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Updated Nov 07, 2023

What Is a Workers’ Comp Exemption?

While workers' compensation insurance is often legally required and recommended, some people are exempt from coverage. Learn how workers' compensation exemption works.

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Kimberlee Leonard, Senior Analyst & Expert on Business Operations
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In most states, if you employ any staff, you are required to have workers’ compensation insurance, which is a specific type of business liability insurance covering costs associated with on-the-job injuries to employees. However, most states also have one or more workers’ comp exemptions, meaning you don’t need to provide a policy for certain people within the company. Qualifying for a workers’ comp exemption can help save on the high costs of workers’ compensation insurance premiums, at least for a few employees.

What is a workers’ compensation exemption?

A workers’ compensation exemption means a business does not need to provide workers’ compensation insurance to certain employees or partners. The employer gets to save on the amount that coverage would cost because the price of workers’ compensation insurance is partially based on payroll. Excluding parts of payroll reduces the overall cost.

But this isn’t without risk, and there are certain things you need to know about workers’ compensation insurance exemptions. When you aren’t carrying workers’ comp for certain employees, they are not protected by a policy should they get injured at work. While you aren’t breaking the law by not having a policy, you are subject to a lawsuit if the injured party feels you are liable for their injuries.

For sole proprietors, the risk of injury could mean high medical expenses plus the loss of income. Imagine that you are a sole proprietor working as an electrician without workers’ comp insurance and you trip over your tools, fall and break your leg. You are unable to work for six weeks, losing much-needed income and your health insurance denies your claim because the injury happened at work. Because you don’t have workers’ compensation insurance, you must foot the bills from your savings or go into debt.

Who qualifies for a workers’ compensation exemption?

Every state identifies the parties who are exempt from the workers’ compensation insurance requirement. You’ll want to check with your state’s workers’ compensation department to see who qualifies since it varies from state to state.

As a general rule, most states exempt those who are self-employed or independent contractors. The thinking here is that the self-employed person is willing to absorb the risk associated with the job and isn’t going to sue themselves in the event of an injury.

These are some other common types of employees who qualify for exemption in many states:

  • Government workers
  • Volunteers
  • Business owners and partners
  • Railroad employees
  • Farm workers
  • Maritime workers
  • Domestic and household workers

There are also exemptions for certain types of comp claims. This means that not every injury or illness obtained on the job will be covered if the injury falls under an exemption.

Bottom LineBottom line
Certain employees may be exempt from the workers' compensation insurance requirement. Be sure you know the laws for your state and type of business.

These are some common claim exemptions:

  • Injuries from horseplay
  • Mental health issues not caused by work
  • Self-inflicted injuries
  • Injuries sustained while violating safety rules, company policy or laws
  • Injuries suffered while impaired by alcohol or drugs

Like employee exemptions, claim exemptions vary from state to state.

Examples of employee workers’ comp exemptions in different states

Because state laws vary, so do the exemptions. Don’t assume you are eligible for an exemption just because you see it listed for another state. Contact your state’s department of labor or workers’ compensation board, as well as your legal counsel, to ensure you aren’t breaking the law.

These are some examples of exemption variations by state:

  • California: Business owners, corporate officers and directors of limited liability companies are eligible for an exemption waiver.
  • Colorado: Independent contractors are exempt unless they are construction contractors, in which case they must either have coverage or formally reject coverage.
  • Florida: No more than three officers of a construction company may file for exemption, while nonconstruction business owners must own at least 10 percent of the limited liability company (LLC).
  • Illinois: Business partners, LLC members and corporate officers may be exempt unless they engage in extra-hazardous occupations, such as construction or trucking.
  • New Jersey: Members of an LLC and sole proprietors are exempt, while corporate officers are not exempt.
  • Washington: Officers of public corporations, nonpublic corporations and family corporations can be exempt under certain circumstances.

These are just a sampling of the types of exemptions you’ll find among states. When verifying that you are exempt from coverage, see if your state has a threshold ownership stake, such as 10 or 25 percent, to qualify for the exemption. Always consult your legal counsel before establishing workplace policies regarding workers’ compensation, insurance and exemptions.

FYIDid you know
If you have employees in multiple states, you must check each state's workers' compensation laws to remain compliant.

How to file for a workers’ comp exemption

Because laws, policies and procedures vary by state, you’ll want to check with your local workers’ compensation board on how you can take advantage of the exemption.

In many locations, you’ll need to file a form, often called a “Notice of Election to Be Exempt From Workers’ Compensation.” While the name may vary slightly, the form will request much of the same information regardless of your state. This is some of the information necessary to process the exemption:

  • Business entity type
  • Industry
  • Up-to-date business licenses
  • Employee details
  • Proof of ownership
  • Insurance carrier information

Complete and file the form with your state’s workers’ compensation board. Often, if you’re a sole proprietor but pay yourself via payroll services, the state will be notified of employee liability. You’ll be contacted by the board to deliver proof of insurance or proof of exemption.

Once you have the exemption, you’ll receive a certificate of your election to be exempt. Keep this with your company’s important documents in case you are ever questioned about it.

Pros and cons of filing for a workers’ comp exemption

Just because an insurance exemption is legally allowed, doesn’t mean it is always the best choice for your business. There are advantages and risks associated with workers’ compensation exemptions.

The pros of filing for a workers’ compensation exemption can include:

  • Cost savings: The main benefit of filing for a workers’ compensation exemption is reduced costs. Workers’ compensation insurance can be expensive, especially for small businesses. Filing for an exemption can save you a significant amount of money on insurance premiums.
  • Increased flexibility: Businesses with workers’ comp exemptions have more flexibility in handling workplace injuries and illnesses. For example, you may negotiate directly with an employee to resolve a claim, rather than going through an insurance company.
  • Time savings: Companies with workers’ compensation exemptions have less paperwork to deal with. You won’t have to file claims with an insurance company or provide your employees with workers’ compensation benefits.

It is important to note that there are also risks associated with filing for a workers’ compensation exemption. The cons of filing for a workers’ compensation exemption can include:

  • Increased legal risks: An employee may sue their employer if they are injured or become ill at work. A lawsuit can cost you a lot of time and money.
  • Increased financial liability risks: If an employee is injured or becomes ill at work, you may be held liable for their medical expenses, lost wages and other damages. This could be financially devastating for a small business.
  • Reduced employee benefits: Workers’ compensation insurance provides workers with benefits like medical coverage, lost wage replacement and vocational rehabilitation. Anyone without workers’ comp coverage may have to take unpaid leave from work while they recover from an injury or illness on their own.

Overall, whether to file for a workers’ compensation exemption is a decision that should be made on a case-by-case basis. Businesses should carefully weigh the pros and cons before making a decision.

TipBottom line
If you are considering filing for a workers' compensation exemption, it is important to consult with an attorney to discuss the risks and benefits and to make sure that you are in compliance with all applicable laws.

When you’ll want to get workers’ compensation insurance

Even if you are legally exempt, there are times when it just makes sense to carry workers’ compensation insurance. If you are concerned about getting hurt at work and would be unable to bear the burden of costs if you are injured and can’t work, you’ll want to get a policy.

Remember that just because you are exempt doesn’t mean that you can’t get workers’ compensation insurance. The process of getting a policy follows the same guidelines for you as it would any other employee. The insurance carrier will want to know your industry, what you do for your job daily, how much you make and whether you’ve had any claims.

A workers’ comp policy also makes it easier to hire employees for part-time work. You may have a large job that you can’t do on your own and need extra help for a month or two. With a policy already in place, you’ll know you’re compliant when you bring people on.

Just as importantly, sole proprietors and independent contractors may be eligible for bigger jobs and contracts if they have a workers’ compensation policy. Many government contracts require policies to eliminate the risk to the government entity offering the contract. This is also true for large private-sector contracts where major corporations want to be certain they are not absorbing your workers’ compensation risk.

Key TakeawayKey takeaway
If you are unsure whether you need a workers' compensation policy or if you meet the exemption rules, it's best to shop around and compare plans from the best insurance providers. They'll walk you through the requirements in your state and the pros and cons of taking that exemption if you qualify.

Workers' compensation exemption FAQ

When considering a worker's compensation exemption, the biggest thing to consider is the laws of your state. Some states have more stringent requirements for workers' compensation exemptions than others, so you will need to carefully review the laws of your state before filing for an exemption. If an exemption is legally permitted, you also should evaluate the size and type of your business. Smaller businesses with fewer employees may be more likely to benefit from a workers' compensation exemption than larger businesses with more employees. Businesses that operate in high-risk industries may also consider keeping their workers' compensation insurance. The last thing to take into account is your financial footing. Businesses with strong financial resources may be better able to afford the risks associated with a workers' compensation exemption. Businesses with limited financial resources may want to keep their workers' compensation insurance to protect themselves from financial ruin in the event of a workplace injury or illness.
If you're injured or become ill at work, you can try filing a claim with your health insurance company. However, many health insurance plans exclude work-related injuries and illnesses. If you're an employee who becomes injured or ill, you can negotiate directly with your employer to resolve your claim. If it's unresolved, you may be able to file a lawsuit against your employer. Note that this is a last resort, as lawsuits can be expensive and time-consuming.
In some instances and states, no. However, if your state requires LLC members to carry workers' compensation insurance, you will need it. Even if it is not legally required, you may still want to carry it as added protection.
If you are noncompliant with workers' compensation insurance laws, penalties will depend on a few things, such as what state you operate in. Some common penalties include fines, stop-work orders and imprisonment. Employers without workers' comp insurance may also be held personally liable for medical expenses, lost wages and other damages for injured or ill employees.

Skye Schooley contributed to this article.

author image
Kimberlee Leonard, Senior Analyst & Expert on Business Operations
Kimberlee Leonard is an insurance expert who guides business owners through the complicated world of business insurance. A former State Farm agency owner herself, Leonard started her decades-long career as a financial consultant advising on investment strategies before switching her focus to insurance and risk mitigation for businesses. Leonard has developed insurance primers on everything from small business insurance costs to specific policies, such as excess liability insurance. She has also reviewed business software tools, analyzed employee retirement plan providers and continues to share insights on financial topics as they relate to business. Leonard's work has been published in Forbes, U.S. News and World Report, Fortune, Newsweek and other respected outlets.
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