Workers' compensation insurance covers medical expenses and lost wages for employees injured on the job. It is state-mandated in all 50 states for businesses with employees (thresholds vary by state) and is a prerequisite for operating legally as an employer.
Workers' compensation is the exclusive remedy system for workplace injuries in the United States — in exchange for guaranteed benefits (medical care + wage replacement), employees generally forfeit the right to sue employers for on-the-job injuries. Every state has its own workers' comp statute administered by its department of labor or industrial commission. Requirements vary: most states require workers' comp for businesses with one or more employees; some states have higher thresholds (e.g., Texas allows businesses to opt out; domestic workers often excluded). Benefits paid under workers' comp: (1) Medical benefits — all necessary and reasonable medical treatment for the work-related injury or illness. (2) Temporary disability — replacement of a portion of lost wages (typically 60-67% of the worker's average weekly wage) during recovery. (3) Permanent disability — compensation for lasting impairment. (4) Death benefits — funeral expenses and survivor income if the injury is fatal. Premium is calculated as: (payroll / $100) × class code rate × experience modification factor. Class codes (set by the National Council on Compensation Insurance, NCCI) rate industries by historical injury frequency. Roofing contractors have very high class code rates; clerical workers have very low rates. The experience modification factor ('ex-mod') adjusts the premium based on the employer's actual claims history — an ex-mod below 1.00 earns a premium discount; above 1.00 means higher premiums. For small business lending: lenders on SBA loans and commercial real estate loans verify that the business has proper workers' comp coverage as part of the compliance and risk review. Employers without required coverage face significant state penalties (back premiums, fines, loss of contractor licenses in many states).
Yes, in virtually all states for businesses with employees. The exact threshold (number of employees, employee classification) varies by state. Failing to carry required coverage is a misdemeanor or felony in many states, results in significant fines, and exposes the employer to uncapped personal liability for workplace injuries. Texas is the only state that allows most private employers to opt out.
Generally no. Workers' comp covers employees, not independent contractors. However, many states scrutinize the employee vs. contractor classification — a worker misclassified as a contractor who is legally an employee would be covered (and the employer faces back premiums and penalties). General contractors also often require subcontractors to carry their own workers' comp coverage, or include them in the GC's policy.
The experience modification factor (ex-mod) is a multiplier applied to workers' comp base premium based on the employer's actual injury claims history vs. industry average. An ex-mod of 1.00 is average. Ex-mod below 1.00 (e.g., 0.80) = 20% premium discount for good safety record. Ex-mod above 1.00 (e.g., 1.30) = 30% premium surcharge for above-average claims. The NCCI calculates ex-mods using 3 years of loss history.