What workers' compensation is

Workers' compensation is a state-run, no-fault system that pays medical care and partial wage replacement when an employee is hurt or becomes ill because of work. The employee does not have to prove the employer was negligent. In return, the employer usually gets protection from most injury lawsuits. The Texas Division of Workers' Compensation describes it this way for employers that carry coverage: except when gross negligence results in a death, coverage limits liability if an employee sues the business for damages.

Each state writes its own workers' compensation statute. Who must be covered, the benefit formulas, waiting periods and the agency in charge all vary from state to state.

Who must carry coverage

According to the NAIC, nearly all U.S. states require employers to buy a workers' compensation policy to cover employees. The details still differ:

  • Employee thresholds. Some states require coverage from the first employee. Others exempt very small employers or set separate thresholds for construction and agriculture.
  • Owners and officers. Corporate officers, LLC members and sole proprietors may be counted or excluded depending on the state and on elections filed with the regulator.
  • Ways to comply. Employers usually buy a policy from a licensed insurer or a state fund. Large employers that meet financial requirements may be approved to self-insure.

Monopolistic state funds

In four states, private insurers cannot write standard workers' compensation. Employers buy coverage from the state fund or, where allowed, self-insure. At the National Council of Insurance Legislators (NCOIL) spring meeting on April 17, 2026, the head of the Ohio Bureau of Workers' Compensation named those states. Ohio is one of four states that by law is the exclusive provider of workers' compensation. The other three are Washington, Wyoming and North Dakota. Multistate employers should know that "other states" coverage on a private policy may exclude the monopolistic states. Ask whether you need separate state fund coverage and stop-gap employers liability.

Texas: the opt-out state

Texas is the notable exception to compulsory coverage. Section 406.002 of the Texas Labor Code says that, except for public employers and as otherwise provided by law, an employer may elect to obtain workers' compensation insurance coverage. Employers that do not buy coverage are called non-subscribers. They must:

  • notify the Division of Workers' Compensation in writing that they elect not to obtain coverage (Section 406.004);
  • report to the division work-related injuries that cause more than one day of lost time, plus occupational illnesses and deaths, according to the Texas Department of Insurance.

Opting out has a legal price. Under Section 406.033, if an injured employee sues a non-subscriber, the employer cannot defend on the grounds that the employee was contributorily negligent, assumed the risk, or was hurt by a fellow employee's negligence. The employee still has to prove the employer's negligence. Non-subscribers can look at occupational accident or employer liability policies, but those are voluntary products, not a substitute required by law.

Federal workers' compensation programs

A few groups of workers are covered by federal rather than state programs. The U.S. Department of Labor's Office of Workers' Compensation Programs (OWCP) runs programs for federal employees, longshore and harbor workers (including Defense Base Act contractors working abroad), coal mine workers, and nuclear weapons workers.

Social Security Disability Insurance is a different system

Workers' compensation covers only job-related injuries. Social Security Disability Insurance (SSDI) pays monthly benefits for long-term disability from any cause, but the rules are strict. According to the Social Security Administration (2026):

  • SSDI pays only for total disability. The condition must prevent substantial gainful activity and must have lasted, or be expected to last, at least 12 consecutive months or to result in death.
  • There is generally a five-month waiting period. The first benefit is paid for the sixth full month after the disability began.
  • Most workers need 40 work credits, 20 of them earned in the last 10 years. In 2026 one credit is earned for each $1,890 of wages or self-employment income, up to four credits a year.
  • In 2026, earnings averaging more than $1,690 a month ($2,830 if blind) generally mean a person is not considered disabled.

SSA notes that its rules assume families have other resources for short-term disability, such as workers' compensation, insurance and savings. Some states fill part of that gap. California's State Disability Insurance program, for example, provides short-term disability benefits for non-work-related illness or injury, including pregnancy and childbirth, plus paid family leave. Private disability insurance and group plans under employee benefits cover the rest.

Checklist for employers

  • Confirm the coverage threshold and filing rules in every state where you have employees.
  • Classify workers carefully: calling employees contractors does not remove the obligation.
  • Post the required notices and report injuries within your state's deadlines.
  • Review employers liability limits and multistate endorsements every year.
  • Policies are issued by licensed insurers or state funds and placed through licensed producers in your state. Compare options on our workers' compensation page or request a quote.