I hired someone — what changes with my insurance?
Hiring your first employee usually means you must buy workers' comp, which is priced on the payroll you report. It also opens two new risks: an employee suing you over how they were treated, and an employee crashing while driving for you. Calling the new person a contractor does not make those risks go away.
- Most states require workers' comp from the first employee; a few start at a small headcount. Check before the first paycheck.
- Workers' comp is priced on payroll, and the insurer checks the real figure after the year ends.
- Paying someone as a contractor does not settle whether they are one. The insurer's auditor decides by how the work is done.
When do I have to start carrying workers' comp?
In most states, from your first employee. A handful of states start the requirement at two to five employees, and the details depend on your state and sometimes your industry, so check before the first paycheck goes out.
Insurance that pays an employee's medical bills and lost wages after a work injury is called workers' compensationWorkers' Compensation Insurance that pays medical bills and lost wages when an employee is hurt or sick because of work. Insurers call it workers' compensation., or workers' comp. The Small Business Administration lists it among the coverages a business with employees must carry and notes that the laws vary by state. (Source: US Small Business Administration)
The rules differ more than many owners expect. One payroll company's state-by-state table lists more than 30 states that require coverage from the first employee, with others setting the line anywhere from two to five. (Source: GoCo state-by-state workers' comp guide) Part-time staff and family members often count. Owners and officers can sometimes opt out, but that choice has to be made on paper with the insurer.
How is workers' comp priced?
On payroll. Each type of job carries a rate per $100 of pay, set by how risky the work is, and your price is your payroll in each job type multiplied by that rate, then adjusted for your claims record.
One large insurer writes the formula out as payroll divided by 100, times the rate for the job type, times a factor for your claims history. (Source: Nationwide) Here it is with round numbers for one job type.
| What happens | Amount |
|---|---|
| Your payroll in this job type is | $200,000 |
| Divided into $100 units ($200,000 ÷ $100) | 2,000 |
| At $1.50 per unit for that job type (2,000 × $1.50) | $3,000 |
| So the premium before any adjustment is | $3,000 |
| Your claims record leaves the price unchanged, a factor of | 100% |
| Your estimated premium is ($3,000 × 100%) | $3,000 |
Illustration only, with round numbers. It is not a statement of what any policy charges; your own policy wording governs.
A cashier and a delivery driver sit in different job types with different rates, so describe each person's actual duties when you report.
The payroll on your policy is an estimate. After the policy year, the insurer checks your real payroll and sends a bill or a refund for the difference. The guide to the year-end insurance audit walks through that review. When you hire, tell your agent so the estimate tracks reality instead of producing a large bill later. Our workers' comp coverage page covers the policy itself.
Does paying someone as a contractor change anything?
Not by itself. Whether someone is an employee depends on how the work is actually done, not on whether you pay them on a 1099 as a contractor or on payroll with a W-2.
The IRS looks at the whole relationship, grouping the evidence into three kinds: whether you control what the worker does and how, whether you control the business side of the job such as pay, expenses and tools, and the type of relationship, including whether it is ongoing and central to your business. (Source: IRS) States apply their own tests for workers' comp, and some are stricter.
The insurer's auditor asks similar questions. One insurer's audit guide says contractor status is decided case by case, and asks for each contractor's business license and proof of their own workers' comp. (Source: Utica National Insurance Group) If a contractor has no coverage of their own, expect their pay to be added to yours. Collect a certificate from each one before the work starts; the guide to certificates of insurance shows what to check.
Can an employee sue me, and does my insurance cover it?
Yes, they can, and your liability and workers' comp policies generally do not cover it. Claims about how you hired, treated, paid or fired someone need their own coverage.
Coverage for claims by employees, such as discrimination, harassment or wrongful termination, is called employment practices liabilityEmployment Practices Liability (EPLI) Coverage if an employee sues you over how you hired, treated, or fired them, such as discrimination or wrongful termination. Insurers call it employment practices liability. more →. These claims are common: the Equal Employment Opportunity Commission received 88,531 new charges of discrimination in its 2024 fiscal year. (Source: EEOC 2024 Annual Performance Report)
A charge can come from a job applicant you never hired, and defending one costs money even when you did nothing wrong. Owners often add this coverage once they have a handful of staff; ask your agent whether it can sit on your existing policy.
What if an employee drives their own car for work?
If they crash on a work errand, the injured person can sue your business too. The employee's personal policy is generally the first to respond, and your business needs its own coverage for what is left; check your own policy wording and ask your agent.
Liability coverage for accidents in vehicles your business does not own, such as a rental or an employee's car used for a bank run, is called hired and non-owned autoHired and Non-Owned Auto Liability coverage for accidents in vehicles your business does not own, such as rentals or an employee's personal car used on a work errand. Insurers call it hired and non-owned auto. more →. One broker's guide notes it sits on top of the employee's personal policy, which pays first, and does not pay for damage to the employee's car. (Source: Arthur J. Gallagher & Co.) If the new hire will drive a company vehicle, see the guide to adding a new driver.
Frequently asked questions about insurance after a new hire
You do not need to report each hire, but tell your agent when your payroll or the kind of work your staff does changes noticeably. A big gap between your estimated and real payroll shows up as a bill after the year ends.
No. Liability policies exclude injuries to your own employees. Those are handled by workers' comp, which is why it becomes the first policy to buy once you hire.
States can fine you or order you to stop work, and an injured employee can sue you directly for medical bills and lost wages. Penalties differ by state, so check with your state's workers' comp agency.
Just made your first hire?
Tell us how many people you employ and what they do, and we will show you what your state requires and what to price.