You're finally doing it. After months of prep, recipe testing, and paperwork, you're ready to hire your first employee for your restaurant. Maybe it's a server to help during dinner rush, or a line cook so you're not doing everything yourself. Exciting, right?
Here's what catches most new restaurant owners off guard: the moment you bring on that first employee, your insurance needs change completely. And we're not talking about optional coverage you can put off. In most states, workers' compensation insurance becomes legally required the day your first employee clocks in. Miss this, and you're looking at serious fines—not to mention being personally liable if your new hire gets hurt on the job.
Let's walk through exactly what insurance you need when hiring your first restaurant employee, what it costs, and how to avoid the costly mistakes that trip up new employers.
Workers' Compensation: The Non-Negotiable Requirement
Workers' compensation insurance covers medical bills and lost wages if your employee gets injured at work. In the restaurant world, that could be a server slipping on a wet floor, a cook getting burned, or a dishwasher straining their back lifting supplies. It happens.
The catch? When you need this coverage varies by state. In New York, you need workers' comp from day one—even if you're hiring your cousin to work the register part-time. In Florida, the requirement kicks in at four employees. Alabama gives you until you hit five employees. And Texas? It's the only state where workers' comp is technically optional, though that doesn't mean going without is a good idea.
Here's the thing most owners don't realize: "employee" means anyone you pay. Part-timers count. Weekend help counts. Family members on payroll count. Seasonal workers count. If you're paying them through Venmo, Cash App, or old-fashioned checks, they need to be covered. The only people who don't count are true independent contractors—and the IRS has very specific rules about who qualifies.
What does it cost? For restaurants in 2025, you're looking at an average of $1.06 per $100 of payroll, which works out to roughly $28-$54 per employee per month depending on your state. New York runs higher at about $73 monthly per worker, while North Carolina comes in around $55. The good news: tips don't count toward payroll for premium calculations, so you're only paying on base wages.
Classification Codes: Why They Matter More Than You Think
When you set up workers' comp, your insurance company will assign classification codes to your employees. These codes determine your premium rates, and getting them wrong can cost you serious money.
Most full-service restaurants fall under code 9082 (Restaurant NOC—Not Otherwise Classified). This covers your servers, chefs, and general restaurant staff. Fast food operations without wait staff typically use code 9083. And if you're running a bar where more than 50% of revenue comes from alcohol, you'll be classified under code 9084.
Here's where it gets tricky: some states use completely different codes. Pennsylvania and Delaware use code 0975 for all restaurants. New York uses code 9074 if you make 30% or more of your revenue from alcohol. Getting this wrong doesn't just mean paperwork hassles—it can mean paying the wrong rate for months before your annual audit catches it, then owing a big back-premium bill.
Pro tip: if you have employees doing office work or bookkeeping, make sure they're classified separately under clerical codes (like 8810). Kitchen and front-of-house staff carry higher risk, so they cost more to insure. Your bookkeeper sitting at a desk? That's a lower-risk classification with cheaper rates.
Employment Practices Liability: Protection From Lawsuits
Once you have employees, you open yourself up to employment-related lawsuits. We're talking wrongful termination, discrimination, sexual harassment, retaliation—claims that can bankrupt a small restaurant even if you win in court. Legal defense alone can cost tens of thousands of dollars.
This is where Employment Practices Liability Insurance (EPLI) comes in. It covers legal costs and settlements when an employee (current or former) sues you for employment-related issues. And restaurants are particularly vulnerable. High turnover, young staff, customer-facing roles, late-night shifts—all of this creates opportunities for claims.
According to industry data, more than half of all employment lawsuits target small to medium-sized businesses. Why? Because unlike big corporations, you probably don't have an HR department or employment lawyer on retainer. You're figuring this stuff out as you go, which means you're more likely to make mistakes.
EPLI policies for small restaurants typically cost $800-$2,000 annually, depending on how many employees you have and your claims history. Some insurers offer it as an add-on to your general liability policy or business owner's policy (BOP), which can save you money versus buying standalone coverage. If you're in a customer-facing business like restaurants, consider getting third-party EPLI coverage too—that protects you if a customer sues over discrimination or harassment by your staff.
Payroll Reporting and the Audit That Will Happen
Here's something nobody tells you until it's too late: workers' comp premiums are based on estimates, and at the end of your policy year, you'll get audited. The insurance company will review your actual payroll, compare it to what you estimated, and either refund you money or send you a bill for the difference.
This means accurate payroll records aren't optional—they're essential. Every employee, every pay period, every dollar of wages needs to be documented. Remember: tips don't count, but everything else does. Base wages, bonuses, overtime—it all goes into the payroll calculation.
And for the love of all that's holy, don't try to classify employees as independent contractors to dodge workers' comp requirements. The penalties are brutal. California charges $5,000-$15,000 per misclassified employee for honest mistakes, and $10,000-$25,000 if they think you did it intentionally. Plus, you'll owe back premiums, unpaid payroll taxes (both employer and employee portions), interest, and penalties for failing to file W-2s. One misclassified employee can cost you more than a year's worth of proper insurance would have.
How to Get Started: A Practical Checklist
Before your first employee's first shift, here's what you need to do:
First, verify your state's workers' comp requirements. Don't assume—check with your state's workers' compensation board or a licensed insurance agent. Some states require coverage from employee one, others give you a grace period. Know which applies to you.
Second, get accurate quotes from at least three insurers. Rates can vary significantly between carriers, and you want to make sure you're getting the right classification codes from the start. Be honest about your payroll estimates—lowballing to save on premiums now just means a bigger bill at audit time.
Third, ask about bundling EPLI with your general liability or BOP. Many insurers offer discounts when you package coverages together, and it's one less policy to manage.
Fourth, set up proper payroll systems from day one. Whether you're using payroll software or working with a payroll service, make sure you can easily generate reports showing total wages by employee and by classification code. You'll need this for your annual audit.
Finally, put basic HR policies in writing. You don't need a 50-page employee handbook, but you should have clear, written policies on harassment, discrimination, termination procedures, and how employees report workplace issues. This documentation can be a lifesaver if you ever face an EPLI claim.
Hiring your first employee is a huge milestone for your restaurant. Don't let insurance gaps turn your celebration into a crisis. Get the right coverage in place before day one, keep accurate records, and treat your insurance as the essential business expense it is. Your future self—and your employees—will thank you.
