More than half of Australia's 2.5 million small businesses are sole traders or independent contractors who enjoy the benefits of being self-employed. Like all workers, sole traders are at risk of injury or illness, but generally are not protected by workers compensation insurance.
Workers compensation is a mandatory insurance that employers have to take out to cover employees and all businesses in Australia are required to have workers compensation for most employees.
If you're a self-employed sole trader operating solo, an independent contractor or part of a limited liability business you are exempt from mandatory workers compensation insurance. As a business owner, you may elect to take out workers compensation but it is not mandatory or legally required, but a sole trader who has employees in any capacity, including unpaid, must provide them with workers compensation.
If your business hires contractors and subcontractors the state employment laws may also categorise them as employees who must be provided with workers compensation insurance cover.
What are the alternatives to workers compensation for sole traders to protect themselves?
There are alternative protection and insurance policies available to sole traders and independent self-employed business operators who risk loss of income and work-related injury or illness.
Four popular alternative insurance protections that provide business owner protections in the absence of workers compensation insurance are:
- key person insurance
- income protection insurance
- total and permanent disability insurance
- directors' group personal accident and sickness insurance.
Key person insurance protects the business from the financial impact of the unexpected loss of a key person
Key person insurance is a form of business continuity planning. Basically it's cover that a business can take out for the owner, with the beneficiary being the business itself if the key person is unable to continue working due to illness or injury, or dies.
It enables a succession handover by paying a lump sum, or a lump sum combined with monthly payments, that can be used to:
- maintain cash flow
- fund an executive search
- re-align shareholdings
- reduce debt.
Income protection insurance provides business income 'salary' continuity
Income protection insurance provides you with cash flow based on salary continuity, for a specified time, in the event that you are temporarily injured or become ill and are unable to work. Some policies may also help with medical or rehabilitation costs.
Income protection insurance can't be cancelled by the insurer, whereas personal accident and injury insurance has to be renewed annually.
Other features that may be available include:
- you don't need to have been injured at work to be eligible for the cover
- you can nominate the benefit period
- premium payments may be tax deductible
- if your condition is permanent, preventing you from resuming work at all, a total disability provision pays out a lump sum.
Total and permanent disability insurance (TPD) provides financial support if you're unable to work
You (and anyone in employment, not just the business owner) also have the option of taking out personal insurance that covers you for total and permanent disability cover. This applies only to injuries or illnesses that occur outside of the workplace.
The definition of disability may be based on whether you are:
- unable to perform your regular duties
- unable to perform the activities involved in any occupation that you're qualified for.
You can also take out trauma insurance that covers you if you experience a life-threatening event such as a heart attack or stroke. After an initial stand-down period your benefit will be paid for the period nominated.
Directors' group personal accident and sickness insurance
Directors' group personal accident and sickness is business insurance cover for senior managers, which can include the owner of the business. It offers two options:
- cover for injury only (during work hours)
- cover for injury and sickness (cover for both, at any time).
The only eligibility requirement is being excluded under your state's workers compensation scheme. Benefits include the cover being effective from the time you take out the policy and the flexibility to nominate the amount you require to replace your weekly income.
Are sole traders responsible for workers compensation for contractors?
You could be, depending on your location. As Australia's different states and territories apply different standards as to whether someone is a worker in your business it's important to check the criteria. For example, sole traders in New South Wales must provide workers compensation cover to anyone working for the business, including contractors.
If a contractor, or subcontractor employed by them, is injured while working for you and is regarded as an employee in your state, you could be held liable and incur a fine and other liabilities if you don't have the appropriate workers compensation cover in place.
Some guidelines for deciding if a contractor is an employee of your business or not are:
- if they are running their own business in providing the service
- if they market and sell their services independently
- if you have engaged them on a single job basis
- whether they carry out the work under their own Australian Business Number (ABN).
To clarify your responsibilities in the case of contractors or sub-contractors consider the information about workers compensation in your state of business and contact the relevant workers compensation body.
Workers compensation insurance providers around Australia
Locations with mandatory workers compensation providers:
- New South Wales: State Insurance Regulatory Authority — mandated provider
- Victoria: WorkSafe Victoria — mandated provider
- Queensland: WorkCover Queensland — mandated provider
- South Australia: ReturnToWorkSA — mandated provider
Locations with choice of workers compensation providers:
- Australian Capital Territory: WorkSafe ACT — or choice of other insurer
- Northern Territory: NT WorkSafe — optional choice of insurer
- Tasmania: WorkSafe Tasmania — optional choice of insurer
- Western Australia: WorkCover WA — optional choice of insurer
