Article Reviewed by a licensed insurance professional: Sam Meenasian (CA dept of insurance license #0F75955).
Estimated reading time: 6 minutes
Workers’ compensation is one of those topics that can give business owners an instant headache. It can feel confusing, time-consuming, and expensive. Some owners even consider skipping it. That is risky.
What is workers’ compensation insurance?
Workers’ compensation insurance helps cover employees who are injured or become ill because of their work. In many states, the system is designed as a no-fault framework. That means an injured employee generally does not have to prove someone else caused the injury to qualify for benefits.
While details vary by state, workers’ comp commonly helps pay for:
- Medical treatment related to a work injury or occupational illness
- Partial wage replacement when an employee cannot work
- Disability benefits (temporary or permanent, depending on severity)
- Vocational rehabilitation in some cases
Workers’ compensation is typically paid for by the employer, not deducted from employee wages.
Is workers’ compensation required?
Workers’ comp is regulated at the state level, so there is no single national rule. In most states, businesses must carry workers’ comp once they hire employees, but the exact trigger can depend on:
- Number of employees
- Industry (construction is often treated differently)
- Whether owners, officers, or family members count as employees
- Whether you use subcontractors or 1099 labor
Two notable exceptions:
- Texas: Participation is voluntary for most employers, although public entities are treated differently, and employers on certain public building or construction projects may be required by contract to carry coverage.
- South Dakota: The state notes there is no law requiring employers to carry workers’ compensation insurance, but it is strongly recommended, and an uninsured employer may be sued in civil court by an injured worker.
Even in states where a policy is not generally required, opting out can shift costs back onto the business through lawsuits, medical bills, and lost productivity.
Quick examples of state thresholds (not a complete list)
These examples show how different the rules can be. Always verify your state’s current requirements.
- Colorado: If you have one or more employees, you must carry workers’ comp, including for part-time workers and even family members.
- Florida: Construction employers generally need coverage with one or more employees, while many non-construction employers need coverage with four or more employees. Agriculture has separate thresholds.
- Georgia: Most employers regularly employing three or more workers (including part-time) must carry workers’ comp.
- North Carolina: Generally requires coverage for three or more employees, with specific exemptions such as certain agricultural employment.
- Virginia: As a general rule, coverage is required when a business employs more than two employees (3+), and an employee is defined broadly.
- Alabama: Generally applies to businesses with five or more employees.
- Missouri: Coverage is generally required for five or more employees, and construction has stricter requirements.
- Tennessee: Non-construction employers generally need coverage for five or more employees, while construction and coal mining have different rules.
- New Mexico: Coverage is generally required for three or more workers, and construction can require coverage regardless of headcount.
Common exemptions and why you should be cautious
Many guides oversimplify exemptions. The safest approach is to assume you need coverage until you confirm otherwise.
- Owners, partners, and corporate officers: Some states allow certain owners or officers to exclude themselves from coverage, but rules vary widely and may not reduce the employee count for threshold purposes.
- Part-time and seasonal staff: Often counted as employees for determining whether coverage is required.
- Working family members: Some states explicitly include them in the definition of employee.
- Independent contractors: Misclassification is a major compliance risk. If you use subcontractors, day labor, or 1099 workers, confirm classification and certificate requirements.
How workers’ comp is purchased (private market vs state funds)
In most states, employers can buy workers’ comp from private insurance carriers (sometimes through an independent agent) or qualify to self-insure if they meet state requirements.
A few states operate differently and require coverage through a state-run system:
- Washington: The state does not allow private workers’ compensation coverage through the standard market. Employers purchase coverage through L and I or qualify as self-insured.
- North Dakota: WSI is the sole provider and administrator, and private insurers cannot underwrite workers’ comp there.
- Ohio: The Ohio Bureau of Workers’ Compensation is the exclusive provider of workers’ comp insurance in Ohio.
- Wyoming: Wyoming’s Department of Insurance describes Wyoming as monopolistic, with most employers obtaining coverage through the state program.
If you operate in one of these states, ask your broker about employers’ liability and “stop-gap” coverage needs, especially if you sign contracts requiring higher liability limits.
The cost of not carrying workers’ compensation
If your state requires workers’ comp and you do not carry it, the consequences can be immediate and expensive. Enforcement varies by state and can include:
- Daily fines and premium penalties
- Stop-work orders that shut down operations until coverage is in place
- Responsibility for claim costs out of pocket
Colorado, for example, notes fines up to $500 per day and potential shutdown action. California rules include stop orders requiring employers to cease using employee labor until required coverage is obtained. Florida law authorizes significant penalties tied to stop-work order violations.
Even where a policy is not generally required, you may be trading an insurance premium for unpredictable legal exposure. South Dakota explicitly warns that an uninsured employer may be sued in civil court by an injured worker. In Texas, employer protections tied to the workers’ comp system apply differently when coverage is in place.
How workers’ comp premiums are typically priced
While pricing varies by carrier and state, premiums often depend on:
- Payroll by job classification (class codes)
- Claims history and experience modification (mod)
- Industry risk and safety practices
- Use of subcontractors and whether you collect certificates of insurance
- Multi-state exposure
Improving safety programs and implementing a return-to-work plan can reduce claim severity and help control long-term costs.
Key takeaways for business owners
- Workers’ comp rules are state-specific. Texas and South Dakota are notable exceptions where a policy is not generally required for most private employers, but opting out can increase liability risk.
- Many states require coverage as soon as you hire your first employee. Other states set thresholds (often 2 to 5 employees) and apply special rules for construction and agriculture.
- Do not assume part-time, seasonal, or family-member workers are excluded. Many states count them as employees.
- Misclassifying workers as independent contractors is a frequent and expensive compliance mistake.
- If you operate in Washington, North Dakota, Ohio, or Wyoming, you may need to purchase coverage through the state system.
Why USA Business Insurance
If you are trying to make sure you are compliant and properly protected, USA Business Insurance can help you compare workers’ compensation options, explain common state requirements, and request quotes based on your payroll and job duties. We can also help with certificates of insurance for clients, landlords, and contracts.
