenses for defending themselves against Workers' Comp claims. These employers are also responsible for paying all medical and wage benefits that are awarded to injured employees. There is no cap to these charges, as you'll learn in the next section.

The High Cost of Medical and Legal Bills for Small-Business Owners Without Workers' Comp

Even without a Workers' Comp policy, chances are you'll end up paying for your employees' occupational injuries in some form. For starters, a judge will probably find you liable for your employees' medical and wage replacement expenses. You'll also have to pay your legal defense costs all by yourself.

To paint a picture of these staggering expenses, take a look at the following numbers:

  • $2,000 to $3,000: Average cost of legal fees (not including defense costs) for a misdemeanor trial (Nolo.com New browser window icon.).
  • $50,000 to $100,000: Average cost of civil case litigation (without appeals or the cost of judgment) for small businesses (SBA.gov New browser window icon.).
  • $87,435: Average cost of a lost-time claim in New York in 2009 (Oliver Wyman [PDF] New browser window icon.).
  • $1,037: Average cost of a medical-only claim in New York in 2009 (Oliver Wyman).
  • $27,933: Average total Workers' Comp claim cost in New York in 2008 (Oliver Wyman).

As a final example, let's imagine that you run a business in New York. An employee files a Workers' Compensation claim for an occupational accident only to find out you don't have coverage.

You have seven employees, which totals $15,000 in fines for not carrying coverage. Your employee sues for medical expenses and lost time. All told, your trial costs $60,000 and the judge awards the injured employee $28,000 for medical and lost-wage benefits. Your total out-of-pocket cost? $103,000.

If that sounds like too much of a financial gamble, read on to learn how the claims process works and how to prevent claims from happening in the first place.

Next: Chapter 3: Everything You Need to Know about Workers' Comp Claims

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