Workers' compensation insurance provides financial protection when employees get injured at work. It covers lost wages and medical costs and protects you from workplace injury lawsuits while ensuring your workers get the care they need. You'll pay premiums based on your payroll (calculated per $100 of wages), which costs far less than covering a serious workplace accident out of pocket.
What Is Workers' Compensation?
Updated: July 2, 2025
Advertising & Editorial Disclosure
Key Takeaways
Workers' compensation covers medical bills and lost wages for work injuries, but excludes intentional injuries and intoxication accidents.
Coverage A is for unlimited medical benefits and wage replacement. Coverage B is for employer liability protection against employee lawsuits.
Most businesses with employees need workers' compensation insurance, especially those in high-risk industries. However, coverage is optional in Texas and South Dakota.
What Is Workers' Compensation Insurance?
Workers’ Comp Coverage Types and Terms
A workers' compensation policy has several key components:
Workers’ compensation coverage A (employee benefits)
Provides unlimited medical benefits and wage replacement according to state law. You can't adjust these amounts because your state's workers' compensation system sets them based on the employee's wages and injury severity.
Workers’ compensation coverage B (employers' liability)
Protects your business from employee lawsuits with three adjustable limits: bodily injury per accident, disease policy limit and disease per employee. Workers' compensation coverage B limits vary by insurer, and you can increase them for additional lawsuit protection.
Deductibles
The amount you pay out-of-pocket before insurance coverage begins. Most standard workers' compensation policies have no deductibles, but larger businesses can choose deductible policies to reduce their premium costs.
Experience modification rate (EMR)
Adjusts your premium up or down based on your claims history compared to similar businesses. A score below 1.0 cuts your premium costs, while a score above 1.0 increases them. New businesses start at 1.0 until they accumulate three years of claims data for accurate scoring.
Classification code
Sets your base premium rate per $100 of payroll. Construction and manufacturing pay higher rates due to injury risks, while office work pays lower rates. Your insurer assigns codes based on what your business actually does, not what you call it.
Premium audits
Your insurer reviews your actual payroll annually to calculate your final premium. You'll receive a bill or refund based on the difference between estimated and actual payroll. Separate your payroll records by job type to avoid surprise charges when the auditor visits.
No-fault system
Workers' comp ensures workers get benefits regardless of who caused the accident and protects you from most workplace injury lawsuits. This trade-off speeds up claims without lengthy court battles over who's to blame.
What Does Workers' Comp Cover?
Workers' compensation covers medical expenses, lost wages, disability benefits and other costs when employees are injured at work or develop job-related illnesses. While coverage varies depending on your location, most policies cover the following:
Claim Type | Is It Covered? | Business Example |
|---|---|---|
Medical expenses for work injuries | Yes | During a busy dinner rush, your restaurant cook burns his hand on the grill. Workers' comp covers the emergency room visit and follow-up doctor appointments. |
Intentional self-injury | No | Employees deliberately hurt themselves, hoping to get time off work. It won't be covered since it was intentional. |
Lost wages during recovery | Yes | Your construction worker breaks their leg at the job site and can't work for six weeks. They'll get about two-thirds of their usual paycheck. |
Injuries while intoxicated | No | A worker shows up drunk and falls off a ladder. Since alcohol caused the accident, you won't have coverage for this injury. |
Permanent disability from work accident | Yes | Your factory worker loses a finger in machinery. They'll receive ongoing monthly payments based on how much the injury affects their ability to work. |
Commuting accidents | No | An employee gets in a car crash driving to work in the morning. Since it happened off your property, it's not a workers' comp claim. |
Death from workplace accident | Yes | A delivery driver dies in a work-related vehicle accident. Their family gets help with funeral costs, plus ongoing income support. |
Personal activities at work | No | Someone hurts their back playing in the optional company softball game. Since it was voluntary recreation, it's not covered. |
Physical therapy and rehabilitation | Yes | Your office worker develops carpal tunnel from typing. Workers' comp pays for physical therapy and ergonomic equipment to help them recover. |
Pre-existing medical conditions | No | A worker's chronic back problems worsen over time. Your policy won't cover it unless you prove work made it significantly worse. |
PTSD for first responders | Yes | Your security guard develops PTSD after witnessing a violent incident at work. Most states now cover counseling and therapy for this. |
Criminal activity injuries | No | An employee gets hurt while trying to steal from your cash register. Injuries during illegal activities aren't covered. |
Job-related stress and anxiety | Yes | Your health care worker develops severe anxiety after repeated patient attacks. Some states are starting to cover work-related mental health issues. |
How Much Workers’ Compensation Coverage Do I Need?
Most small businesses carry $1 million in employers' liability limits (coverage B), while employee benefits (coverage A) provide unlimited medical benefits as state law requires. Your coverage needs depend on state requirements, industry risk level and payroll size. Most states require coverage if you have employees, though some set minimum thresholds of three to five employees.
Who Needs Workers' Compensation Insurance?
Most businesses must carry workers' compensation insurance once they hire employees. Employers always pay the premiums and can't legally deduct these costs from employee wages.
Several factors determine whether your business needs coverage:
- 1
Most businesses require it
In most states, nearly all businesses with employees, even with just one part-time worker, need workers' compensation coverage.
- 2
There are state variations
Texas and South Dakota allow most private employers to opt out of workers' compensation, while other states mandate coverage. Check your state's requirements.
- 3
Your business structure matters
Sole proprietors without employees usually aren't required to buy coverage, but partnerships, corporations and LLCs with employees generally must.
- 4
There are industry-specific requirements
Construction contractors must often carry coverage, even without employees, while certain agricultural businesses may have different requirements or exemptions.
Workers' Compensation Exemptions
Some businesses and workers can legally skip coverage, but exemptions from workers' compensation insurance come with important financial risks.
Exemption | Explanation | Business Example |
|---|---|---|
Business owners | Many states let business owners, partners and corporate officers exclude themselves from coverage even when their companies carry workers' comp for employees. | You own a small retail store with three employees and carry workers' comp for them, but you exclude yourself as the owner to save on premiums. |
Independent contractors | Misclassifying employees creates problems, but your workers' comp policy doesn't cover true independent contractors. | You hire someone to design your website. They're not covered if they're truly independent, but you could face penalties if you treat them like an employee. |
Employee count thresholds | Several states don't require coverage until you reach three to five employees, but requirements kick in once you cross these limits. | Your landscaping business has two full-time workers in North Carolina, which has a three-employee threshold. You're not required to have coverage yet, but will be when you hire your third worker. |
Even when exemptions apply, consider the financial exposure. Without workers' comp, you're personally responsible for employee medical bills, lost wages and potential lawsuits that could cost hundreds of thousands of dollars.
Workers’ Comp Requirements by State
Workers' comp requirements differ by state, with most requiring coverage from your first employee, while others wait until you have three to five workers. Texas and South Dakota are unique in that they make coverage optional for most businesses. You'll also see differences in whether states cover part-time workers or exclude certain industries.
State | Employee Threshold | Coverage Notes |
|---|---|---|
Alabama | 5+ employees | Excludes agricultural and domestic workers |
Alaska | 1+ employees | Includes part-time workers |
Arizona | 1+ employees | Excludes sole proprietors and partners |
Arkansas | 3+ employees | Different rules for agriculture and construction |
California | 1+ employees | Includes part-time and seasonal workers |
Colorado | 1+ employees | Excludes domestic workers in private homes |
Connecticut | 1+ employees | Includes corporate officers |
Delaware | 1+ employees | Mandatory for all employee types |
Florida | 1-4+ employees | Different rules by industry |
Georgia | 3+ employees | Excludes agricultural workers |
Hawaii | 1+ employees | Includes temporary and part-time workers |
Idaho | 1+ employees | Excludes domestic workers |
Illinois | 1+ employees | Strict penalties for non-compliance |
Indiana | 1+ employees | Includes corporate officers |
Iowa | 1+ employees | Excludes agricultural employees |
Kansas | 1+ employees | Coverage required |
Kentucky | 1+ employees | Includes all worker classifications |
Louisiana | 1+ employees | Excludes agricultural and domestic workers |
Maine | 1+ employees | Includes part-time and seasonal workers |
Maryland | 1+ employees | Mandatory for all businesses |
Massachusetts | 1+ employees | Includes corporate officers |
Michigan | Complex System | 1+ employee working 35+ hours/week for 13+ weeks, OR 3+ employees at one time |
Minnesota | 1+ employees | Includes temporary workers |
Mississippi | 5+ employees | Excludes agricultural and domestic workers |
Missouri | 5+ employees | Lower threshold for construction |
Montana | 1+ employees | State fund available (not mandatory) |
Nebraska | 1+ employees | Includes all employee types |
Nevada | 1+ employees | Mandatory coverage required |
New Hampshire | 1+ employees | Includes corporate officers and partners |
New Jersey | 1+ employees | Mandatory for all businesses |
New Mexico | 3+ employees | Different rules for construction |
New York | 1+ employees | Includes domestic and farm workers |
North Carolina | 3+ employees | Excludes agricultural workers |
North Dakota | 1+ employees | Monopolistic state fund |
Ohio | 1+ employees | State fund participation required |
Oklahoma | 1+ employees | Includes all worker types |
Oregon | 1+ employees | Mandatory coverage required |
Pennsylvania | 1+ employees | Must cover all employee types |
Rhode Island | 1+ employees | Includes domestic workers |
South Carolina | 4+ employees | Excludes agricultural and domestic workers |
South Dakota | Optional | No legal requirement |
Tennessee | 5+ employees | Excludes agricultural workers |
Texas | Optional | Businesses with government contracts need coverage |
Utah | 1+ employees | Mandatory coverage required |
Vermont | 1+ employees | Includes part-time workers |
Virginia | 3+ employees | Different rules by industry |
Washington | 1+ employees | State fund participation required |
West Virginia | 1+ employees | Private insurance system (privatized in 2005) |
Wisconsin | 3+ employees | Excludes agricultural workers |
Wyoming | 1+ employees | State fund participation available |
*Workers' compensation requirements change frequently. Check with your state's insurance department for current requirements and verify coverage obligations before making business decisions.
MONOPOLISTIC VS. COMPETITIVE STATES
North Dakota, Ohio, Washington and Wyoming are monopolistic states that require workers' compensation insurance to be purchased only through state-run programs. Other states are competitive, letting you choose between private insurers and state funds. You can shop for rates and services in competitive states, while monopolistic states offer streamlined coverage through state programs.
Penalties for Not Having Workers’ Comp Insurance
Nobody wants to deal with penalties, but skipping workers' comp when your state requires it can create serious problems for your business. You're risking:
Daily fines
States hit you with steep daily penalties when you operate without coverage. Illinois charges $500 per day with a $10,000 minimum, while New York tacks on $2,000 for every 10 days you go without coverage. California penalties can reach $100,000.
Criminal charges
Some states treat intentional noncompliance as a serious crime. Pennsylvania makes it a felony, and you can get up to seven years in prison and $15,000 in fines. California can jail you for up to one year.
Stop-work orders
Many states will shut down your business immediately until you get coverage. No insurance means no operations.
Personal liability
Without workers' comp, you pay all injury costs yourself. That includes medical bills, lost wages and legal fees. One serious accident can cost hundreds of thousands of dollars.
Lawsuits
Employees can sue you directly when you don't have coverage, exposing you to unlimited liability instead of the protection workers' comp normally provides.
Check your state's workers' compensation board for current penalties and requirements.
Workers’ Compensation Insurance: Bottom Line
Workers' compensation benefits everyone. Your employees get medical care and wage replacement when they get hurt at work, but it won't cover intentional injuries or accidents involving intoxication. It also protects you from workplace injury lawsuits. Most businesses with employees need this coverage, especially in high-risk industries, though Texas and South Dakota make it optional.
Workers’ Comp Insurance: FAQ
MoneyGeek answered these frequently asked questions about workers' compensation insurance:
What is workers' compensation insurance?
Workers' comp steps in when employees get hurt on the job. It protects business owners from workplace lawsuits while guaranteeing employee care regardless of fault, covering wage replacement, medical expenses, disability benefits and death benefits.
Who needs workers' compensation insurance?
Most businesses with employees need workers' compensation insurance, though requirements vary by state. You'll need coverage once you hire your first employee, though some states wait until you have three to five workers. Construction and high-risk industries often require coverage from the first hire. Texas and South Dakota don't mandate coverage.
What are the penalties for not having workers' compensation insurance?
Not having required workers' compensation insurance leads to penalties including daily fines, criminal charges, stop-work orders and personal liability for all employee injury costs, including medical bills and lawsuits.
Who pays for workers' compensation insurance?
Employers pay all workers' compensation insurance premiums. Employees never contribute directly. Employers can't deduct costs from employee wages, and non-compliance penalties include fines up to $100,000 plus potential criminal charges.
What are workers' compensation insurance benefits for employees?
Workers' compensation insurance benefits include unlimited medical coverage, wage replacement, temporary and permanent disability payments and death benefits for families. Employees receive these free benefits, including rehabilitation services and job placement assistance.
How do you buy a workers' compensation insurance policy?
Depending on state requirements, employers can get workers' compensation insurance policies from private insurers, state funds or brokers. Compare quotes from multiple providers to find the best rates and coverage options. Apply online or through agents, ensuring coverage starts before employees begin work.
How does workers' compensation insurance work step-by-step?
Workers' compensation insurance works through a simple process: an employee reports a workplace injury to a supervisor, the employer files a claim with the insurance provider within 24 to 48 hours, a medical evaluation determines treatment needs and benefits begin. Claims are typically completed within two to eight weeks.
What workers' compensation technology trends should I expect in 2025?
AI-powered injury prediction, expanded telemedicine and wearable safety technology will dominate in 2025. AI reduces claim expenses through predictive analytics that forecast workplace incidents. Smart wearables monitor employee safety in real time, while automated claims processing speeds up approvals and cuts costs.
How does telemedicine work for workers' compensation claims?
Telemedicine provides immediate medical evaluation, diagnosis and treatment recommendations, reducing claim duration and costs. Injured workers receive prompt care without transportation delays while insurers benefit from faster claim resolution and reduced expenses.
Does workers' compensation cover mental health conditions like PTSD?
Yes, mental health coverage is expanding beyond first responders to all workers. New York covers PTSD for all employees after December 2024 legislation, while Connecticut expanded coverage in January 2024.
About Mark Fitzpatrick
Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. With over five years of experience analyzing the insurance market, he conducts original research and creates tailored content for all types of buyers. His insights have been featured in publications like CNBC, NBC News and Mashable.
Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!
Passionate about economics and insurance, he aims to promote transparency in financial topics and empower others to make confident money decisions.
sources
- California Department of Insurance. "Workers' Compensation." Accessed June 30, 2025.
- Commonwealth of Pennsylvania. "PA Workers' Compensation Employer Information." Accessed June 30, 2025.
- Connecticut General Assembly. "An Act Expanding Workers' Compensation Coverage for Post-Traumatic Stress Injuries for All Employees." Accessed June 30, 2025.
- New York State Governor Kathy Hochul. "Governor Hochul Signs New Law to Support Workers Facing Job-Related Post-Traumatic Stress." Accessed June 30, 2025.
- New York State Workers’ Compensation Board. "Violations of Workers’ Compensation Law (Liability and Penalties)." Accessed June 30, 2025.