Hiring Your First Employee: Insurance Checklist

1. 1

   Check your state's workers comp threshold (it's usually 1 employee)

   Workers compensation coverage is mandated state-by-state. In most states the trigger is 1 employee (CA, NY, NJ, FL — usually 4 for non-construction, IL, MA, PA, OH, WA, ND, WY — state monopoly funds). A few states allow exemptions for very small employers (TX is the major outlier — WC is technically optional but practically required by most contracts).

   Your state's Department of Industrial Relations or workers comp insurance fund lists the exact threshold and any exemptions. If you're in CA, NY, NJ, or any monopoly-fund state, you almost certainly need WC the day employee #1 starts.

   💡 Tip: Don't conflate "WC not technically required" with "WC unnecessary." Even in TX (where it's optional), most commercial contracts and lenders require it, and Employer's Liability exposure exists without it.
2. 2

   Get a workers comp quote — state fund vs private carrier

   In monopoly-fund states (OH, WA, ND, WY), you have one option: the state fund. Elsewhere you choose between state fund and private carrier. Comparison points:

   • State fund: often writes hard-to-place classifications, slower service, less broker support, but no concern about carrier appetite
   • Private carrier: often better service, may bundle WC with BOP or GL for discount, may be cheaper for clean classifications

   For a single-employee business, premium is calculated as (annual estimated payroll ÷ 100) × NCCI class rate × experience mod. First-year experience mod is 1.0 (no claims history). NCCI class rate varies by industry — office workers may be $0.40/$100, while roofers exceed $30/$100.

   💡 Tip: Get quotes from both — they vary by 20-40% in non-monopoly states. See <a href="/compare/state-fund-vs-private-carrier-workers-comp">State Fund vs Private Carrier</a>.
3. 3

   Estimate first-year payroll honestly for the WC quote

   Your WC quote is based on estimated annual payroll. Inflate or deflate this and the year-end audit will adjust your premium up or down (sometimes dramatically).

   Include in payroll estimate:

   • Base salary or hourly wages
   • Overtime (most states cap at regular rate for WC, but check)
   • Bonuses and commissions
   • Vacation, holiday, sick pay
   • Employer 401(k) match (most states exclude, but verify)

   If you under-estimate, the audit issues an additional premium bill that can be 1-3x the original premium. If you over-estimate, you tie up cash.

   💡 Tip: Mid-year if hiring more, file a payroll-change endorsement rather than waiting for the year-end audit — keeps cashflow predictable and avoids audit shock.
4. 4

   Add Employer's Liability if it's not built into your WC

   Workers Comp Part A covers the statutory benefit schedule (medical + lost wages per state law). Part B — Employer's Liability — covers employee lawsuits alleging negligence that caused injury (e.g., third-party-over actions, consequential bodily injury, dual capacity).

   Standard WC policies bundle both, but the Part B limit is typically the bare minimum ($100K/$500K/$100K). For any meaningful business, increase to $500K-$1M or buy an umbrella that sits over Part B.

5. 5

   Consider Employment Practices Liability (EPLI) before day 1

   EPLI covers claims by employees (and ex-employees, and applicants) for harassment, discrimination, wrongful termination, retaliation, and related employment torts. WC does NOT cover these — they're a separate exposure entirely.

   EPLI claims average $60K-$150K to defend per the EEOC's annual reports. For businesses with 1-10 employees, EPLI typically runs $800-$3,500/year. A single employment lawsuit costs more than 10 years of EPLI premium.

   If your industry has elevated EPLI risk (food service, retail, customer-facing) or you operate in CA/NY/NJ (high plaintiff bar), seriously consider EPLI from employee #1.

   💡 Tip: Some BOPs include a small EPLI sublimit ($25K-$100K). Read your declarations page — if you have a sublimit, that's a starting point but rarely adequate.
6. 6

   Update your General Liability if employee work expands operations

   New employees may shift your GL exposure: new locations served, new equipment operated, new client-site work, etc. Document the change and notify your GL carrier — usually no extra premium for a single employee, but failure to disclose can void coverage.

   If the new employee will drive on company business (even their own car) — see Commercial Auto step below — that requires its own coverage.

7. 7

   Add Hired & Non-Owned Auto if employee drives for work

   If your new employee will drive their personal car for work errands (deliveries, client visits, supply runs), you need Hired & Non-Owned Auto coverage. Their personal auto policy excludes business use — and you can be sued as the employer regardless.

   HNOA is inexpensive (often $50-$300/year as a GL endorsement). Cheap insurance against a major exposure.

8. 8

   File the new employee with your payroll service + I-9 + W-4

   Insurance-adjacent compliance — file with payroll provider before day 1:

   • Federal I-9 (employment authorization)
   • Federal W-4 (withholding)
   • State equivalent (CA DE-4, etc.)
   • State new-hire reporting (within 20 days, state-specific)

   Most payroll services (Gusto, Rippling, ADP, QuickBooks Payroll) automate these. Get one — manual payroll for a 1-employee business almost always costs more in time and errors than the service fee.

   💡 Tip: Your payroll service can often broker WC for you. Verify they don't lock you to a single carrier — independence + comparison saves money.
9. 9

   Document the renewal date + audit date on your calendar

   WC policies typically run 1-year terms with year-end payroll audits 60-90 days after expiration. Calendar:

   • Renewal date (60-day reminder)
   • Audit date (when payroll figures will be re-verified)
   • NCCI class-code review if your business activity changes mid-year