Workers’ Compensation Insurance and Exclusions for Business Owners

As a small business owner, it is important that you are aware of all mandatory regulations that affect your business. One such regulation for employers in Washington is providing workers’ compensation coverage for all non-exempt employees. Today’s post discusses some general information related to workers’ compensation insurance, and highlights certain individuals who are not required to be covered by workers’ compensation insurance.

What is workers’ compensation insurance?
Workers’ compensation provides no-fault insurance coverage for most employers and workers in Washington state. Workers that are unable to work because of a work-related injury or occupational disease may be eligible for partial wage replacement benefits and medical treatment for injuries that occur as a result of their employment. Employers are required to provide coverage to all non-exempt employees, and in return, the employers generally cannot be sued for damages related to an injury or illness that occurs on the job.

Are owners of the small business required to obtain workers’ compensation insurance?
In most cases, no. Owners of businesses are exempt from needing to obtain workers’ compensation insurance for themselves.

Generally, individuals who own and control a business are excluded from mandatory coverage.

Limits on excluded owners
There are, however, limits on the number of excluded owners and the level of control required for the owner to be excluded from mandatory coverage. Generally, the Dept of Labor & Industries will look to whether the owner has the ability to manage the day to day operations of the business, e.g. write checks, sign contracts, and make decisions on behalf of the business. If they do, then they are generally excluded from mandatory coverage. If they do not, then they are considered a worker and required to be covered by workers’ compensation insurance. The following examples illustrate a few situations where one owner may be covered and another is not:

Exclusions from Workers Comp

Under the above scenario, Owner 3 is the only excluded owner because Owner 3 is the only owner that owns a percentage of the company and has the authority to operate the business. Owners 1, 2, and 4 are considered “workers” and the business is required to provide workers’ compensation for these owners.

Excluded Owners for Workers Comp

Under the above scenario, all owners are excluded from workers’ compensation coverage because they each own a percentage of the business and the LLC is member-managed, so each member has authority to act on behalf of the business.

Excluded Owners from Workers Comp

Under the above scenario, Owner 1 is excluded and Owner 2 is considered a “worker.”

As you can see, whether you and your business partners are excluded from workers’ compensation coverage will come down to how the business is structured in terms of management and ownership percentages. Knowing the consequences of different ownership and management structures will help you structure your small business properly from the beginning.

To learn more about workers’ compensation insurance in Washington state, you can download a guide from the Dept of Labor & Industries.

 If you’d like to learn more about structuring the management or ownership of your small business, please contact me today.

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