Workers’ Comp Exemption: Which Businesses Qualify? (2025)

Understanding Exemptions for Workers’ Compensation

Workers' compensation insurance is a significant advancement in employer-employee relations that protects millions of workers. When a worker suffers an on-the-job injury, the insurance policy pays for the worker’s medical care. It also pays a portion of the worker’s wages until they can return to work.

This system provides an important safety net for workers injured while performing their job duties. The employer also benefits from the workers’ compensation system. In exchange for buying workers’ comp insurance, the business becomes immune from most employee personal injury lawsuits for work-related injuries.

The workers’ comp system frees both workers and businesses to focus on the business without worrying about what will happen when a workplace accident happens. However, workers’ comp may not be appropriate for every business. In certain cases, a business may qualify for an exemption to workers’ comp.

Workers' Comp Exempt Employers

Workers’ comp rules are set by the states. Each state determines which businesses are required to buy policies and which are exempt. These state requirements vary widely, but some common grounds for a workers’ comp exemption include the following:

Businesses Outside the State’s Mandate

The most common exemption applies to businesses outside the state’s mandate. The businesses required to buy insurance differ from state to state.

For example, Texas exempts all employers from buying workers’ compensation insurance and operates a voluntary workers’ comp system, where businesses decide whether to participate rather than facing a state mandate. Instead of receiving insurance benefits, a work injury lawyer helps injured workers get compensation from non-subscriber businesses that choose not to participate in the system.

California, by contrast, requires nearly all businesses to participate. Specifically, the state’s rules call for businesses with at least one employee, and some with zero employees, to buy workers’ comp insurance.

Employers should check with their state to determine whether their business falls within the workers’ comp system. If the rules do not cover a business, it is automatically exempt.

Small Businesses

The most common mandate is based on the number of employees. A business with fewer than the mandated number is not required to buy insurance, although it can opt into the system to receive legal immunity from employee lawsuits.

Again, the rules vary. Most states have comprehensive systems that cover all businesses with one or more employees. However, some states grant exemptions to small businesses with, for example, fewer than three workers.

Independent Contractors

Some states exempt businesses that rely on independent contractors rather than employees. Companies must use this exemption with care, though.

This is because states usually do not rely on the business’s classification of its employees to determine whether the exemption applies. If states did this, every business would claim its workers are independent contractors.

Instead, states look at the nature of the relationship to determine whether the workers fit their legal definitions for employment. The most common tests look at factors such as who controlled the worker’s schedule and whether the worker was free to take other jobs.

Owners and Executives

Businesses are usually exempt from covering owners, directors and other executives. Thus, when counting the number of employees that fall under the mandate, businesses in many states do not count people in executive positions.

States vary in their definition of “executive.” For example, some states exempt all owners, while other states, like California, count owners who perform work tasks along with their managerial tasks.

Volunteers

Some states exempt volunteers. In other words, businesses in these states that rely on volunteers do not need to count them when determining workers’ comp coverage. By excluding volunteer workers, businesses can either lower their premiums or become exempt altogether.

Workers Covered by Alternate Rules

Some entities are exempt from workers’ compensation because other systems cover their workers. The following employees may get their workplace protections from systems other than workers’ compensation:

• Federal government employees
• Longshore and harbor employees
• Railroad workers

In some states, local and state government workers fall under a self-insurance system run by the state. Rather than buying insurance, the state puts money into a workers’ comp fund that pays according to the same rules as workers’ comp insurance.

Workers’ Compensation Exemption Consequences

A workers’ comp exemption allows some businesses to operate without the mandated workers’ comp insurance. When a business has a workers’ compensation exemption, it does not need to pay for a workers’ comp policy. However, it loses the immunity from employee negligence lawsuits granted to policyholders.

On the worker’s side, people who work for a business with a workman's comp exemption miss out on workers’ comp benefits after suffering an injury or occupational illness. This might discourage people from seeking employment with the business. It may also encourage those who join the business to sue their employer after an accident.

How to Get Exempt From Workers' Comp

Most states require businesses to provide proof of workers’ comp insurance annually. If a business fails to provide proof of coverage, the business may face fines and other penalties.

When an entity qualifies for an exemption, it may need to proactively apply for a workers’ comp exemption certificate. The state usually grants this document after the entity certifies that it falls into one of the exceptions to the state’s rules. The entity may need to recertify annually to renew a workers’ comp exemption.

Learn More About Workers’ Comp From ConsumerShield

Workers’ comp is a complex system, and you may need a lawyer’s help to navigate your options. ConsumerShield helps both workers and businesses understand their legal rights by connecting them with lawyers. Contact us for a free case evaluation today.