The moment you hire your first employee, workers’ compensation insurance stops being optional in most states and becomes a legal requirement, not something you can decide to add later once the business feels more established. This guide walks through when coverage is required, how to actually get a policy, and what workers’ comp does and doesn’t cover once you have it.
What Workers’ Compensation Insurance Actually Covers
Workers’ compensation insurance covers medical costs, a portion of lost wages, and in serious cases, death benefits, for employees injured or who become ill because of their job. It’s a no-fault system, meaning an injured employee generally receives benefits regardless of who caused the accident, and in exchange, the employee typically gives up the right to sue the employer directly for the injury.
Coverage generally includes:
- Medical treatment related to the workplace injury or illness
- A portion of lost wages while the employee recovers and can’t work
- Death benefits paid to family members if a workplace injury is fatal
- Rehabilitation costs in some cases
When Is Workers’ Comp Required?
Requirements vary by state, but the general pattern is straightforward: most states require workers’ compensation insurance as soon as you hire your first employee, regardless of whether that employee works full-time or part-time. A handful of states allow exceptions for very small businesses under a specific employee count, and rules for sole proprietors and LLC members covering only themselves can differ from the rules for businesses with actual employees.
Because these thresholds and exceptions vary significantly by state, confirm your specific state’s requirement before you bring on your first hire, not after. See FRIDAY’s guide to state payroll laws for the broader pattern of how state-specific employment requirements work. Operating without required coverage exposes the business to penalties and, in the event of an actual workplace injury, direct financial liability for the employee’s medical costs and lost wages.
How to Get a Workers’ Comp Policy
Setting up coverage generally follows the same basic path regardless of state:
- Confirm your state’s specific requirement for your business size and structure, since thresholds and exemptions vary; FRIDAY’s employer registration by state guide is a useful starting point for state-specific requirements generally
- Get quotes from a licensed insurance agent or carrier, since rates depend heavily on your industry, payroll size, and claims history
- Classify your employees correctly by job duty, since workers’ comp premiums are calculated based on the risk level of the actual work performed, not a flat company-wide rate
- Review the policy’s coverage limits and exclusions before signing, so you understand exactly what is and isn’t covered
- Display any required workplace notices, since most states require employers to post information about workers’ comp coverage in a visible location
What Determines Your Premium
Workers’ comp premiums are based primarily on your total payroll, your industry’s risk classification, and your business’s claims history. A construction business with employees doing physical labor will pay a meaningfully higher rate than an office-based business with the same payroll, because the underlying injury risk is different. Your insurer assigns a classification code based on the actual work your employees perform, and mixing job duties incorrectly, whether accidentally or to save on premiums, can create problems if a claim is filed and the classification doesn’t match the actual work.
What Workers’ Comp Does Not Cover
Workers’ comp is not a catch-all injury policy. Coverage generally excludes:
- Injuries that occur outside the scope of employment, such as during an employee’s commute
- Injuries caused by an employee’s intoxication or intentional misconduct
- Independent contractors, in most cases, since workers’ comp generally applies to W-2 employees rather than 1099 contractors
Because independent contractors typically fall outside workers’ comp coverage, correctly classifying a worker as an employee versus a contractor matters here too. See FRIDAY’s guide to W-2 vs. 1099 classification if you’re unsure which category a new hire falls into.
What Happens If a New Hire Gets Injured
If a covered employee is injured on the job, the general process looks like this:
- Get the employee any necessary immediate medical care
- Document the incident as soon as possible, including when, where, and how it happened
- Report the claim to your workers’ comp insurance carrier promptly, since most states set a deadline for reporting
- Complete any required state workplace injury forms
- Stay in communication with the employee and the insurance carrier’s claims adjuster throughout the process
Delaying the report or documentation can complicate the claim and, in some cases, create compliance issues of its own. Keep incident documentation as part of your broader payroll and employee record keeping, since records tied to an active claim should be retained until it’s fully resolved.
Setting Up Workers’ Comp as Part of Onboarding
Workers’ comp coverage should be confirmed before a new hire’s first day, not scrambled together after. Build it into your standard onboarding process alongside W-4 and I-9 collection, so it’s one more box checked before someone starts work rather than an afterthought once they’re already on the job.
Where FRIDAY Fits
FRIDAY is building workers’ compensation insurance support through a partnership with CoverDash, expected soon. In the meantime, FRIDAY helps you track the payroll data your workers’ comp carrier will need for accurate premium calculation and audits, since your policy’s cost depends directly on accurate wage and job classification records. Review FRIDAY’s payroll compliance checklist to make sure your broader new-hire setup, including workers’ comp, is covered before your next hire starts.
FAQs
What will workers’ comp not cover?
Workers’ comp generally doesn’t cover injuries outside the scope of employment, injuries caused by intoxication or intentional misconduct, or independent contractors in most cases. Coverage is specifically tied to injuries and illnesses arising from the job itself.
What are the three main requirements to obtain workers’ compensation?
Generally: confirming your state’s specific coverage requirement based on your business size and structure, obtaining a policy through a licensed carrier or agent, and correctly classifying employees by job duty so premiums reflect actual risk. Requirements vary by state, so confirm specifics with your state’s labor department.
Do I get paid while on workers’ compensation?
Typically, workers’ comp covers a portion of lost wages, not full pay, while an employee recovers from a covered injury and can’t work. The exact percentage and duration of wage replacement varies by state and by the specifics of the injury.
What not to say when reporting a workers’ comp claim?
Avoid making assumptions about fault or minimizing the severity of an injury before it’s been properly evaluated. Report the facts of what happened as accurately and promptly as possible, and let the claims process, not informal conversation, determine the outcome.
Disclaimer: This article is for general informational purposes only and does not constitute legal or insurance advice. Workers’ compensation requirements vary significantly by state. Consult a licensed insurance agent or employment attorney for guidance specific to your business.
Pincus Schiff is a payroll software specialist at Friday App, where he helps businesses simplify payroll, stay compliant, and automate their workflows. He writes about payroll best practices, compliance, and the latest in workforce technology.
