Self empoyed mechanic at work

Income protection or workers compensation for sole traders?

How can sole traders protect their income in Australia and support are they eligible to receive?

A sole trader is someone who is the exclusive owner of a business but may hire employees for whom they must have compensation insurance. As a sole trader:

  • You must provide workers compensation for all your workers. The definition of worker varies between states and generally includes apprentices and trainees, but not contractors. You are not required to have workers compensation for yourself.
  • You may take out a workers compensation policy for yourself, even if you don’t have any workers. This is only allowed in some states, and the benefits of doing so also vary based on location.
  • You should compare the costs and benefits of taking out a workers compensation policy for yourself with the advantages of a direct life insurance policy.

Each state in Australia has its own workers compensation program. Each program differs, but some details are the same for all states:

  • Sole traders do not automatically have workers compensation. Unless you deliberately take out a workers compensation insurance policy, you are not entitled to its benefits as a sole trader.
  • Life insurance and income protection policies are not the same as workers compensation. Some of these types of benefits may be available in certain situations with workers compensation, but not always. For this reason some sole traders take out private life and income protection insurance policies, even if they also take out workers compensation policies on themselves.

Before making a decision, you should find out how workers compensation works for sole traders in your state. Compare the advantages of private insurance versus workers compensation policies. You should also know how and when you are required to provide cover for your workers, and what your options are for covering yourself.

Australian Capital Territory

In the ACT, sole traders may choose between taking out a workers compensation policy or taking out other private insurance. The workers compensation scheme is privately underwritten and market-driven, meaning there are different workers compensation policies available, but all must be approved by the state government.

What is the definition of a worker in the ACT?

Sole traders are required to provide workers compensation for anyone they have entered into a contract of service with as an employer, regardless of whether it was written, oral or implied. Conditions apply for different industries and types of occupation.

The advantages of workers compensation as a sole trader in the ACT
  • It is inexpensive protection against loss of income, injury and death on the job.
  • Benefits are payable for rehabilitation expenses.
  • Plans include injury management, return to work and personal injury programs.
The advantages of private insurance as a sole trader in the ACT
  • The ACT has some of the lowest workers compensation benefits in Australia.
  • Workers compensation only pays for specific costs while private insurance pays benefits to be used at your discretion.
  • Workers compensation requires you to prove that the injury or illness was a direct result of the job being undertaken. Private insurance also covers you for non-work-related events.

New South Wales

NSW has some of the most sophisticated and expansive workers compensation laws in Australia. However, as a sole trader in NSW you are not allowed to cover yourself with workers compensation. You should instead protect yourself by comparing private life and income protection insurance cover.

What is the definition of a worker in NSW?

You are required to provide workers compensation to anyone with whom you have entered into a service or training contract, regardless of industry or type of occupation, and regardless of whether the contract was expressed or implied, oral or written.


Northern Territory

Workers compensation in the NT is carried out through a program called WorkSafe. Workers compensation insurance is privately underwritten, and employers can choose between different policies with varying benefits and costs. Sole traders in the Northern Territory are able to take out a workers compensation policy for themselves if desired, or opt for private life and income protection insurance.

What is the definition of a worker in the NT?

You are required to provide workers compensation to anyone who has entered into a contract or agreement of any kind to provide work or services for you. Exceptions may apply if the worker supplies an Australian Business Number as this may designate them a contractor.

The advantages of workers compensation as a sole trader in the NT
  • You receive competitively priced cover for loss of income, permanent impairment, disability or death on the job.
  • NT workers compensation lets patients choose their own doctor or practitioner for medical certificates or treatment.
  • Benefits are payable for workplace modifications and retraining costs if required.
The advantages of private insurance as a sole trader in the NT
  • The NT workers compensation claims process is not designed for situations where the employer and worker are the same person. Private health insurance has much simpler claims processes if you are covering yourself.
  • Workers compensation benefits are broken down, with certain parts payable according to specific criteria. Private insurance is more likely to pay bigger sums.
  • Private insurance also provides cover outside of the workplace and working hours.

Queensland

Queensland-based sole traders may take out workers compensation policies for themselves as long as they meet the state definition of a worker, which not everyone does. There is also the option of private life and income protection insurance. However, Queensland has a third option, workplace personal injury insurance, which is designed for directors, partners, trustees and sole traders who don’t meet the definition of a worker.

What is the definition a worker in Queensland?

You are required to provide workers compensation for anyone who works for you under any kind of contract unless they are being paid to achieve a specified result or outcome, have provided all their own trade tools and are liable for rectifying any defects in the work performed.

The advantages of workers compensation as a sole trader in Queensland
  • Queensland has a relatively comprehensive workers compensation scheme with good benefits, particularly for income replacement needs. Certain benefits, however, may require you to seek damages from your employer, in this case, yourself. Because this is not possible you may have to settle for relatively small lump-sum benefits for certain types of injury.
  • Full wage replacement following incapacitation can stretch for up to 104 weeks.
The advantages of private insurance as a sole trader in Queensland
  • Policies also cover non-work-related injuries and illnesses. Workers compensation requires you to prove that the job was directly responsible for your injury or illness.
  • There is a flexible range of policies to choose from, which can include modular income protection, term life and trauma cover.
What is workplace personal injury insurance?
  • Workplace personal injury insurance is a third type of workplace insurance policy available in Queensland. It is a government scheme conducted through approved insurers.
  • It pays weekly benefits of up to 85% of usual income, medical expenses, rehabilitation costs, travelling expenses, lump-sum payments and death benefits. It does not cover injuries or illnesses sustained when not at work.

South Australia

South Australia’s workers compensation scheme pays the highest weekly incapacity payments and funeral benefits of any state, but it also has the highest average premiums. Sole traders are able to take out workers compensation policies for themselves, assuming they meet both employer and worker eligibility requirements, but many South Australian sole traders choose not to. This is because South Australia’s workers compensation is relatively expensive for employers. It is also more oriented towards peripheral services like job placements, work fitness assessments and mediation services, which are generally of no benefit to sole traders.

What is the definition of a worker in SA?

You are required to provide workers compensation to anyone working for you under a contract of service, as a volunteer or as a self-employed person. You are not required to pay full workers compensation if workers are earning less than $12,426 in the 2016–17 financial year. If they are earning below this threshold and injure themselves, you will be required to sign up for a minimal workers compensation policy.

The advantages of workers compensation as a sole trader in SA
  • You receive cost-effective access to a variety of disability and work-related support services
  • You can take advantage of personalised assistance, assessments and occupational plans.
  • There is more expansive cover of occupational therapy, speech pathology, osteopathy, chiropracty and psychological services than with other options.
The advantages of private insurance as a sole trader in SA
  • You have more freedom over what your benefit payments can be spent on.
  • It is potentially more cost-effective, particularly if you prefer less-comprehensive policies.
  • Some SA workers compensation benefits may only, or more easily, be available by having a separate employer, leaving them out of the reach of sole traders.

Tasmania

Tasmania has a thriving forestry industry which keeps its workers compensation scheme busy. It has both one of the highest incidence rates in the country as well as the highest rate of rehabilitated people returning to work. Uniquely, it has potentially unlimited incapacity payments which can extend for over nine years. However, it also has some of the strictest disability requirements in the country, making it harder to claim benefits than in any other state or territory. Sole traders are able to get workers compensation insurance directly from Tasmania’s approved providers assuming they meet the definition of a worker.

What is the definition of a worker in Tasmania?

You must provide workers compensation to anyone who has entered into or works under a contract of service or training agreement with you, regardless of the type of contract.

The advantages of workers compensation as a sole trader in Tasmania

  • Tasmanian workers compensation potentially provides more comprehensive cover over a longer period of time in the event of disability and serious injury than many private insurance policies.
  • WorkCover Tasmania heavily emphasises return-to-work services and may help a sole trader find a new line of work if an injury leaves them unable to work in their previous field.
  • It can potentially deliver a cost-effective set of advantages if your job carries a risk of severe injury or disability.

The advantages of private insurance as a sole trader in Tasmania

  • Many of Tasmania’s workers compensation benefits are focused on the employer, the facilitation of a supportive workplace, and slowly increasing a worker’s duties until they have fully recovered. A sole trader might not benefit from these as much as an employee.
  • Private life and income protection insurance protects you from accidents, injuries and illness around the clock, whether or not you’re at work. Workers compensation only pays benefits for injuries, illness or death sustained while on the job, or as the direct result of work.

Victoria

Sole traders in Victoria cannot take out a workers compensation policy to cover themselves. Compare private life and income protection insurance policies instead to find the right level of cover for you.

What is the definition of a worker in Victoria?

You are required to provide workers compensation insurance to anyone, including domestic worker and outworkers, who provide work under contract. This includes pupils undertaking workplace training and TAFE students undertaking practical placements. You are not required to take out workers compensation if you expect to pay less than $7,500 per year in remuneration.


Western Australia

Western Australia’s workers compensation scheme pays for lost wages, medical expenses and associated costs while you are unable to work. The complexities and business-orientation of WA’s workers compensation scheme means most people, and injured employees who are making claims, decide to navigate it with the help of an insurance broker.

What is the definition of a worker in WA?

You are required to provide workers compensation to anyone who works for you under a contract of service regardless of whether the contract was oral or written. This includes workers whose service was implied by industrial awards or agreements and people who work for your business in exchange for any type of compensation.

The advantages of workers compensation as a sole trader in WA

  • Western Australia’s workers compensation scheme is privately underwritten, which means you can choose between different policies and insurers to find more suitable options.
  • There are a wide variety of benefits available from WA workers compensation schemes. Depending on the type of policy you opted for, it may be advisable to cover both yourself and workers with compensation policies.
  • Western Australia’s workers compensation scheme provides limited medical treatment benefits of up to $57,000. A further $50,000 extension is available, but only if a worker’s financial situation warrants it. In the event of serious disablement and exceptional medical circumstances a further maximum of $250,000 may be awarded.

The advantages of private insurance as a sole trader in WA

  • It covers you in the event of death, injury, disability or loss of income both inside and outside of work.
  • You are able to bundle trauma insurance in with private life and income protection insurance policies. This may provide better cover in the event of serious injury or illness as funds can be spent at your discretion rather than for state-approved purposes only.

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Andrew Munro

Andrew writes for finder.com.au, comparing products, writing guides, sniffing out deals and looking for new ways to help people get the most out of their money.

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