Why We Like Having Workers’ Compensation Insurance

Many new business owners choose to exclude themselves from Workers’ Compensation insurance to save money.  Let’s review why the system we have for workplace illness and injury exists in the first place and how it works, and then we’ll explain why we think exclusion is a bad idea for business owners in general, and a particularly bad idea for the members of a worker cooperative.

Why Workers Compensation Exists

In the early 1900s, a much larger portion of the workforce was engaged in industrial production, and safety standards we nowhere near what they are now.  Back then, workers who were injured could be fired (and often were), and the main remedy for wrongdoing was through the courts, which often required proof of negligence on the part of the employer as a basis for awarding damages.  Payouts hit profits, and many companies had their own lawyers on payroll, so there could be (and other were) incentive to tie up these proceedings as long as possible.

For someone who lost an arm, became blind, or had some other serious injury, this unreliable and complicated process could take a long time to provide relief, and there was little or nothing beyond private charity on which to rely in the meantime.  (Social Security’s disability provisions wouldn’t come into effect until decades later.)  Worse, by the time that a judgment was made, the employer might not even have any money to satisfy the court ruling.  In that case, even clear wrongdoing could provide no relief.

Maryland enacted the first Workers’ Compensation law in 1902, and other states followed their lead in later years and decades.  Early programs were voluntary out of concern that mandating coverage might violate the due-process clause of the Fourteenth Amendment.  A 1917 court ruling set that aside, and by 1949, every state had some form of Workers’ Comp law on its books.

How It Works

At the core of Workers’ Compensation insurance is a compromise between employees and employers.  The system operates on a no-fault basis, so the employee is not required to prove anything beyond the work-related nature of an injury or illness to qualify for compensation.  At the same time, it is an exclusive remedy: beyond a few narrow exceptions, an employer covered by a valid Workers’ Comp policy generally may not be sued or otherwise held liable for injuries.

This compromise prevents workers who are injured from having to wait months or years to qualify for relief in the courts.  The insurer pays for immediate and ongoing medical care related to the workplace injury or illness.  Moreover, while a worker who makes a claim might need to be evaluated by medical professionals chosen by the employer, this evaluation is separate from decisions regarding who will treat the illness or injury, which are firmly in the hands of the covered employee.  In addition, Workers’ Comp insurance generally provides payments for resulting disabilities.

Who Provides Coverage

Ohio, North Dakota, Washington, and Wyoming have single-payer monopolies on Workers Compensation.  Most states allow private insurance, with special funds or “risk pools” maintained to insure any employer that can’t get a policy in the commercial market.  This can happen for several reasons: having prior claims is obviously a rational for rejecting an application, but new or small businesses in certain industries can also find it difficult to get coverage from private insurers.

In many states, there are also provisions for an employer to self-insure, and two states (Texas and Oklahoma) allow employers to opt out in favor of developing their own benefits.  Self-insurance requires employers to meet the same standards of care as would be provided by insurance and demonstrate clear ability to meet the financial needs of claims.  In practice, it’s not much different from being separately insured.  Opting out is an entirely different matter: custom-designed benefits can vary widely from company to company, even excluding certain workplace injuries entirely.

Who Is Covered (and Who Isn’t)

Workers’ Compensation laws vary by state with regards to who must be covered.  Some states provide exceptions for businesses with very few employees, while others require coverage if even one employee is hired.  Partners in a partnership are commonly excluded unless they opt in, while shareholder-employees of an S-Corp tend to be covered unless they are able to opt out under an exclusion provision (often dependent on holding an officer role or a particular percentage of total ownership).

Interestingly, some states that automatically exclude partners require members of a limited liability company (LLC) to be covered even if the LLC is taxed as a partnership, although there are generally provisions to exclude some maximum number of LLC members.  Worker cooperatives aren’t given any special treatment under this scheme: if their members are employees, they fall under employee requirements, and if they’re partners or LLC members, those provisions apply.

What Coverage Costs

Workers’ Compensation insurance can be expensive.  Prices vary from state to state, but in Delaware, Maryland, and Virginia, we’ve seen rates as low as 0.13% for office work and as high as 14.5% or higher for construction trades such as painting.  These rates are applied against all taxable compensation within maximums that may be established by law.  Some states also have minimum policy costs and may have minimum compensation levels for owner-employees, which might be higher than the pay an owner is actually taking.

Shortcomings of the System

Workers’ Compensation doesn’t work perfectly.  Despite it being a no-fault system, employers do pay premiums based in part on their safety records, giving them an incentive to report fewer workplace illnesses and injuries.  They can’t control that themselves, but they can create workplace cultures that discourage workers from self-reporting by gaining reputations for discrimination against anyone who files a claim.  That’s illegal.  It’s also hard to prove, and unfortunately, it happens.  When it does, workers don’t get the care they need, which is the whole point of the system.

What We Think

Like other businesses, worker cooperatives have limited resources based on their revenues and capital.  They don’t have to deliver separate profits to owners, but they do need to find a balance between pay, benefits, and operating costs.  It’s common for business owners to look for ways to avoid unnecessary expenses, and Workers’ Compensation insurance can be a hefty expense.  Because it’s calculated on taxable compensation, it also goes up as pay goes up, which puts pressure on revenues.

We’ve met quite a few worker-owners (as well as partners and officers in capitalist companies) who exclude themselves from Workers’ Comp as long as possible.  We sympathize!  That said, we’re firmly of the opinion that taking an exclusion is a bad idea that’s not in the interest of a worker cooperative’s members.

You might be able to exclude yourself as an employee-owner, but what happens if you actually are hurt on the job?  The fact is, a worker cooperative that sees Workers’ Comp insurance as a place to save money is probably not in a position to take care of its members on a voluntary basis.  You fall off a ladder or cut your thumb off using a slicer, and if there’s no insurance to pick up the bill, it’s the end of the cooperative and a very bad outcome for the member.

When you think about it, Workers’ Comp is a benefit that reflects the cooperative ideal almost perfectly.  It’s there to make sure people who get sick or hurt by their jobs can recover and come back to work, and also to provide fair relief in cases were they can’t.  The system’s only shortcomings arise when the owners’ profit motive infringes on their commitment to their employees, leading to opt-out provisions or cultures of fear that discourage self-reporting, and these are factors that shouldn’t be present in businesses run by and for their own workers.

We pay a few thousands of dollars each year for Workers’ Compensation insurance, mostly for our construction subsidiary Paint and Patches.  XENSHA’s policy was easy to find on the commercial market, but for Paint and Patches, we had to go through a state risk pool to get coverage in Delaware, and then get a separate policy for work in Maryland when we expanded our scope.  Each of these was subject to minimums higher than our actual payrolls in either place.

But the premiums for Workers’ Comp are based on the risk of a particular kind of work.  It only takes a big bite when the work you’re doing is known to have a high chance of injury.  If you’re looking to exclude yourselves to save money, do you really think you’re going to have money to help whoever gets hurt?

We formed a worker cooperative so we could be better off than we would be if our labor was producing profits for someone else.  Making sure we’re all covered if any of us gets hurt on the job is part of our commitment to one another and our shared future.  That’s why we like having Workers’ Compensation insurance, and why we think it’s the right choice for a worker cooperative.

This article explains we did and why.  Please don’t interpret our choices or views as professional legal or financial advice.  Your circumstances may be quite different than ours, or we may have made a bad choice that will come back to bite us later. 


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