You've done it. Your retail store is thriving, and you're finally ready to hire your first employee. It's an exciting milestone—and a nerve-wracking one. Between posting the job, conducting interviews, and figuring out payroll, there's one critical item that often catches new employers off guard: insurance. The moment you transition from solo business owner to employer, your insurance needs change dramatically. Miss these requirements, and you could face state penalties, lawsuits, or financial disaster if something goes wrong.
Here's the thing most first-time employers don't realize: in most states, workers' compensation insurance isn't optional once you hire that first person. And beyond workers' comp, you'll want to think about employment practices liability coverage to protect yourself from the kinds of lawsuits that can bankrupt small businesses. Let's break down exactly what you need, why you need it, and how to get it right from day one.
Workers' Compensation: Your First Legal Requirement
The biggest insurance change when you hire your first employee is workers' compensation coverage. This isn't just a good idea—it's the law in nearly every state. Workers' comp covers medical expenses and lost wages if your employee gets injured on the job. Slip on a wet floor while restocking shelves? Workers' comp. Strain their back lifting boxes? Workers' comp. It protects both your employee and your business from devastating medical bills.
Most states require coverage from your very first hire, though a handful have different thresholds. Some states kick in at three employees, others at four or five. Texas is the only state that doesn't require it at all—but that doesn't mean you should skip it. Without coverage, you're personally liable for any workplace injuries, and those costs can easily run into six figures.
For retail businesses in 2025, workers' comp costs average about $46 per month per employee, or roughly $1.66 per $100 of payroll. That's actually pretty affordable compared to other industries. Why? Retail employees face lower physical risks than construction workers or manufacturers. Your premium is based on your payroll and your classification code—more on that in a minute.
Getting Your Employee Classification Right
Here's where a lot of new employers trip up: workers' comp premiums are determined by classification codes, and getting this wrong can cost you thousands. Most retail businesses fall under class code 8017, which covers general retail store employees—think cashiers, sales associates, and stock clerks. This code has relatively low rates because the work isn't particularly dangerous.
But if you misclassify employees—say, putting someone who does warehouse work under the retail code instead of the wholesale code 8018—you'll either overpay or get hit with a nasty surprise during an audit. Office staff like bookkeepers fall under code 8810, which has even lower rates because desk work is low-risk. When you're setting up your policy, be specific about what each employee actually does day-to-day. Your insurance agent needs accurate information to quote you correctly.
One more thing: some states use different codes. Delaware and Pennsylvania use code 0928 instead of 8017 for general retail, but the concept is the same. Make sure you're working with an agent who knows your state's specific requirements.
Employment Practices Liability Insurance: Your Safety Net Against Lawsuits
Workers' comp isn't the only coverage you need to think about. Employment Practices Liability Insurance (EPLI) is technically optional, but skipping it is risky. The moment you hire someone, you're exposed to employment-related lawsuits: discrimination claims, sexual harassment allegations, wrongful termination suits, even claims from people you didn't hire who say you discriminated against them in the application process.
Small businesses are actually the most vulnerable to these claims. Why? You probably don't have an HR department or an employee handbook with clear policies about hiring, discipline, and termination. You're figuring it out as you go, which means you're more likely to make mistakes—and those mistakes can be expensive. The retail and service industries account for more than half of all EPLI claims. If you hire seasonal workers or have high turnover, your risk goes up even more.
EPLI covers your legal defense costs and any settlements or judgments if you're sued. For a small business with five to twenty employees, a standard $1 million policy costs between $1,500 and $2,500 per year. Some policies average around $222 per month. It's often available as an add-on to your general liability policy or as part of a Business Owner's Policy (BOP), making it easy to bundle and manage.
Payroll Reporting and Accurate Records Matter More Than You Think
Your workers' comp premium is based on your payroll, so accurate payroll reporting isn't just an accounting task—it directly affects what you pay for insurance. When you apply for coverage, your insurer will estimate your annual payroll. At the end of the policy year, they'll audit your actual payroll and adjust your premium accordingly. If you underestimated, you'll owe more. If you overestimated, you'll get a refund.
This is why meticulous payroll records are essential. Track every hour worked, every wage paid, and make sure your classifications are correct. If your employee does both retail work and office work, you may need to split their payroll across two codes. It sounds tedious, but getting it right from the start saves you headaches and money later.
Also, remember that both full-time and part-time employees count for workers' comp purposes. Seasonal hires count too. If you bring on extra help during the holidays, factor that into your payroll estimates and notify your insurer if your staffing changes significantly.
How to Get Started: Finding the Right Coverage for Your Store
The first step is understanding your state's specific requirements. Check with your state's workers' compensation board or labor department to confirm when coverage is required and whether you need to purchase through the state system or a private insurer. Four states—North Dakota, Ohio, Washington, and Wyoming—require you to buy workers' comp through state-run programs. The other 46 states let you shop around with licensed brokers.
Talk to an insurance agent who specializes in small business coverage. They'll help you determine the right classification codes, estimate your payroll accurately, and bundle policies if that makes sense. Many agents can package workers' comp, general liability, and EPLI together as a Business Owner's Policy, which simplifies management and often saves you money.
Don't wait until your first employee's start date to secure coverage. Most states require you to have workers' comp in place before your employee begins work. Failing to comply can result in hefty fines, stop-work orders, and even criminal penalties in some jurisdictions. Get your coverage sorted at least a week or two before your hire date to avoid any last-minute scrambling.
Hiring your first employee is a huge step for your retail store, and getting your insurance right protects both your business and your team. Workers' compensation keeps you compliant and shields you from catastrophic medical costs. EPLI protects you from employment-related lawsuits that can sink small businesses. With the right coverage in place, you can focus on growing your store and building a great team—without lying awake at night worrying about what could go wrong. Take the time to do this right from the start, and you'll thank yourself later.
