Workers' Compensation Insurance: How it Works, What it Covers and Requirements

The basics of workers' compensation insurance is important for every business owner to understand because it is almost always required and protects both the business and employees. Here's what every employer needs to know about this workers' comp protection:

Workers' compensation insurance is a state-required coverage that provides medical benefits and income replacement to employees who are injured or become ill due to their job. It also protects employers from most lawsuits related to workplace injuries.  Employers pay for workers' compensation insurance premiums to protect their employees and business.

Workers' compensation policies typically include two main parts:

• Part A (Employee Benefits): Covers medical expenses, wage replacement and rehabilitation costs for injured employees
• Part B (Employer Liability): Protects your business from lawsuits filed by injured employees

When an employee is injured at work, workers' comp insurance covers their medical expenses, rehabilitation costs, and a portion of lost wages. Unlike other insurance types, workers' compensation often don't have deductibles for covered claims.  Employees typically cannot sue their employer for the injury, creating a "no-fault" system that benefits both parties.

Every state except Texas and South Dakota require most employers to carry workers' compensation insurance. This requirement protects workers from financial issues due to workplace injuries while ensuring businesses can continue operating after an incident and limit liability.

Workers' compensation provides protection for workplace injuries and illnesses, covering short-term and long-term needs. Knowing these benefits help employers communicate coverage to employees and ensures proper expectations during the claims process.  Here's what it covers:

Workers' compensation doesn't cover every type of injury or situation. Below are situations that are not covered and these can helps you avoid claim denials and know when you might need other types of insurance.

The majority of businesses with employees need workers' compensation insurance, but requirements vary by state and industry. For instance, in Georgia, businesses with three or more employees must have workers’ compensation insurance. In Florida, non-construction companies with four or more employees need coverage and construction businesses with at least one employee must have coverage.  

Here's what determines if you need coverage:

Most Common Triggers:

• Employee count: Usually 1-5 employees depending on your state
• Industry type: Construction and high risk industries often has stricter rules
• Business structure: Corporations vs. sole proprietorships have different requirements

Usually Exempt:

• Independent contractors
• Solo business owners
• Some agricultural and domestic workers
• Certain family members in family businesses

The table below shows specific requirements for each state, but these can change so verify current rules with your state's workers' compensation board.

You need coverage where your employees work, not where your company is based. This includes remote workers, traveling staff, and temporary workers. 

Track your employee count by state and get coverage before workers start in new states. A multi-state policy can make this easier.  Some common mistakes include: missing coverage when you expand, not covering traveling employees who work in different states for extended periods, and not knowing that construction or similar industries usually requires coverage from the first employee.

The penalties for operating without required workers' compensation insurance can be harsh. States take these requirements seriously because when workers get injured without coverage, they're left paying medical bills out of pocket while unable to work

In California for example, they may assess penalties of $1,500 per employee for the entire period without coverage, plus potential criminal penalties of $10,000 minimum fine and up to one year in jail. Penalties can reach $100,000 maximum. Corporate officers face personal liability if they "knew or should have known" about the insurance requirement.

Not all workers are required to be covered by workers' compensation insurance. These exemptions help you determine who needs coverage and avoid unnecessary costs while staying compliant with state laws.

Common Exemptions
Most states provide similar exemptions, though specific rules vary by location:

• Independent contractors: Properly classified contractors don't need coverage
• Business owners: Sole proprietors, partners, and some LLC members are often exempt
• Corporate officers: May be exempt if they own a certain percentage of the company
• Family members: Spouses, children, and parents working in family businesses
• Volunteers: Unpaid volunteers generally don't require coverage

Industry-Specific Exemptions
Certain industries have additional exemptions:

• Agricultural workers: Many states exempt farm workers or have higher employee threshold requirements
• Domestic workers: Often exempt unless working a minimum number of hours per week
• Real estate agents: Usually exempt as independent contractors
• Clergy: Religious workers are exempt from coverage requirements

Important Consideration
While exemptions can reduce costs, it will eliminate employer protections related to injuries. Exempt workers can sue if you don't have coverage. Many business owners choose to purchase coverage even when not required for the legal protection it provides.

Several factors determine your workers' compensation costs, with some you can control and others you can't. These help you manage your premiums and budget effectively.

Workers’ compensation insurance costs vary widely based on the factors below.. Low-risk businesses like accounting firms with 10-50 employees might pay $500-$2,000 annually, while moderate-risk companies such as restaurants or retail stores often pay $2,000-$8,000 per year. High-risk industries like construction or manufacturing can expect costs of $8,000-$25,000+ annually.

Your business is assigned a classification code that determines your base rate per $100 of payroll.  This code is based on the industry where you operate your business. Rates vary by industry risk level and are based on our analysis of thousands of workers' comp quotes:

Your total annual payroll determines the base cost of your workers' compensation premium since rates are calculated per $100 of payroll. See below to learn how different types of wages are counted helps you budget accurately and avoid surprises during your annual audit.

• Annual payroll: primary factor in premium calculation
• Overtime wages: included at regular rates
• Seasonal variations: averaged across the policy period

Your Experience Modification Rate compares your company's workers' comp claims history to other businesses in your industry. This factor can significantly impact your premiums. 

An EMR of 1.0 represents the baseline.  Rates below 1.0 provide discounts and rates above 1.0 add incremental cost. For example, an EMR of 0.75 provides a 25% discount, saving $2,500 on a $10,000 premium, while an EMR of 1.25 adds a 25% increase. 

How to Improve Your EMR:

• Implement safety programs with regular training
• Report claims promptly and investigate thoroughly
• Develop return-to-work programs to minimize claim duration
• Focus on claim management rather than claim avoidance

Where your business operates significantly impacts your workers' compensation costs.  Each state has different laws, medical costs, and laws. Businesses in the same industry can pay vastly different rates depending on their location.

State-specific factors that affect costs:

• Benefit levels: Each state sets different wage replacement rates and medical coverage requirements
• Medical costs: Regional healthcare expenses vary widely across different areas
• Legal environment: States with more frequent litigation tend to have higher insurance costs
• Regulatory requirements: Varying compliance rules and administrative costs by state

Your company's safety performance directly impacts your workers' compensation costs. Insurance companies offer lower premiums to businesses that invest in workplace safety and poor safety records result in higher rates. A strong safety program protects your employees and cost savings.

• OSHA violations: Can increase premiums by 10-25% as they indicate higher risk
• Safety certifications: May qualify for premium discounts of 5-15%
• Training programs: Often result in rate reductions through improved safety performance
• Loss control services: Provided by insurers can lower costs through risk reduction

The claims process can seem complex, but understanding each step helps employers respond to help an employee get the right care. Claims management also protects your experience modification rate (EMR) and future policy costs.

Most workers' compensation claims are completed within 2 months. Medical treatment should begin immediately after an injury and wage benefits start after a 3-7 day waiting period. Insurance companies have 14-30 days in most states to make a claim decision, and the average claim lasts 4-8 weeks for minor injuries or 6+ months for very serious injuries.

The right documentation helps you have a successful claim in a shorter timeline. You'll need to complete a First Report of Injury form and provide medical records, treatment documentation, and payroll records for wage calculation. If appropriate, gather witness statements and photos of the accident scene, as this evidence can help support your claim and speed up the approval process.

A workers’ compensation settlement is the financial compensation paid to an employee who has sustained work-related injuries or illnesses. It can be used to pay off medical bills, rehabilitation costs or even death benefits.

Once a claim has been approved, the provider will offer the injured employee a settlement amount as a lump sum or through a structured payment plan. Employees can either accept or negotiate the amount.  If accepted, the employee waives any right to pursue legal action against the employer related to the injury or illness.

Employers can reduce workers' compensation costs through safety programs and return-to-work programs. Our research shows that companies with both programs see up to 60% lower claim costs, up to 50% faster recovery times, and significantly reduced EMR rates which can lower costs.

Safety Program Benefits:

• Regular training and hazard identification prevent injuries before they occur
• Safety certifications, drug-free workplace programs, and safety committees can reduce premiums by 5-15%
• Incident investigation and proper documentation improve future prevention

Return-to-Work Programs:

• Written policy with a specific owner
• Modified hours, light duty, and work-from-home arrangements
• Regular communication with employees during recovery

Workers' compensation benefits the employee and employer.

Employee Benefits

• Guaranteed medical care and income replacement
• Job protection and return-to-work assistance
• No need to prove employer negligence to receive benefits

Employer Benefits

• Legal protection from most workplace injury lawsuits
• Protection of business and personal assets
• Compliance with government contract requirements

Employers must purchase workers' compensation insurance according to state regulations. In some states, you can buy it from private insurers like Nationwide or The Hartford. In states like North Dakota, Ohio, Washington and Wyoming, you must purchase insurance through the state fund. These states are called monopolistic workers compensation states.

If your business is located in a state where you can purchase coverage through a private insurer, then the process of getting workers' compensation insurance involves:

1. Checking your state's requirements: Each state has its own workers' compensation insurance requirements, so it's good to research these before purchasing a policy.
2. Exploring insurance providers: Research different business insurance providers that offer workers' compensation insurance in your state. A good place to start is by asking other business owners for recommendations.
3. Comparing coverage options: Get quotes from different providers to compare premiums and coverages. Some providers allow you to get quotes online, while others may want you to call or visit a physical location.
4. Applying for a policy: Once you've chosen an insurance provider and policy that meets your needs and budget, apply for the policy. Many insurers allow you to apply and purchase online after getting a quote.