Who's Eligible for a Workers' Compensation Exemption?

Most businesses with employees must have workers' compensation insurance, and exemptions are rare. If you have even one employee, you want coverage regardless of your business structure or industry. Exemptions primarily apply to business owners themselves: sole proprietors, partners, LLC members and corporate officers who can exclude themselves from coverage while still protecting their employees.

A workers' compensation exemption lets specific individuals or businesses opt out of workers' compensation insurance. Workers' compensation insurance typically covers medical expenses and lost wages for employees injured or made ill by their jobs.

Eligibility for workers' compensation exemptions varies by state and business type, but certain types of business owners and employees commonly qualify to opt out of mandatory coverage. Common exemption categories include:

Business Owners

• Sole proprietors with no employees (most straightforward exemption)
• Business partners when no employees work outside the partnership
• Corporate officers who meet state ownership requirements
• LLC members in most states

Specific Worker Types

• Independent contractors (must meet classification criteria)
• Agricultural workers and seasonal farm laborers
• Domestic workers like housekeepers and nannies (varies by state)
• Real estate agents and brokers are typically exempt because they're classified as independent contractors rather than employees.  

Special Situations

• Family-owned businesses where only family members work
• Nonprofit organizations with volunteer-based operations
• Contract-based businesses with minimal full-time employees

Common Exemption For Business Types

Certain types of businesses may qualify for a workers' compensation exemption. Common examples include the following:

• Self-employed workers often qualify for a workers' compensation exemption.
• Business partnerships, particularly those without employees other than the partners, may be able to opt for an exemption.
• Family-owned businesses may qualify for exemptions, especially if the employees are all family members.
• Some nonprofit organizations can qualify for exemptions, depending on the nature of their operations and the type of work their volunteers and staff perform. Religious organizations, educational institutions and charitable nonprofits with 501(c)(3) status qualify for exemptions for clergy, teachers and non-manual workers.
• Businesses that operate seasonally, such as certain agricultural operations or holiday-themed stores, may qualify for exemptions due to their temporary and fluctuating workforce.
• Contract-based businesses that rely on independent contractors rather than employees are eligible for exemptions.

Important: We strongly recommend having workers' compensation insurance as it protects employees and employers from real financial risks. Requirements vary significantly by state, and misclassification of workers can result in penalties. Most exemptions apply only to owners, not employees.

Employee Count Thresholds determine when coverage becomes required in most states. Small businesses often get exemptions based on how many people they employ:

• 1-2 employees: About 15 states don't require coverage for very small businesses
• 3-4 employees: Most common threshold — roughly 25 states require coverage at this level
• 5+ employees: Nearly all states mandate coverage once you reach five employees

See the workers comp state employee count threshold guidelines here.

What This Means for Your Business

• Check Your State's Specific Rules because these general patterns have exceptions. Contact your state's workers' compensation board or department of labor for exact requirements.
• Consider Multi-State Operations carefully. If you have employees in multiple states, you'll need to meet the most restrictive state's requirements.
• Don't Assume Exemptions Transfer when expanding to new states. An exemption in Tennessee might not apply if you start operating in California.
• Plan for Growth by understanding when you'll need coverage. If you're currently exempt with two employees, know that hiring a third might trigger mandatory coverage in your state.

Workers' compensation exemptions can reduce immediate insurance costs, but they transfer financial and legal risks to your business. We recommend careful evaluation of your specific situation, industry risks, and financial capacity to handle workplace injuries.

Many clients and contractors require proof of workers' compensation insurance before starting projects, even from exempt business owners. This requirement protects them from potential liability if you're injured while working on their property or project.

Government Contracts almost always require workers' comp coverage. Federal, state and local agencies typically won't award contracts to businesses without proper insurance documentation. This requirement can exclude exempt sole proprietors and independent contractors from lucrative public sector opportunities.

Large Private Companies often have similar requirements. Corporate clients want to avoid the risk of being held liable for contractor injuries. If you don't have workers' comp coverage and get injured on their job site, they might face lawsuits or workers' comp claims.

Construction and High-Risk Industries have particularly strict requirements. General contractors typically require all subcontractors to carry workers' comp insurance, regardless of exemption status. The construction industry's high injury rates make this coverage essential for managing liability exposure.

Health insurance doesn't replace workers' comp coverage. The two serve different purposes and have different rules about work injuries.

Your Health Insurance May Not Cover Work Injuries. Most health insurance policies exclude work-related injuries and illnesses. If you break your arm on a job site, your health insurer might deny the entire claim.

Workers' Comp Replaces Lost Wages. Health insurance covers medical bills but won't replace your paycheck when you can't work. Workers' comp provides partial wage replacement — usually two-thirds of your weekly pay.

Legal Protection Works Differently. Workers' comp prevents employees from suing you for workplace injuries. Health insurance doesn't provide this legal shield.

Don't assume health insurance covers everything. If your work involves physical risk, workers' comp fills important gaps that health insurance won't cover.

Below, we answer some of the most common questions about the people and businesses eligible for workers' compensation exemptions and how these exemptions work.