What Is Workers Compensation & How Does It Work?

At its most basic level, workers’ compensation is one of the simpler compliance requirements for employers to navigate. You either need to carry it, or you don’t—and because most US states require employers to carry workers’ compensation coverage, if you have employees, you’re likely to need coverage.

But here’s where it can get thorny: Workers’ compensation requirements are determined by state law, and authorized providers, required benefits, and exemptions vary by state. When you’re juggling countless other tasks related to business compliance, the details related to workers comp can fall through the cracks.

Read on to learn the basics of this mandatory insurance policy, when you might be required to have it, and how to avoid costly penalties related to noncompliance.

What is workers compensation?

Workers’ compensation insurance (or workers’ comp) is a type of insurance that provides medical care and cash benefits to workers who are injured or become ill on the job or as a direct result of their job.

Workers’ comp serves two main purposes:

1. To protect employees. Workers’ compensation insurance coverage can allow employees to access benefits for work-related injuries and illnesses regardless of their employer’s available assets and without necessarily navigating the court system.

2. To protect businesses. In exchange for workers’ comp benefits, employees typically forfeit the right to sue employers for damages. This can protect businesses from costs associated with legal proceedings or judgments. In the event of a dispute, some insurance carriers will also cover a business’s legal fees.

In the US, workers’ comp is mandated by individual state laws, and individual state agencies (typically known as workers’ compensation boards) oversee state programs.

In all cases where coverage is required, employers pay workers’ comp premiums. Unlike some health insurance costs, these expenses can’t be withheld from an employee’s paycheck.

What expenses does workers’ comp cover?

Workers’ comp can cover a range of employer and employee expenses. Here’s an overview of the benefits.

Medical care. Workers’ compensation insurance can pay for medical care needed for employees who are injured on the job or as a direct result of a job or for employees who require care for a work-related illness.
Wage replacement. Workers’ compensation insurance can provide partial wage replacements for compensation lost due to a work-related injury or illness.
Disability benefits. Although workers’ compensation insurance isn’t the same thing as disability insurance, coverage can include long-term payments to employees who are unable to return to work due to a covered injury or illness.
Death benefits. In the event of a fatality, workers’ compensation insurance can pay death benefits to the employee’s beneficiaries.
An employer’s legal fees. In the event of a dispute, insurance carriers can provide coverage for an employer’s legal costs.

Who is required to have workers’ comp insurance?

Every US state except for Texas requires businesses with a certain number of employees to carry some form of workers’ compensation insurance unless those employees are also owners of the business.

Although the majority of states don’t consider business size when determining coverage requirements, 10 states include coverage exemptions for small businesses. In these states, companies are only required to offer workers’ compensation coverage when they reach a certain payroll threshold or employee count (either in that state or in total depending on state law).

workers comp insurance by state

Here’s a list of states with small business exemptions (as of May 2023) and the factors that trigger coverage requirements in each.

Alabama. If you have at least five employees (including part-time employees and officers), you must purchase workers’ compensation insurance in Alabama.
Arkansas. Arkansas employers with three or more employees are generally required by law to provide workers’ compensation coverage in the state.
Florida. If you have four or more employees in Florida (including part-time and full-time workers), you are generally required to obtain workers’ compensation insurance in the state.
Georgia. If you have three or more employees in Georgia, you are required to obtain workers’ compensation insurance in the state.
Mississippi. If you have five or more employees in Mississippi, you are required to carry workers’ compensation coverage in the state.
Missouri. If you have five or more employees in Missouri, you are required to carry workers’ compensation coverage in the state.
New Mexico. Employers with three or more total workers must carry workers’ compensation coverage if at least one employee is in New Mexico.
North Carolina. You are required to obtain workers’ compensation insurance in the state if you have three or more employees in North Carolina.
South Carolina. If you have four or more employees or at least $3,000 in annual payroll in South Carolina, you are required to carry workers’ compensation coverage there.
Tennessee. If you have at least five employees in Tennessee, you are required to carry workers’ compensation coverage in the state.
Virginia. Virginia employers with three or more employees are required to carry workers’ compensation coverage in the state.

Regular vs. monopolistic state requirements

North Dakota, Ohio, Washington, Wyoming, Puerto Rico, and the U.S. Virgin Islands are considered monopolistic states (or jurisdictions) for the purpose of workers’ compensation insurance.

These jurisdictions require employers to purchase workers’ comp from the applicable state or territorial government. Essentially, the jurisdiction sets up and operates a fund to provide workers’ compensation benefits, and private insurance companies aren’t allowed to compete for coverage.

If you operate a business in a monopolistic state, your business will be required to buy into its state-administered plan. If you also operate in other states, you can elect to use a private insurance carrier in non-monopolistic states as long as that provider is licensed to provide coverage in each state where you carry insurance.

How much does workers’ comp cost?

The cost of workers’ compensation coverage varies depending on factors including payroll amount, number of employees, claims history, industry, location, and the degree of risk associated with the employee’s work.

Payroll and number of employees. Your potential liability increases relative to your total payroll and number of employees. The more you pay your staff, the greater your potential wage replacement expenses, and the more employees you have, the greater your risk of a claim. For this reason, most insurance carriers factor both payroll and number of employees into the cost of coverage.
Industry and type of work. Workers’ comp insurance is typically more expensive for businesses in higher-risk industries. Many insurance carriers use North American Industry Classification System (NAICS) and National Council on Compensation (NCII) codes to classify industries by risk, assigning a base rate by industry and type of work. As an example, Wyoming assigns a base rate of .03 to clerical office occupations and a base rate of 7.41 to motor vehicle towing. The higher base rate of the latter category reflects the greater likelihood of workplace injury for these workers.
Claims history. Like many types of insurance, workers’ comp can be more expensive for organizations with a history of claims. Insurers consider past claims to indicate an increased likelihood of future expenses.
Location. Workers’ comp costs can vary by state and by geographic location within a state.

Workers’ compensation compliance

Maintaining compliance with workers’ compensation insurance requirements can be particularly complicated for multi-state businesses.

Although most US states require most businesses with employees to carry workers’ compensation insurance, specific requirements vary by state, and multi-state employers may need to carry a mix of state-operated and private insurance plans. Some states also exempt businesses under a certain size, which means that your compliance requirements can change in some states as your business grows.

Mosey can help your business manage the complexities of multi-state workers’ compensation coverage requirements. Mosey is a compliance platform that monitors all of your workers’ compensation insurance requirements by state. Mosey connects to your payroll provider and notifies you when you reach the employee count threshold and need to obtain coverage in each state. You can also use Mosey to automate workers’ compensation coverage in monopolistic states when you register for payroll accounts.

Mosey is the complete system for state compliance in all 50 states. Stay organized across HR, payroll, insurance, registration, and tax requirements for each location in one place. We automate setup, provide tools to identify and manage ongoing compliance, alert you when requirements change, and provide a unified source of truth.

Want to learn more? Schedule a demo—our team is excited to meet you.