Congratulations—you're ready to hire your first employee for your auto repair shop. This is a huge milestone. You're growing beyond a one-person operation, and that's exciting. But here's what catches most new employers off guard: the insurance requirements change dramatically the moment you bring someone else on board. What worked when you were solo won't cut it anymore, and the penalties for getting this wrong can be severe.
Here's the thing most shop owners don't realize until it's too late: you're not just adding payroll expenses. You're triggering mandatory insurance requirements that vary by state, and missing them can mean fines, lawsuits, and even criminal charges in some cases. Let's walk through exactly what insurance you need, why you need it, and how to get it right from day one.
Workers' Compensation: Your First Legal Requirement
In almost every state, workers' compensation insurance becomes mandatory the instant you hire your first employee. Not when you get around to it. Not after a 90-day probation period. Immediately. The only exception is Texas, which doesn't mandate workers' comp at all (though most insurance carriers and contracts will still require it).
States like California, New York, and New Jersey require coverage with just one employee. Others, like Florida, have different thresholds depending on your industry—general businesses need four or more employees, but construction companies need it with even one. Since auto repair work involves physical labor and potential hazards, you're typically treated more like construction than office work.
What does this coverage do? Workers' comp pays for medical expenses and lost wages if your employee gets hurt on the job. In an auto repair environment, that could be anything from a back injury lifting an engine to burns from welding to cuts from sharp metal. It happens more often than you'd think, and without coverage, you'd be personally liable for every dollar of medical bills, rehabilitation, and lost income.
Understanding Classification Codes and What They Cost
Here's where it gets interesting. Your workers' comp premium isn't a flat rate—it's based on classification codes that reflect the risk level of what your employees actually do. Most auto repair shops fall under class code 8380, which covers vehicle repair and maintenance. As of 2025-2026, this code typically costs about $2.15 per $100 of payroll, or roughly $93 per month per employee.
But here's the catch: if your employee does different types of work, you might need different codes. Auto body repair (code 8393) has a lower rate at $1.54 per $100 because it's considered less risky. Towing services (code 7225) jump up to $6.79 per $100 because of the higher injury risk. Office staff doing purely administrative work? That's code 8810, with much lower rates.
Getting these classifications right matters. If you misclassify a mechanic as office staff to save money, you're committing fraud and setting yourself up for denied claims and massive penalties during an audit. On the flip side, if you're paying for a higher-risk code than necessary, you're wasting money every month. Be honest about what each employee does, split payroll accurately between codes if needed, and work with your insurance agent to get it right.
Employment Practices Liability Insurance: Protection You Didn't Know You Needed
This is the coverage most first-time employers skip, and it's a mistake. Employment Practices Liability Insurance (EPLI) protects you against claims of discrimination, harassment, wrongful termination, and retaliation. Think you don't need it because you're a good person who would never discriminate? That's not how this works.
You're exposed from the moment you start interviewing candidates. If you choose not to hire someone, they could allege discrimination—age, race, gender, disability, you name it. Even if the claim is completely baseless, defending yourself in court costs tens of thousands of dollars. Small businesses with fewer than 100 employees face about a 12% chance of having an employment-related charge filed against them. Those aren't great odds when you're just trying to grow your shop.
Here's the good news: EPLI is surprisingly affordable for small businesses. The average cost is about $222 per month, though 36% of small businesses pay less than $150 monthly. For a standard $1 million policy covering five to 20 employees, you're looking at $1,500 to $2,500 annually. Compare that to the $50,000+ it could cost to defend a single employment lawsuit, and it's an easy decision.
What Happens If You Skip These Coverages
Let's talk worst-case scenarios, because they're more common than you'd think. Operating without required workers' compensation insurance can result in immediate stop-work orders, fines of $1,000 to $10,000 or more, and even criminal charges in some states. If an employee gets hurt, you're personally liable for all medical costs, lost wages, and potentially permanent disability payments.
Without EPLI, you're self-insuring against employment claims. That means writing checks from your business account (or personal account if your business assets run out) for legal defense, settlements, and judgments. A single discrimination case can easily exceed $100,000 when you factor in legal fees and settlements. Most small auto repair shops can't absorb that kind of hit.
How to Get Started: Your Action Plan
Before you extend that first job offer, take these steps. First, contact your state's workers' compensation board or Department of Labor to confirm your specific requirements. Don't assume—state laws vary wildly, and what your buddy's shop does in another state might not apply to you.
Next, talk to a commercial insurance agent who specializes in auto repair shops. Not your personal auto insurance agent—someone who understands classification codes, EPLI, and the specific risks of your industry. They can bundle workers' comp with your existing garage liability coverage and add EPLI for comprehensive protection.
Get quotes from multiple carriers. Workers' comp rates can vary significantly between insurers, even for the same classification code. Some specialize in auto repair and offer better rates or risk management resources. Don't just take the first quote—shop around.
Finally, set up proper payroll reporting from day one. Your workers' comp premium is based on actual payroll, and you'll be audited annually. Keep detailed records of what each employee does and how their time is split between different job duties. This protects you during audits and ensures you're not overpaying or underpaying throughout the year.
Hiring your first employee is exciting, but it comes with real responsibilities. Getting your insurance right protects your new hire, your business, and your personal assets. Do it before that first day of work, not after. Your future self will thank you.
