No matter how careful you are, accidents in the workplace can happen. And without safeguards in place, the cost of a workplace injury lawsuit can easily put a growing startup out of business.
Workers' compensation insurance protects your startup and gives you peace of mind if the worst happens to one of your employees. Since carrying this type of insurance is required for nearly all employers in the US, it's also important to know your responsibilities under workers' compensation laws.
So if you'll be hiring employees for the first time, keep reading to learn:
- What is workers' compensation?
- What benefits do employees get under workers' compensation?
- How does workers' compensation insurance benefit employers?
- What are employers responsible for under workers' compensation laws?
- Which employers are required to carry workers' compensation?
- How much does workers' compensation cost?
- How to file a workers' compensation claim
- Key 2026 regulatory changes to know
- Startup compliance made easy with Warp
What is workers' compensation?
Workers' compensation is a type of business insurance that provides benefits for employees with a work-related injury or illness.
Generally, injuries and illnesses must happen on the job or result from workplace conditions in order to qualify for workers' compensation. Employees must also be able to prove that their illness or injury was not the result of negligence, intoxication, illegal drug use, or misconduct on their part.
Workers' compensation benefits cover incidents like:
- Injuries sustained from repetitive movements, like carpal tunnel syndrome
- Illnesses that result from exposure to harmful chemicals
- Car accidents that take place while an employee is on the clock
- Slip and fall injuries
- Stress-related health issues (in some states)
Each state's workers' compensation board manages how its program is run.
Most employers are required to purchase coverage through a private insurance carrier or their state's workers' compensation fund, while federal employers have access to their own insurance programs. Larger employers with the means to do so may self-insure themselves, although they must first meet specific requirements and get approval from the workers' compensation board.
However, the lack of federal standards for this type of insurance means that employer guidelines and processes generally differ from state to state.
What benefits do employees get under workers' compensation?
Workers' compensation insurance typically provides one or more of the following benefits to injured or sick employees:
Reimbursement of healthcare costs
Employees are entitled to compensation for medical treatment that helps cure or relieve the effects of a work-related injury or illness. This includes first aid treatment, medical care, and medical rehabilitation assistance if needed. Medical benefits require coverage of all reasonable and necessary treatment without deductibles or co-pays—a lifetime obligation in most states with no time limit on medically necessary care.
Salary replacement benefits
Workers' compensation also provides weekly cash payments to cover a portion of wages lost during recovery. Under workers' compensation laws, employees can typically expect to receive up to two-thirds (66%) of their average weekly wages, though maximum and minimum benefits vary by state.
Employees who become permanently disabled may also be able to receive wage payments through workers' compensation insurance. In these cases, the compensation amount is determined by state law.
Vocational rehabilitation
Employees who cannot continue working in their current role or will be out of work for an extended period of time may receive vocational rehabilitation benefits as well.
These benefits provide employees with the resources needed to attend school, receive job training, or update their skill set so they can successfully return to their previous role or re-enter the workforce in a new line of work.
Death benefits
In addition to financial assistance for recovering employees, workers' compensation also covers funeral expenses and benefit payments (called death benefits or survivor benefits) to dependents if an employee dies from a work-related injury or illness.
How does workers' compensation insurance benefit employers?
In return for partial coverage for healthcare expenses and wage replacement benefits, employees who accept a workers' compensation offer waive the right to sue their employer for their injury or illness.
The cost of insurance and claim payments is typically less than what an employer might pay in a civil injury lawsuit, thus protecting your business from the financial fallout from these incidents. This is why some employers still purchase workers' compensation policies, even if they're not required to do so under their state's laws.
However, remember that workers' compensation coverage doesn't offer blanket protection for all work-related illnesses and injuries. Employees can still sue companies for things like:
- Not informing them about their rights under workers' compensation laws
- Getting injured as a result of their employer's intentional actions
- Not carrying workers' compensation insurance
What are employers responsible for under workers' compensation laws?
In addition to carrying insurance coverage, workers' compensation laws require most employers to meet the following obligations:
Informing employees of their rights under workers' compensation laws
Companies must educate employees and new hires on their rights under the state's workers' compensation laws.
For example, employers are responsible for displaying required workers' compensation notices or posters in an area of the workplace where employees can easily read them, such as the break room or kitchen.
These notices must contain the following information:
- Employee rights under workers' compensation laws, including the right to receive medical treatment for work-related injuries and illnesses
- Benefits employees are entitled to under state laws
- The employer's insurance carrier and claims adjuster
Each state offers a printable version of these notices on the workers' compensation board website.
New for 2026: The Workplace Know Your Rights Act (SB 294) requires California employers to provide standalone written notices about workers' compensation rights effective February 1, 2026, for existing employees and January 1, 2026, for new hires. Notices must be distributed annually in nine languages including English, Spanish, Chinese, Tagalog, Vietnamese, Korean, Hindi, Urdu, and Punjabi. Check out a more comprehensive list of all the changes California employment law changes for 2026 here.
Filing insurance claims on behalf of employees
Employers must also provide workers with a workers' compensation claim form within 24 hours of receiving a report about a work-related injury or illness.
Once they receive a completed claim form from an employee, employers are responsible for filing it with their insurance provider. In certain circumstances, an employer may also need to report the incident to the Occupational Safety and Health Administration (OSHA) and the state workers' compensation board.
Which employers are required to carry workers' compensation?
Every state but Texas requires employers to purchase workers' compensation.
However, the minimum number of employees needed for a company to meet this requirement can vary between states. Some states require businesses to purchase coverage once they hire their first employee, while others make it mandatory for companies with at least two to five employees. Companies that meet specific federal requirements may also need to carry workers' compensation insurance, even if they don't meet the employee threshold.
State-by-state coverage thresholds
Most states mandate coverage immediately upon hiring any employee, including California, Colorado, Connecticut, New York, and Pennsylvania. A handful of states set higher thresholds:
- Virginia: Coverage required at 2 employees
- Arkansas and Georgia: Coverage required at 3 employees
- Florida and South Carolina: Coverage required at 4 employees
- Alabama, Mississippi, and Tennessee: Coverage required at 5 employees
Texas: The only opt-out state
Texas remains the only true opt-out state where private employers can completely forgo coverage. Approximately 28% of Texas employers operate as "non-subscribers" outside the system, though this carries significant legal exposure—non-subscribers lose common law defenses and face unlimited tort liability. A 2025 Texas Supreme Court ruling provided modest relief by allowing non-subscribers to designate responsible third parties to share fault.
Monopolistic state fund states
Four states operate monopolistic state fund systems requiring employers to purchase coverage exclusively from government-run programs:
- Ohio (BWC)
- North Dakota (WSI)
- Washington (L&I)
- Wyoming (DWS)
Employers in these states cannot purchase workers' compensation from private insurers but must separately obtain "stop-gap" employer's liability coverage since state funds exclude this protection.
Worker exemptions
Not all workers are covered under a state's workers' compensation laws. Independent contractors employed by a company aren't eligible for these benefits. Many states also have additional exclusions for employees in specific industries. The most common exemptions include domestic, agricultural, and seasonal workers.
Sole proprietors are automatically excluded but can opt in across most states. Corporate officers are automatically included but can opt out in many jurisdictions, with ownership thresholds varying: Colorado, Kansas, and Michigan require 10% ownership for exemption eligibility, while Massachusetts and Nebraska set the bar at 25%.
Because these regulations differ from state to state, make sure you fully understand your state's workers' compensation requirements. Employers that are required to carry workers' compensation insurance but fail to do so are subject to severe penalties, including heavy fines, lawsuits, and even imprisonment on criminal charges.
How much does workers' compensation cost?
The cost of this type of insurance varies since the laws that apply to a state's workers' compensation program (and even which carriers are available) differ from state to state. Costs can also fluctuate between similar employers in the same state, since the price an insurer sets on premiums depends on factors like the employer's industry risk, policy type, payroll size, and claims history.
State-by-state cost variations
State-level cost differences are substantial:
- California: $62/month average
- Texas: $32/month average
- Ohio: $29/month average (lowest)
- Alabama: $119/month average (highest).
2026 rate outlook
The 2026 rate outlook brings good news for most employers:
- Florida approved a 6.9% decrease—its ninth consecutive year of reductions, bringing cumulative cuts to 78% since 2003 according to NCCI's Florida filing
- New Hampshire continues a 14-year streak with a 6.1% decrease
- Connecticut marks its 12th straight year of rate cuts
- Idaho also announced rate decreases for 2026
However, California bucked the trend with an 8.7% increase—its first major increase in a decade. Washington State approved a 4.9% increase citing rising wages and medical costs.
How to file a workers' compensation claim
Filing a workers' compensation claim follows a different process than the one used in most other lines of insurance. The exact procedure will vary from state to state, but generally employers can expect to take the following steps:
- When an employee is injured at work, they should get appropriate medical treatment (if needed) and provide you with a written notice about the incident within a certain amount of time.
- Inform the employee about the claims process and give them the appropriate paperwork to fill out so you can file their claim with the insurer. You should also collect witness statements and any other documentation needed to support the claim. Depending on the state's guidelines, you may need to fill out some forms of your own as well.
- File the completed form and supporting documentation with your insurer, typically within seven days. If the situation requires it, you may also need to report the incident to the workers' compensation board and OSHA.
- The workers' compensation board then processes the claim. If it's approved, your insurance carrier reaches out to the employee with a payment offer. The employee can accept the offer as is or negotiate a settlement. If the claim is denied, the employee can appeal the decision with the workers' compensation board.
State filing deadlines
State-level First Report of Injury deadlines vary substantially so make sure you know what the requirements are for the states you have employees in. Here are some examples of deadlines across states:
- Wyoming: 72-hour reporting required
- California: Immediate reporting for serious injuries
- Colorado: Reporting within 10 days for injuries causing 3+ days of lost time
- Minnesota: Submission within 10 days to the insurer and 14 days to the Department of Labor and Industry
- Michigan: Up to 90 days allowed
What are the penalties for non-compliance for workers compensation?
Failing to carry required workers' compensation coverage triggers severe consequences across all states except Texas. Here are some of the largest penalties for failing to comply with workers compensation laws in these states:
California
California imposes penalties up to $100,000 total, with $10,000 per employee for compensable injuries, plus criminal prosecution carrying up to one year in county jail. The California Department of Insurance issues stop-work orders that prohibit using any employee labor, with violations adding 60 days jail time and an additional $10,000 fine.
New York
New York penalties start at $2,000 per 10-day period without coverage, with first penalty notices often exceeding $12,000. Corporate officers—specifically the president, secretary, and treasurer—bear personal liability for these penalties. Subsequent convictions within five years escalate to Class D felony charges and a 5-year bar from public contracts.
Florida
Florida calculates penalties as twice the premium that should have been paid for up to 24 months, with violations of stop-work orders adding $1,000 per day. Criminal violations can reach felony status with penalties up to 30 years imprisonment.
Pennsylvania
Pennsylvania treats intentional non-compliance as a felony carrying up to 7 years prison and $15,000 in fines.
Insureon's penalties guide provides state-by-state penalty information.
Loss of exclusive remedy protection
The most significant risk of not complying to workers compensation laws is loss of exclusive remedy protection. Without coverage, employers cannot shield themselves from civil lawsuits, exposing them to full tort damages including pain and suffering, mental anguish, and punitive damages—with no caps. In Texas, non-subscriber employers lose defenses like contributory negligence and assume 100% liability even when minimally at fault.
Worker's Compensation through Warp
Warp offers an integration with NEXT Insurance for Worker's Compensation Insurance, making it easy to sign up for coverage or connect your existing plan directly through the Warp platform.
Key benefits of setting up Worker's Compensation on Warp:
- Automatic data sync: Employee data stays consistent across all platforms—no need to make manual changes to insurance or send reports manually
- Automatic premium calculations: Insurance premium calculations update automatically with every pay cycle to ensure your coverage stays current
- Pay-as-you-go billing: Benefit from month-to-month billing instead of paying an annual lump sum upfront
- Reduced errors: Integration minimizes mistakes in payroll calculations and insurance premiums, reducing the risk of costly compliance issues
- Time savings: No more manual reports to carriers—everything syncs automatically
Note for founders: Officers and owners are generally exempt from worker's compensation coverage. If you're a small team of just founders/cofounders running payroll, you may be exempt from obtaining worker's comp. This changes as soon as you hire your first non-owner W-2 employee—you'll need to purchase coverage right away.
Discover how Warp can help your startup run more efficiently by requesting a demo today.
Last updated: January 2026. This guide is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified professional for guidance specific to your situation.
