What Is Workers’ Compensation Insurance?

Workers' compensation (workers’ comp, for short) is a government-mandated program that protects workers who become injured or ill as a result of their job. This coverage pays for healthcare costs, lost wages and more. Workers’ comp is regulated at the state level and requirements can vary by location. All states except for Texas require businesses to maintain workers’ compensation insurance if they employ a certain number of employees.

How Does Workers’ Compensation Work?

Workers' compensation protects your workers by paying a portion of their income and medical costs if they were injured on the job, regardless if they were to blame for their injury. An employee must report their injury to their employer as soon as possible and it is the employer’s responsibility to facilitate the workers’ comp filing process.

A workers’ compensation policy will generally cover the following costs for employees:

1. Necessary medical care
2. Rehabilitation
3. Lost wages
4. Disability
5. Death benefits

How Is Workers’ Compensation Calculated?

Workers’ comp is designed to pay your workers a portion of their wages. One way to determine the costs is by calculating what your worker would make every week. If they worked five days per week, you would divide their total salary by the total number of days they were paid, then multiply the result by 260 and divide that by 52.

As an example, let’s use a full-time employee’s salary and working hours from the prior year to calculate how much they would be owed in workers’ compensation. Last year, a full-time employee made $60,000 after working 250 days.

1. Calculate the employee’s average daily wage by dividing $60,000 by 250. This equals $240.
2. Calculate the amount a full-time employee would make in a year by multiplying $240 by 260 (number of full-time working days in a calendar year). This equals $62,400.
3. Calculate the employee’s average weekly wage by dividing $62,400 by 52 (number of weeks in a year).
4. The employee’s average weekly wage is $1,200.

This means the employee would be entitled to $1,200 per week of workers’ comp benefits. However, this is only a simplistic example. The actual figure may be adjusted based on the employee’s number of days worked in a given year and the severity of the injury.

Who Pays for Workers’ Compensation?

Employers pay for workers' compensation. Employees do not have to contribute to this.

How Much Does Workers’ Comp Cost?

The monthly premium for workers’ compensation can be as low as $70 depending on the business and location. The cost is largely determined by several factors, including revenue, the business type and its industry and the business owner’s claims history.

The Hartford provides a simplistic formula for estimating the cost of workers’ comp insurance:

Workers’ Class Code Rate X Claims Experience Modifier X (Payroll / $100) = Premium

Developed by the National Council on Compensation Insurance (NCCI), workers’ comp class codes are three- to four-digit codes that are based on the riskiness of a business and its industry. Business owners can look up workers’ comp codes on the NCCI website.

Higher-risk businesses, like those in construction, will be assigned a higher-risk class code. This will contribute to higher premiums.

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Is Workers’ Compensation Insurance Required for All Businesses?

Not all businesses require workers’ comp insurance and requirements will depend on your state’s laws, type of business, number of employees and class of employees. According to your state, regular employees may be eligible for workers' compensation, including full-time, part-time or seasonal.

Almost all states require businesses with employees to purchase workers’ compensation, but there may be some exemptions:

• Freelancers
• Independent contractors
• Sole proprietors
• Volunteers
• Railroad workers
• Government workers
• Maritime workers
• Farm workers

Penalties for Not Having Workers' Compensation Insurance

Businesses that fail to provide workers’ compensation insurance could find themselves vulnerable to lawsuits from injured employees. If your business does not have a valid workers’ compensation policy, or is not self-insured or is not legally exempt from workers’ comp, you may be violating your state’s labor laws.

Penalties for not complying may include high fines and even imprisonment.

Below are examples of penalties you may face in California, New York and Florida:

State	Penalty
California	No less than a $10,000 fine and/or up to one-year imprisonment in a county jail. Additional $100,000 for employers illegally uninsured.
New York	$1,000 - $5,000 fine for businesses with five or fewer employees. $5,000 - $50,000 fine for businesses with more than five employees in addition to other penalties.
Florida	Fine of $1,000 or double the amount of a workers’ compensation premium.

What Types of Injuries Are Covered by Workers’ Comp?

According to the National Safety Council (NSC), some of the most common forms of work-related injury include:

• Fractures
• Muscle sprains
• Cuts
• Repetitive strain or stress
• Slips and falls
• Electrocution
• Crushed or stuck between objects
• Being hit by an object
• Driving accidents

What Isn’t Covered?

Workers’ comp may not cover the following:

• Malicious intent
• Accidents that occurred when the employee was intoxicated
• Accidents that happen during a fight the employee caused
• Accidents that occurred outside of the workplace
• Defamation
• Discrimination
• Assault
• Gross negligence

How To Get Worker’s Compensation Insurance

Workers’ compensation insurance is required in most states. Depending on your state, you can get workers' compensation insurance from the private insurance marketplace, your state’s workers’ comp fund or you can choose to self-insure.

Private Insurance Companies

Similar to buying general liability business insurance or another commercial policy, business owners can buy workers’ compensation insurance from familiar insurance companies, like The Hartford, Nationwide and Cerity.

State-Funded Insurance

State-funded insurance allows employers to pay for their own workers’ comp losses instead of buying from a private insurance carrier. Not all states offer this option.

Some states require that employers get coverage from their state-funded programs, such as Ohio, North Dakota, Wyoming or Washington. This is called monopolistic state-funded workers’ compensation.

Self-Insure

Instead of purchasing a workers’ compensation insurance policy and paying a regular premium, businesses can opt to self-insure. Business owners that self-insure assume total responsibility for providing workers’ comp benefits to their employees.

Self-insuring is only suitable for businesses that have enough cash reserves to pay for workers’ comp claims out of pocket.

Workers’ Compensation Laws by State

Each state sets its own benefits and premium amounts based on how risky the job is and the state’s economy. While most states are similar, it’s a good idea to make sure you know what your state requires for workers’ comp. The National Federation of Independent Businesses (NFIB) compiled workers’ compensation laws by state:

State	Required Number of Employees	Exemptions	State-Administered Fund Available?
Alabama	4 or fewer or more full-time or part-time workers	Construction businesses, farm laborers, household/domestic employees or casual employees	No
Alaska	1 or more employees	Partners, sole proprietors, nonprofit executive officers, LLC members, babysitters, harvest help, non-commercial cleaners, contract entertainers, sports officials for amateur events, commercial fishers and taxi drivers.	Yes
Arkansas	3 or more employees	Farm laborers and real estate agents	No
Arizona	1 or more full-time or part-time workers	Farm laborers and real estate agents.	Yes
California	1 or more full-time or part-time workers	Independent contractors, working partners, casual workers or domestic servants. Sole proprietors can opt out of coverage if they don’t have employees	Yes
Colorado	1 or more full-time or part-time workers	Domestic workers, real estate agents, brokers, and independent contractors (with no employees)	Yes
Connecticut	1 or more full-time or part-time workers	LLC members, corporate officers and sole proprietors.	No
District of Columbia	1 or more employees	Sole proprietors without employees	No
Delaware	1 or more employees	Farmworkers and independent contractors	No
Florida	Non-construction businesses with 4 or more employees and construction businesses with 1 or more employees. Agricultural businesses with 6 or more employees	Sole proprietors and partners in the non-construction industry	No
Georgia	3 or more employees	Sole proprietors and partners	No
Hawaii	1 or more employees	Sole proprietors and partners	No
Idaho	1 or more employees, excluding domestic workers	Sole proprietors and household/domestic workers	Yes
Illinois	1 or more full-time or part-time employees	Sole proprietors	No
Indiana	All employees must be covered	Sole proprietors, independent contractors, partners, and LLC members	No
Iowa	1 or more full-time or part-time employees	Sole proprietors and LLC members	No
Kansas	Any business with a gross payroll over $20,000	Sole proprietors, partners, and LLC members	No
Kentucky	1 or more full-time or part-time employees	Sole proprietors, partners, and LLC members	Yes
Louisiana	All employees must be covered	Musicians and crop-dusting airplane crew members, sole proprietors, partners and LLC members	Yes
Maine	All employees must be covered	Independent contractors, sole proprietors, partners and LLC members	Yes
Maryland	1 or more employees, with a few exceptions	Sole proprietors	Yes
Massachusetts	All employees must be covered	Sole proprietors, partners and LLC members	No
Michigan	1 or more employees	Sole proprietors	Yes
Minnesota	All employees must be covered	Sole proprietors, partners and some managers of LLC	Yes
Mississippi	5 or more employees	Sole proprietors, partners, and corporate officers	No
Missouri	5 or more employees	Sole proprietors, partners, farm laborers, domestic servants, real estate sales, and commercial taxis	Yes
Montana	All employees must be covered	Sole proprietors, domestic workers, newspaper carriers, licensed barbers or cosmetologists, petroleum land professionals, real estate, securities, and insurance sales	Yes
Nebraska	All employees must be covered	Sole proprietors, federal employees, railroad employees, independent contractors and domestic servants	No
Nevada	1 or more employees	Sole proprietors	No
New Hampshire	All employees must be covered	Sole proprietors and partners	No
New Jersey	1 or more employees	Sole proprietors	No
New Mexico	3 or more employees	Sole proprietors, domestic servants, real estate, or farm laborers	Yes
New York	All employees must be covered	Sole proprietors or partners without employees	Yes
North Carolina	3 or more employees	Sole proprietors, LLC members, and partners	No
North Dakota	All employees must be covered	Sole proprietors, partners and family farm corporate officers	Yes
Ohio	1 or more employees	Sole proprietors, family farm corporate officers with no employees.	Yes
Oklahoma	All employees must be covered	Sole proprietors, LLCs, partners and corporate officers	Yes
Oregon	1 or more employees Sole proprietors can purchase coverage but are not required to	Family member partnerships, corporations and limited liability companies	Yes
Pennsylvania	1 or more employees	Sole proprietors, partners and corporate officers	Yes
Rhode Island	4 or more employees	Employers with three or fewer employees, sole proprietors, partners and independent contractors	Yes
South Carolina	4 or more employees	Sole proprietors, partners, real estate and LLC members	No
South Dakota	1 or more employees	Sole proprietors and partners, part-time domestic servants, farm/agricultural laborers, independent contractors and real estate agents	No
Tennessee	1 or more employees	Family members, part-time employees, corporate officers, sole proprietors, LLC members and partners	No
Texas	Workers’ compensation insurance is optional		Yes
Utah	1 or more employees	Sole proprietors, partners, LLCs, agricultural laborers, domestic workers and real estate brokers	Yes
Vermont	1 or more employees	Sole proprietors, partners, corporate officers, and LLC members	No
Virginia	2 or more employees	Sole proprietors, partners, LLCs and general contractors	No
Washington	1 or more employees	Sole proprietors, partners, corporate officers, LLC members, domestic servants, private residential gardeners, maintenance/repair workers, musicians/entertainers, cosmetologists and barbers	Yes
West Virginia	All employers must carry coverage	Independent contractors, some agricultural employers and casual employers	No
Wisconsin	3 or more employees	Sole proprietors, LLC members and partners	No
Wyoming	All employees must be covered	Sole proprietors and partners	Yes

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Key Takeaways Workers’ compensation helps pay benefits to workers who are injured or become disabled due to their job. The cost of workers’ compensation insurance will vary based on state, industry and the number of employees, among other factors. Every state has its own regulations and exemptions regarding workers' compensation. The compensation often includes partial salary repayment and medical bills coverage.

If you live in a state that allows your business to purchase workers’ comp insurance, you will have to understand your state’s regulations and search for insurance providers who can offer the best workers’ compensation for you and your workers. SmartFinancial can help you narrow down your search, enter your zip code below to view quotes in your area.