In this guide
Workers' compensation insurance pays medical costs and part of lost wages when an employee is hurt or becomes ill because of their job, usually regardless of who was at fault. In exchange, employees generally cannot sue their employer over the injury. Workers' compensation is governed by state law, and in most states most employers with employees must carry it. Texas is the notable exception, where most private employers may choose not to.
Key takeaways
- Workers' compensation covers job-related injuries and illnesses, including medical care, rehabilitation, and a portion of lost wages.
- It is mostly a no-fault system and typically serves as the employee's exclusive remedy against the employer.
- State law decides who must carry it, which employees or owners are covered, and where coverage can be purchased.
- Four states (North Dakota, Ohio, Washington, and Wyoming) have monopolistic state funds, so private carriers generally cannot write the coverage there.
- Premiums generally depend on payroll, job classification, and claims experience.
How workers' compensation works
The National Association of Insurance Commissioners (NAIC) describes workers' compensation as a bargain between employers and employees. Employees receive benefits for work-related injuries and illnesses without having to prove the employer was at fault. Employers, in return, give up certain legal defenses and are protected from most lawsuits over those injuries. The system is generally the employee's "exclusive remedy."
Typical benefits include:
- Medical care related to the injury or illness.
- Wage replacement for part of the income an employee loses while unable to work.
- Rehabilitation services.
- Death benefits, including a funeral benefit, if a worker is killed on the job.
Benefit amounts, waiting periods, and time limits are set by state law and are adjusted by legislatures from time to time. State labor or workers' compensation agencies administer the system, and disputes are typically resolved by state boards or judges, according to the NAIC.
Who has to carry it?
For private employers, the answer is set by each state. In most states, most employers with employees must have workers' compensation. Details differ, including:
- How many employees trigger the requirement. Some states exempt very small employers or certain industries.
- Whether sole proprietors, partners, LLC members, and corporate officers are required, allowed, or able to opt out of coverage.
- Treatment of part-time, seasonal, farm, domestic, and volunteer workers.
- Whether you can buy from private insurers, a state fund, or both, or whether large employers can self-insure.
The NAIC notes that most states let large, financially stable employers self-insure if they meet qualification standards. Because the specifics change, the most reliable source is your state's workers' compensation agency or department of insurance.
Watch out: Penalties for failing to carry required coverage can be severe and vary by state. They may include fines, stop-work orders, and personal liability for the injured worker's costs. Check your state's rules before you hire.
Employees vs. independent contractors
Workers' compensation applies to employees, so classification matters. The IRS looks at behavioral control, financial control, and the type of relationship, with no single factor deciding the question. State workers' compensation agencies have their own tests, which may be stricter. If a worker you treated as a contractor is later considered an employee, the business may face premium audits and penalties. A legal or insurance professional can help with a specific situation. See also insurance for freelancers and independent contractors.
Where employers get coverage
| Option | How it works |
|---|---|
| Private insurers | In most states, private insurers compete to write workers' compensation policies. |
| State funds | Some states have a state fund that competes with private insurers; others use one to provide coverage to employers who cannot find it elsewhere. |
| Monopolistic state funds | North Dakota, Ohio, Washington, and Wyoming. Employers there generally must buy from the state fund. |
| Self-insurance | Large employers that meet state standards may fund claims themselves in most states. |
The NAIC also lists Puerto Rico and the U.S. Virgin Islands as having monopolistic state funds. In monopolistic states, employers may still need separate employer's liability coverage for some lawsuits not covered by the state fund, so ask the state agency or an agent what applies.
Texas: coverage is generally optional
Texas is the only state where most private employers may choose whether to carry workers' compensation, according to the Texas Department of Insurance (TDI). Employers that opt out are called "non-subscribers." Key points from TDI and the NAIC:
- Non-subscribers can be sued by injured employees and keep their traditional legal defenses, which may leave them more exposed than employers that carry coverage.
- Non-subscribing employers must still meet notice and reporting duties, such as notifying the state they do not have coverage and reporting certain work-related injuries and illnesses to the Division of Workers' Compensation.
- Private employers who contract with government entities must provide workers' compensation coverage for employees working on those projects, under TDI's rules.
- Government entities such as school districts, cities, and counties must have coverage.
Good to know: Even where the law does not require coverage, customers, general contractors, or lenders may require proof of workers' compensation in a contract. Texas employers should read agreements carefully and check TDI's current rules.
How premiums are calculated
The National Council on Compensation Insurance (NCCI) describes a common structure for premium. Class codes describe your operations, and for most classes the exposure is employee payroll. A rate approved by the state for each classification is applied per $100 of payroll. Higher-hazard classes carry higher rates. NCCI gives roofing versus clerical work as an example.
The basic formula is exposure times rate divided by 100. Several other factors can adjust the result:
- Experience modification (mod). This compares your actual losses with expected losses for similar employers, usually using the latest three years of data. A mod above 1.0 increases premium, and one below 1.0 reduces it. New businesses or those without enough data typically receive a neutral 1.00.
- Payroll audits. Insurers often audit payroll after the policy period and adjust the premium.
- Other charges or credits. These can include expense constants and state assessments, depending on the state.
Because classification and payroll drive the price, accurate records matter. For a broader look at pricing, see what affects the cost of small business insurance.
What workers' compensation does not cover
- Lawsuits from customers, vendors, or other third parties. That is a job for general liability. See our small business insurance guide.
- Injuries unrelated to work, which are generally excluded.
- Professional errors, property damage, or employment practices claims such as discrimination.
- Independent contractors, in most cases, unless state law treats them as employees.
A business owner's policy does not include workers' compensation either. Read business owner's policies explained for details.
What to do if an employee is hurt
- Get medical help first. Call 911 for emergencies.
- Report the injury to your insurer as soon as possible. Many states and policies set deadlines for notice.
- Complete required state forms. Employers often have to file a first report of injury with the state or insurer.
- Document what happened. Record the date, place, witnesses, and details.
- Cooperate with the claims process, including return-to-work planning where appropriate.
- Do not retaliate. Many states prohibit punishing workers for filing a claim.
How to get started as an employer
- Check your state's requirements with the workers' compensation agency or insurance department before your first hire.
- Classify your employees accurately by their duties.
- Estimate payroll for the year.
- Compare quotes from several insurers, or check the state fund where that is the only source.
- Post required notices and keep proof of coverage available.
- Review at renewal, since payroll and operations change.
Frequently asked questions
Is workers' compensation required in every state?
No. It is required for most employers in every state except Texas, where most private employers may opt out, according to the NAIC and TDI. Even in other states, thresholds and exemptions vary, so check yours.
Do sole proprietors need workers' compensation?
Often a sole proprietor with no employees is not required to carry it, but rules vary by state and industry. Some owners can choose to cover themselves. Ask your state agency.
What is a non-subscriber in Texas?
An employer that has chosen not to carry workers' compensation. They can be sued by injured workers and must meet certain notice and reporting requirements, according to TDI.
What is an experience mod?
It is a multiplier that compares your claims history with expected losses for similar employers. NCCI explains that a figure above 1.0 raises your premium and below 1.0 lowers it.
Can I buy workers' compensation from a private insurer in every state?
No. In North Dakota, Ohio, Washington, and Wyoming, coverage generally must come from the state fund. In other states, private insurers are usually available, sometimes alongside a state fund.
Does workers' compensation cover remote or home-office employees?
It can, if the injury arises out of and in the course of employment, but the details depend on state law and the facts. Ask your insurer and state agency.
Sources
- NAIC – Workers' Compensation Insurance
- Texas Department of Insurance – Workers' compensation insurance guide
- Texas Department of Insurance – Non-subscriber information
- Texas Department of Insurance – Employer resources
- NCCI – ABCs of Experience Rating
- IRS – Independent Contractor (Self-Employed) or Employee?
General information only. This guide explains general concepts and is not insurance, legal or financial advice. Rules and prices vary by state and insurer. Check your policy documents and speak to a licensed insurance professional or your state insurance department about your situation.