Workers' Compensation is regulated by each state, and the rules regarding this business obligation can vary significantly from one state to the next. In just about every state and territory in the U.S., an employer is responsible for injuries and/or occupational diseases that result from workplace exposures.  Workers' Compensation generally pays for medical costs of such injuries/diseases, as well as for lost wages.  The specific benefits payable vary significantly from state to state.  That's why the rates for Workers' Comp insurance also vary significantly from state to state.

Generally, an employer will be held responsible not only for employees but also for independent contractors and subcontractors if they do not carry their own Workers' Compensation insurance.  However, most states do not require a sole proprietor to purchase Workers' Comp insurance on himself or herself.  (Many, but not all, states similarly do not require partners to insure themselves for Workers' Comp.)

But if an employer uses the services of such a sole proprietor as an independent contractor, the employer may have liability for workplace injuries or illness for such a sole proprietor.  Some states will allow such a sole proprietor to be exempted from coverage if the sole proprietor works for another company, but in many states the company that hires such a sole proprietor may be held liable if the sole proprietor does not obtain coverage (such coverage is available on a voluntary basis, even though most states don't require a sole proprietor to get insurance for himself or herself.)  Sole proprietors need to remember that as soon as they have workers, they have liability under Workers' Comp statutes for those workers, and probably need to obtain insurance coverage.  Currently, only Texas really allows employers to legally "go naked", that is, not purchase Workers' Comp insurance (or satisfy the WC obligation in another approved fashion, such as self-insurance.)

Most states establish some minimums and exemptions regarding when an employer must purchase Workers' Compensation insurance.  Such minimums will vary significantly from state to state, so it is important for an employer to check what the current rules are in the state (or states) where the employer has workers.  One state may require that only employers with more than two employees purchase insurance, while a neighboring state will require that all employers with employees purchase insurance (but that same neighboring state might exempt commission-only sales people from benefits.)

 Most states utilize a system where most employers purchase private insurance to meet this statutory obligation, but some states maintain a state-run fund that competes with private insurance. A few states require employers to use only their state fund and do not allow private insurance. For the details on each state, check our State by State directory.

Many states allow a qualifying employer to self-insure for Workers' Compensation coverage.  The specific requirements for qualifying for self-insurance vary from state to state, but generally are a viable option only for very large employers.  Not all states allow self-insurance, so it's important to determine what the specific rules are in your particular state.

Another option that many states have allowed in recent years is group self insurance.  Under such programs, an employer can obtain valid coverage through a program that appears to be essentially the same as a conventional insurance policy.  But group self-insurance has significant differences from traditional insurance.  Most importantly, the financial stability of such group programs has been questionable in many instances.  Although many group self-insurance programs have been administered conservatively and carefully, many others have not been.  When a group self-insurance program fails, it can expose members and former members to significant assessments to make up shortfalls.  Thus, members and former members can end up being billed not just for their own losses, but for the overall losses of the group.

The most common way for employers to meet their statutory obligations for Workers' Compensation coverage is to purchase an insurance policy from an approved insurance company.

If your company purchases Workers' Compensation insurance, your premium is calculated according to a certain format. Some of the fine details of that format can vary from state to state, but there is also a considerable degree of uniformity from state to state regarding how premiums are calculated.

To learn more about how the premium charges for Workers' Compensation insurance are calculated, take a look at our online guide to Workers' Compensation insurance.