Workers’ Compensation Insurance FAQs

For many new employers, workers’ compensation insurance is a mystery. What is it? Why do I need it? How does it protect me—and my staff? Here are answers to those questions and more.

What is workers’ compensation?

Workers’ compensation is a form of insurance that covers the medical and rehabilitation costs of your employees if they’re injured on the job. (It also covers some lost wages.) Typically, having insurance that covers these costs means employees give up their right to sue your business for negligence—and in turn, they get peace of mind knowing they can recover for work-related injuries without the complexity of a lawsuit.

Why does my small business need it?

Your small business should carry workers’ compensation insurance because almost every state requires it. Even if your state doesn’t require it, as in Texas, your customers might not do business with you unless you carry it. State-levied penalties for not carrying workers’ compensation can be stiff.

Specific requirements vary from state to state. For example, farming employees and self-employed persons are exempt in some states. (Here’s a list of state-by-state rules.) And remember, states do not provide the insurance—insurance must be purchased in the private marketplace, and options are sometimes limited.

When should I purchase workers’ compensation?

In most states, workers’ compensation insurance is required as soon as you have one or more employees who aren’t the business owner or partner.

Is it expensive?

Cost is determined by the workers’ compensation board in your state, but most states use a similar formula to calculate rates: classification risk, multiplied by 1% per $100 of an employee’s payroll.

Here’s what that means in plain English: Each occupation is assigned a “risk classification” determined by two factors: frequency of injury at work and severity of the injury. Then the classification is assigned a dollar amount based on the risk. For example, clerical workers in California have a classification of $1.25—a lower risk. If an office manager makes $600 per week, the workers’ compensation premium for that employee would be $7.50.

Your premiums, however, can be increased or decreased based on your business’ safety history, whether you offer health insurance, and other factors.