Workers’ Compensation Insurance Requirements by State | '25

Differences in Workers' Compensation Insurance Requirements by State

Each state sets its own workers’ compensation rules. Some of these rules vary by state, including exemptions from mandates, thresholds for coverage, deadlines for action and sources for coverage.

Workers’ Compensation Requirements by State: Exemptions from Mandates

Every state operates a workers’ compensation system. However, you will find many variations in workers' compensation laws by state.

For example, only one state exempts all businesses from a mandate to buy insurance. Texas operates an entirely voluntary system where companies can choose whether to participate in workers’ compensation insurance. The other 49 states mandate that most employers buy a workers’ compensation insurance policy.

States can exempt certain businesses from their mandates. For example, some states with large agricultural industries exempt farmers from workers’ compensation mandates. The following states have created this exemption so that farmers do not need to pay the cost of workers’ compensation insurance:

• Alabama
• Arkansas
• Delaware
• Georgia
• Indiana
• Kansas
• Kentucky
• Mississippi
• Missouri
• Nevada
• North Dakota
• South Carolina
• Tennessee
• Texas
• Wyoming

All states exempt certain workers, like longshore workers and railroad workers, who are covered by programs governed by federal laws.

Some states operate a separate workers’ comp system for state employees. In other words, these workers get the same kind of benefits after an on-the-job injury, but they receive them from a fund exclusively held for public-sector employees like teachers and police officers.

In most states, workers' compensation laws are limited to employees; companies that only use independent contractors are exempt. However, these companies can usually insure independent contractors if they elect to.

States that differentiate between employees and independent contractors do not rely on the company’s classification of its employees. If they did, an unscrupulous employer could claim that all its workers were contractors to avoid paying for workers’ comp insurance. Instead, the government tests the relationship by looking at the employer’s degree of control.

Workers' Compensation Rules by State for Coverage Thresholds

Several states require all employers to buy workers’ compensation insurance. For example, California and New York require all businesses with at least one employee to have workers’ comp insurance.

Conversely, some states exempt very small businesses. Alabama, Mississippi and Missouri set the highest threshold, requiring companies to buy workers’ comp insurance only if they have five or more workers. Other states set lower thresholds of two, three or four workers.

Workers' compensation insurance requirements by state vary in who gets counted toward the threshold. Most states exempt owners and executives from counting toward the minimum number of employees needed to trigger the insurance mandate. However, some states specifically include owners in the count.

For example, Florida requires businesses with four or more workers to buy workers’ comp insurance. If a business has three employees and two owners, it must buy a policy because the owners count toward the threshold in Florida.

Another difference between systems is the minimum workers' compensation limits by state. Once the insurer determines the number of workers covered, it will set a premium. This premium unlocks benefits up to the limits set by the state. In other words, all insurers in a state must offer the same limits, although the limits may vary from state to state.

Workers' Compensation Insurance Requirements by State: Purchase Options

Most workers’ compensation insurance policies come from one of three sources:

• State fund
• Private insurers
• Self-insurance

Twenty-five states have public funds run by the government. In these states, businesses can buy a workers’ comp policy from the state fund. The benefit of this option is that premiums through the public fund are often cheaper because the funds have large numbers of subscribers.

Four of these states have a state fund only and do not license private insurers to sell workers’ comp insurance. North Dakota, Ohio, Washington and Wyoming have monopolies over their workers’ comp insurance markets. The other 21 states license private insurers to compete with the public fund.

Private insurers can sell workers’ comp insurance in every state except the four monopolistic states. The benefit of private insurance policies is that competition is believed to help control pricing. However, these options are almost always more expensive than public funds because their subscriber pools are much smaller.

Many states also permit businesses to self-insure. To self-insure, a company usually contracts with a claims administrator to hold its benefit fund and pay claims. This is not practical for small businesses, but large businesses and those in hazardous industries might not be able to afford any other option.

Similarities in Workers’ Comp by State

Despite the focus on dissimilarities so far in this workers' compensation state-by-state comparison, the states have many more similarities in their systems than differences.

For example, workers' compensation benefits by state are fairly uniform. All states include full medical coverage for injured workers. They also include some amount of money toward wage replacement.

States vary on the amount of wages replaced and the waiting period to begin receiving this benefit. The most common wage replacement benefit is two-thirds of the injured worker’s average weekly wage up to a statutory cap.

You will also find uniformity in workers' compensation insurance rates by state.

Insurers, whether they are state funds or private businesses, set premium rates based on the insured company’s experience rating. This rating is a prediction of the costs the insurer will incur handling the company’s claims. It is based on the number of years the business has operated, the nature of the company’s business and the number and value of claims paid.

Thus, a business with few claims and a long period of operations will have low premiums. Conversely, a business in a risky industry like construction might have a long and expensive claim history that increases its premiums.

Learn About Your State’s Workers’ Comp System From ConsumerShield

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