Step 8 - Insurance Requirements

10 Steps to Starting a Business

STAGE THREE – HIRING EMPLOYEES

Complying with Employer Requirements

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Step 8 – Insurance Requirements

As previously discussed, the moment a business hires even one employee, it is subjected to an overwhelming barrage of government regulations and requirements.  Stage Three of starting a business covers all the steps necessary (Steps 4 through 9) for complying with these employer requirements.  The previous newsletter discussed Step 7 – withholding employee taxes.  This newsletter continues the discussion of the 10 Steps to Starting a Business, moving on to Step 8 – Employer Insurance Requirements.

8.  Insurance Requirements

In addition to withholding taxes from your employees’ wages, employers must also maintain various types of insurance for their employees.  Basically, employers must provide their employees with three types of insurance:  1) disability insurance, 2) unemployment insurance, and 3) workers’ compensation insurance.

1)  Disability Insurance

California imposes a State Disability Insurance (SDI) tax on employers, and California employers are responsible for deducting these SDI taxes from their employees’ wages and reporting them to the State.  Revenue from the SDI tax is then pooled in the California Disability Insurance Fund, which allows the State to provide Disability Insurance and Paid Family Leave benefits to eligible employees.  The Disability Insurance Branch of the EDD administers three types of disability insurance plans:  a) State Plan, b) Voluntary Plan, and c) Elective Coverage.  To learn more about State required disability insurance, check out the EDD’s website.

2)  Unemployment Insurance

Unemployment Insurance (UI) is a nationwide program created to provide partial wage replacement to unemployed workers while they conduct an active search for new work.  Unemployment insurance is a Federal-State program, based on Federal law, but executed through State law.  Like disability insurance, California employers are required to finance the UI program by paying taxes on their employees’ wages.  To learn more about unemployment insurance, check out the EDD’s website.

3)  Workers’ Compensation Insurance

California also requires employers to carry workers’ compensation insurance coverage for their employees.  Workers’ compensation is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee’s right to sue his employer for the tort of negligence.  Employers can obtain workers’ compensation insurance in three ways:  a) through a commercial carrier, b) on a self-insured basis, or c) through the State Workers’ Compensation Insurance Fund.  The Division of Workers’ Compensation (DWC) monitors the administration of workers’ compensation claims and provides administrative and judicial services to assist in resolving disputes that arise in connection with claims for workers’ compensation benefits.

Similar to withholding taxes, a business owner should think of using an attorney, a payroll service provider, or other professional to handle the employer insurance requirements.  To this end, I’ve begun working some great financial and wealth management professionals at Northwestern Mutual Financial Network, who recommend using a professional services company like CBIZ, who offer a variety of compliance services for businesses of all size.  But regardless of whether you spend the time to learn all the laws yourself or simply outsource this task to a professional services company, make sure to establish procedures for complying with your employer insurance requirements.

Assuming you have established protocols and systems to ensure compliance with these insurance requirements (i.e. you have systems to maintain all three types of insurance for all your employees), you are ready to proceed to the last (and easiest) step in Stage 3 – complying with the workplace poster requirements.