Workers' Compensation
Workers' compensation is a state-regulated insurance system that pays medical care, rehabilitation and partial lost wages to employees injured or made ill by their jobs, generally without proving fault, in exchange for limiting the employee's right to sue the employer.
Last updated October 13, 2026
How workers' compensation works
The NAIC describes workers' compensation as a program in which employers are protected from most employee injury lawsuits, and injured workers receive medical care, rehabilitation and partial wage replacement. Benefits also include funeral benefits in the event of a work-related death. It is a no-fault system: an employee generally does not have to prove the employer was negligent. In exchange, the workers' compensation benefits are typically the employee's exclusive remedy against the employer.
Rules are set state by state. According to the NAIC, coverage is mandatory for most employers in every state except Texas, where employers can choose whether to participate. The Department of Labor notes that private employers are covered under state programs, while the federal government runs separate programs for specific groups such as federal employees. Employers usually satisfy the requirement through a private insurer, a state fund or, for some large employers meeting state standards, self-insurance. Premiums typically depend on payroll, job classifications and claims experience.
Workers' compensation policies commonly include employers liability coverage, which handles certain employee injury claims that fall outside the compensation system. It is a separate coverage part with its own limits.
Workers' compensation vs. related terms
- Workers' compensation vs. general liability. General liability typically excludes injury to the company's own employees, which workers' compensation handles instead.
- Workers' compensation vs. employers liability. Employers liability is usually part of the same policy and addresses certain employee injury claims that fall outside the compensation system, with its own limits.
- Workers' compensation vs. employment practices liability. EPL covers claims such as discrimination or wrongful termination. Workers' compensation covers workplace injury and illness.
- Workers' compensation vs. health or disability insurance. Group health and disability plans generally address non-work conditions, while workers' compensation addresses work-related injuries and illnesses. Which applies depends on the facts and the state.
Example
An assembly technician at a hardware startup injures a hand on equipment. The employee reports the injury and receives medical treatment and partial wage replacement through the company's workers' compensation policy, regardless of who was at fault. The employee generally cannot sue the company for the same injury.
A second example
A hypothetical fintech has remote employees in several states. One employee, working from a home office, injures a wrist in a fall during the workday and reports it. Whether the injury is compensable depends on the facts and on the rules of the state where the employee works. The company's policy needs to list that state to respond as intended, so it is worth reviewing the policy's state schedule whenever someone is hired in a new state.
What to watch for
- Where employees work. Coverage and rules depend on the state. Remote or traveling employees may bring other states' rules into play, so confirm the policy reflects every state where people work.
- Classification and misclassification. Treating a worker as an independent contractor when the law sees an employee can create uninsured exposure. The NAIC has discussed how the changing workforce challenges the employee definition.
- Not an EPL substitute. Workers' compensation does not respond to discrimination or wrongful termination claims. See employment practices liability and our EPL coverage page.
Questions to ask your broker or insurer
- Does the policy cover every state where our employees work, including remote staff and travelers?
- Do the classification codes match what our people actually do?
- How does the payroll audit work, and how does our claims history, shown in loss runs, affect premium?
- What will underwriters want to see, such as payroll by state, job duties and safety practices?
- How are owners, founders and officers treated under our state's rules and our entity type?
- Do we use a PEO, and if so, whose policy covers our employees?
- Do any contracts require a waiver of subrogation?
Common mistakes
- Treating employees as independent contractors when the law may see employment.
- Not updating the policy when hiring in a new state.
- Misreporting payroll or classifications, which can lead to audit adjustments.
- Failing to collect a certificate of insurance from contractors, leaving a possible uninsured exposure.
Why it matters for technology, AI, fintech and digital-asset companies
A company's first employee in a new state, a lab or assembly line for a hardware product, or a remote-first team can each trigger workers' compensation obligations even at an early stage. Requirements depend on the state and the employment relationship.
Remote-first and distributed teams make state-by-state coverage a real planning point, and hardware or lab environments add physical hazards that a pure software company does not face. Fintech and digital-asset firms with small offices still carry the same requirement for employees. Early-stage startups should also ask how founders are treated under their state's rules. For general background see our pages for venture-backed startups, physical AI and hardware and employment practices liability, and the glossary entries on premium and exclusions.
Related terms
Related reading: Why workers' comp belongs at the start of your entity setup
Frequently asked questions
What is workers' compensation insurance?
Workers' compensation is a state-regulated insurance system that pays medical care, rehabilitation and partial lost wages to employees injured or made ill by their jobs, generally without proving fault, in exchange for limiting the employee's right to sue the employer. Requirements and benefits are set by each state.
Is workers' compensation insurance required?
In most states, employers must carry it or otherwise secure the obligation. The NAIC notes Texas is the exception, where coverage is elective for employers, though opting out has legal consequences. Rules vary by state, employee count and industry, so check your state's requirements.
What does workers' compensation cover?
It typically pays reasonable medical expenses, rehabilitation and a portion of lost wages for work-related injuries or illnesses, plus death benefits for dependents. Benefit amounts, waiting periods and covered conditions are set by each state and can differ substantially.
Can an employee sue their employer over a work injury?
Generally not for injuries covered by the system, because workers' compensation is typically the exclusive remedy. There are exceptions that vary by state, such as some cases involving uninsured employers or certain intentional acts. Employers liability coverage may respond to claims that fall outside the system.
What is the difference between workers' compensation and EPL?
Workers' compensation covers workplace injuries and illnesses. EPL covers claims such as discrimination, harassment and wrongful termination, and typically excludes bodily injury. A company can face both types of claims, so one does not replace the other.
How is workers' compensation premium calculated?
It is typically based on payroll in each classification code, multiplied by a rate per $100 of payroll, and then adjusted for factors such as claims experience. Premium is often audited after the policy period against actual payroll.
Do I need workers' compensation for remote employees?
Generally you need coverage that reflects the state where each employee works, even if they are remote. Rules vary by state, so list every state of employment with your broker.
Do independent contractors need workers' compensation?
True independent contractors are typically responsible for their own coverage, but misclassification can create exposure for the company that hired them. Rules differ by state, so confirm how your workers are classified.
Are business owners and founders covered by workers' compensation?
It varies by state and entity type. Some states allow owners or officers to be included or excluded, while others have different rules, so ask how your founders are treated.
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