- Workers’ compensation is state-mandated insurance that covers work-related injuries and illnesses with medical, wage-replacement, and rehabilitation benefits.
- Most states require coverage as soon as you hire your first employee; some have thresholds (e.g., 2–5 employees) or industry exceptions. A few states (e.g., Texas, South Dakota) allow employers to opt out.
- Premiums are driven by payroll, job risk, claims history, and state rules. Pay-as-you-go options can align payments with each payroll.
- Four monopolistic states (North Dakota, Ohio, Washington, Wyoming) require purchasing coverage from the state fund.
- Workers’ comp is generally the exclusive remedy for workplace injuries, limiting lawsuits when benefits are accepted.
No matter what type of business you run, there’s a chance employees could get hurt or sick. They might slip on a wet floor, fall off a ladder, cut themselves with a blade, or get in a car accident while running a business errand. Because your employees can become hurt or sick in numerous ways, your business must have workers’ compensation insurance.
What is workers’ compensation insurance?
Workers’ compensation is a state-mandated insurance that provides medical benefits and wage replacement for employees who have a job-related illness or injury. When an employee accepts workers’ comp benefits, they typically waive their right to sue you. Workers’ compensation insurance also goes by workers’ comp or workmans’ comp.
Workers’ compensation is a no-fault system, which means the insurer pays out benefits regardless of who (employer, employee, co-worker, customer, etc.) caused the incident.
In most states, workers’ comp is the exclusive remedy for workplace injuries. Employees who accept benefits generally cannot sue the employer for negligence related to the injury.
There are some restrictions, however. An employee cannot receive benefits if they purposely self-inflect the illness or injury, it’s not job-related, or if they received it while committing a crime or violating a company policy. You will want to take the necessary steps if you suspect workers’ compensation fraud.
An employee doesn’t have to have an accident at work to receive benefits; the incident just needs to be work-related. The illness or injury can happen over a long period of time, such as carpal tunnel syndrome, chronic back problems, lung disease, hearing loss, and stress-related injuries.
The injury doesn’t have to happen at the workplace; it just has to be work-related. An employee can be hurt while running a business errand or traveling for business.
If an employee has a job-related illness or injury, you should not retaliate or threaten the employee to prevent them from filing a claim. If you do threaten or retaliate against the employee, they can report you to your state or insurance agency.
Who needs workers’ compensation insurance?
Most states require workers’ compensation as soon as you hire your first W‐2 employee, even if they are part-time or seasonal. A few states allow employers to wait until they reach a specific employee count (commonly 2 – 5), and two states (South Dakota and Texas) generally allow employers to opt out.
Examples from state rules (view our chart later for more information):
- Virginia: Required with 2 or more employees
- Georgia and North Carolina: Generally 3 or more employees
- Florida and South Carolina: Generally 4 or more employees
- Missouri and Mississippi: Generally 5 or more employees
- California, New York, and many others: Required with your first employee
Sole proprietors and single-member LLCs typically are not required to cover themselves if they have no employees, but requirements can change when you hire your first employee or work in certain industries (e.g., contractors in some states).
If you operate in North Dakota, Ohio, Washington, or Wyoming (monopolistic states), you must buy coverage from the state fund.
Independent contractors are often excluded, but misclassification risks apply. If contractors are reclassified as employees after an audit or claim, you could owe back premiums or face penalties.
Workers’ compensation benefits
Workmans’ compensation pays out benefits to help employees when they receive a work-related illness or injury. Workers’ comp benefits your employees might be eligible for include:
- Payment for diagnosis, treatment, and rehabilitation
- Job retraining
- Pay while unable to work (normally about ⅔ of typical wages, with caps)
Medical benefits
Covers reasonable and necessary medical care related to the work injury or illness, including doctor visits, hospital stays, surgery, prescriptions, and medical devices. Some states require treatment within a managed care network or designate the first treating physician.
Wage replacement (temporary and permanent disability)
Partial wage replacement is typically about two-thirds of the employee’s average wages, subject to state maximums and minimums. Benefits may be temporary total, temporary partial, permanent partial, or permanent total depending on recovery and impairment.
Rehabilitation and job retraining
Includes physical or occupational therapy and vocational rehabilitation to help an employee return to suitable work if they cannot perform their prior job duties.
Death benefits
If a covered injury or illness results in death, eligible dependents may receive ongoing benefits and reimbursement for funeral and burial expenses (amounts vary by state).
Workers’ compensation costs
You are responsible for paying workers’ compensation insurance premiums. Your premiums are based on the amount of your payroll, the type of work employees do, and how many claims you’ve had in the past. Rates might range from $0.75 to $2.74 per $100 of employee wages.
Depending on your policy, you will either have annual payments or monthly payments. If you pay an annual lump sum, you will have one large payment. If you pay as you go each month, you will have smaller payments, which might help your cash flow.
What affects your premium:
- Job classification (class codes): Higher-risk roles (e.g., construction) cost more than lower-risk roles (e.g., office).
- Payroll: Premiums scale with payroll.
- Claims history (experience modification factor): A strong safety record can reduce costs; frequent or severe claims can increase them.
- State rules: Benefit levels and insurer competition vary by state and industry.
- Policy structure: Pay-as-you-go options align premium payments with your actual payroll each run and can reduce large year-end audit adjustments.
Automatically pay your workers’ comp insurance premium with each payroll through our partner, ERGO Next Insurance.
How workers’ compensation insurance can protect your business
- Legal compliance: Avoid fines, penalties, and stop-work orders for noncompliance.
- Financial protection: Policy covers medical and wage-replacement obligations after a covered injury, reducing out-of-pocket exposure.
- Employee trust and retention: Demonstrates a commitment to safety and recovery support.
- Contract eligibility: Many clients and general contractors require proof of coverage (certificates of insurance).
- Administrative efficiency: Pay-as-you-go options through payroll reduce cash flow spikes and audit variances. Patriot integrates with ERGO Next Insurance so you can automatically remit premiums each payroll run.
How to file a workers’ comp claim (employer steps)
- Ensure immediate medical care and stabilize the situation.
- Document the incident: Who, what, when, where; gather witness statements if available.
- Provide the employee with required state forms and notices.
- Report the claim to your insurer and, if required, the state workers’ comp agency within mandated time frames.
- Cooperate with the adjuster: Share medical and work status updates and return-to-work options.
- Keep records for audits and compliance. Do not retaliate against the employee for filing a claim.
State requirements
Each state has its own workers’ compensation laws and programs.
Workers’ compensation insurance is a legal requirement in most states. However, some states allow employers to elect coverage until they reach a certain number of employees, at which time it becomes a requirement.
South Dakota and Texas allow all employers to elect workers’ compensation insurance, no matter the type of work or number of employees.
Most states allow employers to shop around for workers’ compensation coverage. However, employers must purchase insurance from the state in North Dakota, Ohio, Washington, and Wyoming.
Workers’ comp by state [Chart]
Use our chart below to determine your state’s workers’ compensation requirements. Click on your state to learn more.
| State | Is Workers’ Comp Required? |
|---|---|
| Alabama | If you have 5 or more employees. |
| Alaska | Yes |
| Arizona | Yes |
| Arkansas | If you have 3 or more employees. |
| California | Yes |
| Colorado | Yes |
| Connecticut | Yes |
| Delaware | Yes |
| D.C. | Yes |
| Florida | If you have 4 or more employees. |
| Georgia | If you have 3 or more employees. |
| Hawaii | Yes |
| Idaho | Yes |
| Illinois | Yes |
| Indiana | Yes |
| Iowa | Yes |
| Kansas | Yes |
| Kentucky | Yes |
| Louisiana | Yes |
| Maine | Yes |
| Maryland | Yes |
| Massachusetts | Yes |
| Michigan | Yes |
| Minnesota | Yes |
| Mississippi | If you have 5 or more employees. |
| Missouri | If you have 5 or more employees. |
| Montana | Yes |
| Nebraska | Yes |
| Nevada | Yes |
| New Hampshire | Yes |
| New Jersey | Yes |
| New Mexico | If you have 3 or more employees. |
| New York | Yes |
| North Carolina | If you have 3 or more employees. |
| North Dakota* | Yes |
| Ohio* | Yes |
| Oklahoma | Yes |
| Oregon | Yes |
| Pennsylvania | Yes |
| Rhode Island | Yes |
| South Carolina | If you have 4 or more employees. |
| South Dakota | No |
| Tennessee | If you have 5 or more employees. |
| Texas | No |
| Utah | Yes |
| Vermont | Yes |
| Virginia | If you have 2 or more employees. |
| Washington* | Yes |
| West Virginia | Yes |
| Wisconsin | If you have 3 or more employees. |
| Wyoming* | Yes |
*You must obtain workers’ compensation through your state’s program.
Check with your state’s workers’ compensation office for more information.
Frequently asked questions
In most states, yes. Coverage is required as soon as you hire your first employee. Some states set thresholds (e.g., Virginia at two or more employees, Georgia and North Carolina at three or more, Florida and South Carolina at four or more, Missouri and Mississippi at five or more). South Dakota and Texas do not require workers’ comp. Always verify current rules with your state agency.
Typically not if you have no employees. Once you hire employees, you may be required to carry coverage, and some industries have special rules. Independent contractors are usually excluded, but misclassification can trigger liability.
Penalties vary by state and can include fines, stop‐work orders, injunctions, and potential criminal charges. You may also be liable for medical costs and lost wages from a workplace injury if you were required to carry coverage but didn’t.
Many small businesses pay between $0.75 and $2.74 per $100 of employee wages, depending on state, job risk, payroll size, and claims history. Pay‐as‐you‐go options can improve cash flow and reduce audit surprises.
Most W‐2 employees (full-time, part-time, seasonal) are covered. Family members on payroll are typically covered. Independent contractors are generally not covered by workers’ comp, but misclassification can result in back premiums and penalties.
Intentional self-inflicted injuries, injuries not arising out of employment, those occurring during criminal acts or policy violations, and injuries while intoxicated are generally excluded (state rules vary). Non-work-related illnesses are not covered.
In most states, you can purchase from private insurers via an agent or broker. In monopolistic states (ND, OH, WA, WY), you must buy from the state fund. Payroll-integrated, pay‐as‐you‐go options can simplify payments and audits.
Usually yes if the employee works in a state where coverage is required. Coverage is generally governed by the state where the employee performs work. Multi‐state employers should confirm rules and endorsements with their insurer.
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This article is updated from its original publication date of October 11, 2017.
This is not intended as legal advice; for more information, please click here.
