This article is part of a larger series on Workers' Compensation Insurance.
Forty-nine states require most employers to carry workers’ compensation insurance. Texas is the only state that gives employers the choice to offer coverage. Rules vary, so it’s important to research workers’ compensation insurance requirements by state. Some states require workers’ comp for every business and others base the requirement on the number of employees.
What Is Workers’ Compensation Insurance?
Workers’ compensation insurance covers employees who experience a work-related injury or occupational illness during the course of their regular duties. Depending on your state, workers’ comp may pay medical expenses, a percentage of injured employees’ weekly wages, and sometimes costs for traveling to healthcare providers. Policies also can cover funeral expenses and death benefits.
In exchange for workers’ comp benefits, employees essentially give up their right to sue for workplace injuries. However, some states allow employees to file a civil suit in certain situations such as claims of intentional harm or gross negligence. In these cases, many states offer employer’s liability coverage in their workers’ compensation insurance to pay for the employer’s legal defense.
Workers’ Compensation Laws by State
With the exception of Texas, 49 states require employers to carry workers’ compensation insurance—but each state has its own set of rules. These rules determine not just who has to carry coverage, but also how they can get it and what happens when they don’t.
For example, most states mandate employers provide workers’ compensation benefits for full-time employees, but some also require coverage for part-time workers, contractors, temps, and seasonal employees. There are also states that only mandate coverage once you reach a certain number of employees, and others that require workers’ compensation for specific industries such as construction.
Workers’ comp laws by state may also list exemptions. Certain types of employees, such as limited liability company (LLC) members, board members, and family members, are often exempt from WC coverage.
In most states, you can purchase workers’ compensation insurance from a private insurance carrier like other types of business insurance. In a few states, however, you need to buy it exclusively through the state workers’ compensation fund or an assigned risk pool if your business is difficult to insure. Some states also allow employers the option to self-insure.
Who Is Required to Provide Workers’ Compensation Insurance?
Nearly every state requires employers to carry workers’ compensation insurance to cover the costs associated with a workplace injury or illness. Some states require employers to carry coverage as soon as they hire their first employee. In other states, employers don’t need to purchase workers’ comp until they reach a certain number of employees.
On the one extreme, you have states like California, Hawaii, and Illinois that require employers to have workers’ compensation insurance the moment they hire their first employee. Other states, like Mississippi, have a threshold of five regular employees before the law mandates coverage. Generally, states with a threshold require workers’ compensation coverage once businesses have between three to five employees.
You may need workers’ comp insurance if your business falls into one or more of several categories:
- Businesses located in the United States: Most US states require workers’ compensation insurance for any business that employs workers
- Businesses in high-risk industries: High-risk industries, like construction, need workers’ compensation to help reduce the overall cost of worker injuries; many states require coverage in these industries without exception
- Businesses acting as subcontractors: Clients may require subcontractors to have workers’ comp to avoid liability for your or your employees’ injuries; some states, like Virginia, requires employers to cover subcontractors in particular situations
- Businesses that want to reduce risk: Employees are less likely to sue if their workplace injury care costs are paid by their employer with workers’ comp
While seldom required by workers’ comp state laws, some business owners get self-employed workers’ compensation insurance even if they don’t have employees. That way, their business is protected if they suffer an injury that keeps them from earning income.
Workers’ Compensation Insurance Exemptions
Each state has its own requirements when it comes to who must be covered by workers’ compensation insurance. Each state also has its own exemptions. Often, independent contractors, corporate officers, LLC members, business owners and partners, domestic laborers, and sole-proprietors are exempt from workers’ comp regulations.
To know if your business needs workers’ compensation insurance, contact your state’s official department of workers’ compensation. The US Department of Labor provides a directory of each state’s workers’ compensation pages.
How to Cover Out-of-State Employees
Remember, what’s applicable in one state may not apply in another. Workers’ compensation exemptions fall under each state’s own rules and regulations. That’s important to keep in mind if your business has employees based in other states. Workers’ compensation policies are bound to the state or states listed in the policy, but you might be able to add an additional state to your policy.
For example, say your business is located in Texas, where workers’ comp insurance is not typically required. But you have a distributed team of employees working in New York, where coverage is mandatory for all employees. You would need to obtain workers’ comp coverage for the New York employees to remain compliant with state law.
If you have distributed employees working in a monopolistic state, however, you may need to buy a separate policy since you can’t purchase it on the private market. In some cases, state governments may have reciprocal agreements with other states. For example, Washington state has signed reciprocal agreements with eight other states that designated coverage under the laws of a worker’s home state when working temporarily in another state.
State Penalties for Workers’ Comp Noncompliance
Failing to comply with state workers’ compensation insurance requirements can mean serious fines or even jail time. Penalties for noncompliance vary by state but are often dependent on the number of employees in the company and the length of time in noncompliance. Your reason for being without required workers’ comp coverage may also play into consideration.
Here are some examples of state penalties for workers’ comp noncompliance:
- California: Noncompliance is considered a criminal offense and can lead to penalties of twice the amount the business would have paid in workers’ compensation premium or $1,500 per employee, whichever is higher
- Illinois: Noncompliance is usually a misdemeanor unless an employer is shown to have knowingly failed to comply, then the charge is a felony; employers can be fined up to $500 for every day of noncompliance
- New Jersey: Noncompliance is considered a criminal offense with violators facing up to $10,000 in fines or jail time of up to 18 months
- New York: Businesses with more than five employees found noncompliant can face up to $50,000 in fines
- Virginia: Businesses can face up to $250 for each day of noncompliance, up to a maximum penalty of $50,000
As stated, each state handles noncompliance penalties differently, with many levying hefty fines.
The penalty amount that a noncompliant business must pay often depends on:
- Number of employees: It’s not a rule of thumb, but sometimes smaller businesses face lower fines
- Length of noncompliance: Many states charge businesses who knowingly fail to obtain workers’ comp coverage for each day of noncompliance
- Reason for noncompliance: If you purposefully misrepresent your business’s number of employees or the type of jobs they perform, you might be charged higher penalties
Whatever the reason, noncompliance can cost your business thousands of dollars in penalties—or you could even face jail time. Also, if you fail to provide workers’ compensation benefits, there’s a higher risk an injured employee could file a lawsuit against your business to recoup the cost of medical expenses and lost wages.
How to Obtain Workers’ Compensation Insurance
In most states, business owners can purchase workers’ compensation insurance from private carriers. Some states also offer state-funded workers’ comp for businesses that struggle to find coverage from private insurers. Four states are monopolistic, meaning the state fund is the only avenue. Additionally, some accounting and payroll vendors can help you acquire workers’ comp insurance.
Here are four ways to obtain workers’ compensation insurance:
Private Insurance Carriers
Most states, including many with state funds, allow businesses to obtain workers’ compensation coverage from a private insurance company. Buying directly from a private insurer or broker can sometimes be faster and simpler, while also allowing you to consolidate your business insurance shopping experience and manage all your policies in one place.
Competitive Workers’ Compensation State Funds
A competitive state-run workers’ compensation fund is set up by a state and used to provide employers with workers’ compensation. State funds are an alternative option to private workers’ compensation insurance companies. If your business is in a high-risk industry or you have existing workers’ comp claims, the state fund might be the right choice.
Not all states that have funds are state-administered—some are private insurance companies that write workers’ comp coverage for difficult-to-insure businesses. Rates tend to be more affordable from state funds for high-risk industries or businesses that struggle to find coverage with a private insurer.
These states have competitive state funds:
- Arizona: CopperPoint
- California: State Compensation Insurance Fund
- Colorado: Pinnacol Assurance
- Hawaii: Hawaii Employers Mutual Insurance Company
- Idaho: State Insurance Fund
- Kentucky: Kentucky Employers’ Mutual Insurance Authority
- Louisiana: Louisiana Workers’ Compensation Corporation
- Maine: Maine Employers Mutual Insurance Co.
- Maryland: Chesapeake Employers’ Insurance Company
- Minnesota: State Fund Mutual Insurance Company
- Missouri: Missouri Employers Mutual Insurance Company
- Montana: Montana State Fund
- New Mexico: New Mexico Mutual Casualty Company
- New York: New York State Insurance Fund
- Oklahoma: CompSource Mutual Insurance Company
- Oregon: SAIF Corporation
- Pennsylvania: State Workmen’s Insurance Fund
- Rhode Island: The Beacon Mutual Insurance Co.
- Texas: Texas Mutual Insurance Company
- Utah: Workers’ Compensation Fund of Utah
While not all states have a state-administered fund, some, such as Alaska and South Carolina, offer an assigned risk pool for difficult-to-insure businesses. These pools are often administered by the National Council on Compensation Insurance (NCCI). State-run funds may not always provide the most comprehensive workers’ comp for employers, so it’s important to research your options to find the right coverage.
Monopolistic Workers’ Comp State Funds
Four states—North Dakota, Ohio, Washington, and Wyoming—prohibit businesses from getting coverage from private insurance carriers. These are known as monopolistic workers’ comp states because the state fund is the only option for workers’ compensation insurance. Employers must obtain coverage from the state fund or be approved to self-insure.
Remember to pay special attention to the workers’ comp rules and regulations if your business is located in a monopolistic state, such as if your employees work in another state where a monopolistic fund does not exist. Unless your state or the other state has reciprocity laws, you may not have sufficient coverage.
Some states allow approved business owners to self-insure for workers’ compensation. Instead of paying a premium to a private insurer or state fund, an employer pays the cost of each claim out of pocket. To self-insure, many states require businesses to demonstrate they have the appropriate financial stability to back up claims on their own. Business owners may also find they need administrative and claims processing assistance.
Workers’ Comp Requirements Frequently Asked Questions (FAQ)
Workers’ compensation insurance can be a complicated and confusing topic for business owners because of its wide variety of regulations and requirements. Below are a few commonly asked questions.
Do I need workers’ compensation insurance?
In most cases, employers are required by law to obtain workers’ compensation to pay for costs when an employee experiences a work-related injury. Workers’ compensation insurance is state regulated, and there are many exceptions, so it’s important to check your state’s rules.
Do I need workers’ comp for employees working in a different state?
If you have employees living or working in more than one state, you may need additional workers’ comp coverage. Businesses with remote or distributed teams should carefully research each employee’s workers’ compensation insurance requirements by state to ensure you’re legally operating there.
Do I need workers’ compensation insurance if I’m a sole proprietor?
If you’re self-employed or a sole proprietor with no employees, your workers’ compensation coverage requirements are dependent on the state in which you operate. Some states allow sole proprietors to opt out of coverage, but you likely still have the option to obtain it. Check your state’s requirements to ensure your business complies with all coverage mandates.
How do I manage keeping workers’ compensation premiums low?
You can help keep your workers’ compensation premium low by maintaining safe business operations to reduce the likelihood of claims. Implement safety training for employees to help prevent injuries. Typically, businesses with fewer claims see lower workers’ compensation premiums.
Workers’ compensation insurance requirements vary by state, by industry, and even by the size, structure, and payroll of your business. Businesses that fail to carry workers’ compensation insurance can face severe fines, lawsuits, or even jail time for noncompliance. Review workers’ comp laws by state to learn if coverage is mandated for your business.