Hiring your first employee for your physical therapy practice is exciting—it means your business is growing. But here's what catches most practice owners off guard: the insurance landscape changes completely the moment you go from solo practitioner to employer. That part-time front desk person or new PT you're bringing on board triggers a whole new set of insurance requirements, and ignoring them isn't just risky—it's often illegal.
The good news? Once you understand what coverage you actually need and why, getting properly insured is straightforward. Let's walk through exactly what changes when you hire that first employee, what you're legally required to have, and what optional coverage actually makes sense for a growing PT practice.
Workers' Compensation: The Big One You Can't Skip
In most states, workers' compensation insurance becomes mandatory the instant you hire your first employee. Not when you hit five employees. Not after a probationary period. Immediately. States like California, Massachusetts, and New York have zero tolerance—one employee means you need coverage. A few states (Texas being the notable exception) allow small businesses to operate without it, but that's playing with fire.
Workers' comp covers medical expenses and lost wages if an employee gets injured on the job. For a physical therapy practice, that could be anything from a PT straining their back while demonstrating an exercise to your receptionist slipping on a wet floor. The policy also protects you from lawsuits—in exchange for guaranteed coverage, employees generally can't sue you for workplace injuries.
Here's where physical therapy practices need to pay close attention: classification codes. Insurance carriers assign different classification codes based on job duties, and the codes for a licensed physical therapist, physical therapy assistant, aide, and administrative staff are all different—with vastly different premium rates. A licensed PT has higher premiums because the work involves more physical demands and injury risk. If you misclassify employees to save money, you'll get hammered during the annual audit. Carriers will reclassify your employees, charge you the difference retroactively, and potentially add penalties.
Premiums are calculated based on payroll, typically expressed as a rate per $100 of payroll. For physical therapists, rates in 2025-2026 generally range from $2 to $8 per $100 of payroll depending on your state and claims history. So if you're paying a PT $60,000 annually and your rate is $4 per $100, you're looking at around $2,400 in annual workers' comp premium for that employee.
Employment Practices Liability Insurance: Protection From Employee Claims
Once you have employees, you're exposed to employment-related lawsuits. Wrongful termination, discrimination, sexual harassment, wage and hour disputes—these claims can cost tens or even hundreds of thousands of dollars to defend, even if you win. Your general liability policy won't cover this. Your professional liability policy won't cover this. You need Employment Practices Liability Insurance.
EPLI isn't legally required, but it's increasingly standard for any business with employees. According to Hiscox, employment practices claims are among the most common lawsuits small businesses face, and the average settlement exceeds $40,000. For small physical therapy practices with limited cash reserves, a single claim could be financially devastating.
EPLI policies typically range from $500 to $2,500 annually for small practices, depending on the number of employees and coverage limits. Most policies have a retention (essentially a deductible) of $2,500 to $10,000. The coverage kicks in for legal defense costs and settlements or judgments. Many carriers also include access to HR hotlines and template employment documents, which can help you avoid problems in the first place.
How Your Existing Coverage Changes With Employees
Your professional liability insurance—the malpractice coverage that protects you from claims of negligent treatment—doesn't automatically extend to employees. You need to notify your carrier when you hire licensed staff and add them to your policy. Each additional insured typically adds $300 to $1,200 to your annual premium depending on their credentials and your specialty.
Your general liability policy covers slip-and-fall accidents and property damage claims from patients, but it generally excludes employee injuries—that's what workers' comp is for. You may need to increase your general liability limits as you grow, but hiring your first employee doesn't typically trigger immediate changes here.
If you have a Business Owner's Policy (BOP), which bundles general liability and property coverage, adding employees may require a policy endorsement. BOPs sometimes include limited EPLI coverage or make it available as an add-on at a reduced rate compared to standalone EPLI policies.
Payroll Reporting and Classification: Getting It Right
Workers' comp premiums are based on payroll, which means accurate reporting is critical. When you set up your policy, you'll estimate annual payroll for each classification code. At the end of the policy term, the carrier audits your actual payroll and adjusts your premium accordingly. Pay more than you estimated? You owe more. Pay less? You get a refund.
Here's what trips up PT practice owners: what counts as payroll. It's not just base salary. Bonuses, commissions, paid time off, and certain fringe benefits all count toward payroll for workers' comp purposes. Some states allow you to exclude certain benefits or cap payroll at a maximum weekly wage, but rules vary significantly. Your insurance agent or broker should explain your state's specific rules.
Classification accuracy matters enormously. If you hire someone to handle admin work but they occasionally assist with patient exercises, are they clerical or clinical? The answer affects your premium significantly. When in doubt, discuss job duties with your agent and get clear guidance on proper classification. The audit will reveal the truth eventually, so it's better to classify correctly from the start.
What Happens If You Skip Coverage?
Operating without required workers' compensation insurance is serious. Penalties vary by state but commonly include daily fines ($100 to $500+ per day per employee), stop-work orders that shut down your practice until you obtain coverage, and potential criminal charges. In California, it's a criminal offense punishable by up to a year in jail and fines up to $100,000.
Beyond legal penalties, you're exposed to unlimited liability if an employee is injured. Without workers' comp, that employee can sue you directly for medical bills, lost wages, pain and suffering, and more. A serious injury could bankrupt your practice. Workers' comp premiums seem expensive until you consider the alternative.
Some practice owners try to classify employees as independent contractors to avoid workers' comp requirements. States are cracking down on misclassification. The IRS and state labor departments use specific tests to determine employment status, and simply calling someone a contractor doesn't make it so. If they work set hours, use your equipment, and follow your protocols, they're almost certainly employees—and you need workers' comp coverage.
How to Get Started With Employee Coverage
Before you hire your first employee, contact your insurance agent or broker. They can help you obtain workers' comp coverage, review your existing policies for gaps, and discuss whether EPLI makes sense for your situation. Most agents can bind workers' comp coverage quickly—often within 24 hours—so you can have protection in place before your new hire starts.
Gather information about your new employee's job duties, estimated annual wages, and start date. Your agent will need this to quote coverage accurately. Be specific about job responsibilities—vague descriptions lead to classification errors and premium surprises down the road.
If you're hiring a licensed physical therapist or PTA, notify your professional liability carrier immediately and request an endorsement adding them to your policy. Don't assume they're covered just because they work for you—most policies require specific endorsements for additional insureds.
Hiring your first employee is a major milestone for your physical therapy practice. Getting the insurance right from day one protects your business, keeps you compliant with state law, and gives you peace of mind as you grow. The coverage might seem like just another expense, but it's really an investment in sustainable growth—and it's far cheaper than dealing with an uninsured claim or regulatory penalties. Talk to your insurance professional before that first day on the job, and you'll be set up for success.
