4 Common Reasons Nonprofits Avoid Workers Compensation Insurance

Workers compensation is often the last coverage a small nonprofit purchases.

While insurance in general is a very uncomfortable expense for startup nonprofits, workers compensation reflects one of the most avoided coverages of all.

Why 501c3s wait to buy workers compensation

I’ve been given a lot of reasons why a nonprofit won’t purchase workers compensation. These reasons typically fall in one or more of the following four categories:

Reason 1: The ‘Exempt’ Misconception:

Some new nonprofit  leaders have an idea that they don’t have to carry the coverage since they are a 501c3. This idea is rare, but it’s mish-mashed with some version of a ‘Good Samaritan’ idea. The fact is that according to most states’ laws, if you are an employer and you have employees, then you, more than likely, will be on the hook for medical bills and disability payment if the employee gets hurt on your time.

Reason 2: The Minimum Employee Rule

In Georgia, a business is not required to have workers comp by law if they have fewer than 3 employees (including officers). Your business would still be required to pay workers comp benefits even if you have 1 or 2 employees. You just don’t have to have the coverage. In other words, it’s coming out of your pocket regardless.

States vary, but the key point to remember is this: The rule only removes the requirement to carry coverage, not the requirement that the business is responsible for worker injuries.

Reason 3: The 1099 vs. W-2 Fallacy

I’ve had nonprofits tell me they don’t need workers comp because all of their employees are 1099 contractors – even the executive director. Department of Labor issues aside, if someone works for you and gets hurt, she will more than likely be able to request and be granted workers comp benefits – tax status can be irrelevant. This is especially true if that person’s relationship with the NPO looks more W-2 than 1099.

You need to be extremely concerned, especially if you’re a nonprofit that pays everybody from the executive director to the maintenance staff on a 1099. If you argue that you don’t have to pay benefits because of 1099 status, you might then leave yourself open to a liability lawsuit.

Reason 4: Budgetary Priority

Workers compensation insurance is low on the budgetary list of priorities. A nonprofit will prioritize general liability or other coverages over workers compensation. I get it, and I understand. This budgetary issue is one reason why I recommend engaging an insurance agent early in your business planning process.

I’ve created a short post with 6 suggestions on how to help keep your workers compensation costs lower, should you want some tips.

Executive directors and executive boards have to make difficult choices. Even if your organization decides to go without workers compensation for a period, keep it in the business plan and on the t0-do list.

What to do with this information

Simply ask yourself this question:

What is the best way to steward the employees of my nonprofit?

If your reason for not carrying workers compensation feels like an excuse or an administrative workaround, reconsider your position. If your reason is budgetary, consider creating a line item for your development plan specifically to address the gap in coverage.

Questions:
  • Do you currently have workers compensation?
  • What are other reasons why a 501c3 organization might choose to go without?
  • If you are a small nonprofit, has it been easy to find quotes for the coverage?
If you have questions about this blog or other insurance topics, please send them to me via email, Twitter, Facebook, or LinkedIn (use the buttons in the sidebar). You can also click on ‘Request for More Information’ and connect that way. 

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