Who's Eligible for a Workers' Compensation Exemption?

A workers' compensation exemption lets you or your business opt out of this insurance requirement. Workers' comp insurance covers medical expenses and lost wages for employees injured or made ill by their jobs.

Most businesses with employees need workers' comp insurance, and exemptions are rare. If you have even one employee, you want coverage regardless of your business structure or industry. Exemptions mainly apply to business owners themselves: sole proprietors, partners, LLC members and corporate officers who can exclude themselves from coverage while still protecting their employees.

Eligibility for workers' compensation exemptions varies by state and business type, but certain types of business owners and employees commonly qualify to opt out of mandatory coverage. 

Common exemption categories include:

Business Owners

• Sole proprietors with no employees (most straightforward exemption)
• Business partners when no employees work outside the partnership
• Corporate officers who meet state ownership requirements
• LLC members in most states

Specific Worker Types

• Independent contractors (must meet classification criteria)
• Agricultural workers and seasonal farm laborers
• Domestic workers like housekeepers and nannies (varies by state)
• Real estate agents and brokers (if independent contractors rather than employees)

Special Situations

• Family-owned businesses where only family members work
• Nonprofit organizations with volunteer-based operations
• Contract-based businesses with minimal full-time employees

We strongly recommend having workers' compensation insurance because it protects employees and employers from financial risks. Requirements vary by state, and misclassification of workers can result in penalties. Most exemptions apply only to owners, not employees.

Employee count thresholds determine when coverage becomes required in most states. Small businesses often get exemptions based on how many people they employ:

• One to two employees: About 15 states don't require coverage for very small businesses
• Three to four employees: Most common threshold — roughly 25 states require coverage at this level
• Five+ employees: Nearly all states mandate coverage once you reach five employees

Note: Some states have different thresholds for high-risk industries. For example, Florida requires coverage for construction businesses with just one employee, while other industries can have up to four employees before coverage becomes mandatory.

What This Means for Your Business

• Check your state's specific rules because these general patterns have exceptions. Contact your state's workers' compensation board or Department of Labor for exact requirements.
• Consider multi-state operations carefully. If you have employees in multiple states, you'll need to meet the most restrictive state's requirements.
• Don't assume exemptions transfer when expanding to new states. For example, an exemption in Tennessee might not apply if you start operating in California.
• Plan for growth by understanding when you'll need coverage. If you're currently exempt with two employees, know that hiring a third might trigger mandatory coverage in your state.

Many clients and contractors require proof of workers' compensation insurance before starting projects, even from exempt business owners. This requirement protects them from liability if injured while working on their property or project.

Government contracts almost always require workers' comp coverage. Federal, state and local agencies typically won't award business contracts without proper insurance documentation. This requirement can exclude exempt sole proprietors and independent contractors from lucrative public sector opportunities.

Large private companies often have similar requirements. Corporate clients want to avoid the risk of being held liable for contractor injuries. If you don't have workers' comp coverage and get injured on their job site, they face lawsuits or workers' comp claims.

Construction and high-risk industries have stringent requirements. General contractors typically require all subcontractors to carry workers' comp insurance, regardless of exemption status. The construction industry's high injury rates make this coverage essential for managing liability exposure.

Health insurance doesn't replace workers' comp coverage. The two serve different purposes and have different rules about work injuries.

Your health insurance may not cover work injuries. Most health insurance policies exclude work-related injuries and illnesses. If you break your arm on a job site, your health insurer might deny the entire claim.

Workers' comp replaces lost wages. Health insurance covers medical bills but won't replace your paycheck when you can't work. Workers' comp provides partial wage replacement, usually two-thirds of your weekly pay.

Legal protection works differently. Workers' comp prevents employees from suing you for workplace injuries. Health insurance doesn't provide this legal shield.

Don't assume health insurance covers everything. If your work involves physical risk, workers' comp fills important gaps that health insurance won't cover.

Below, we answer some of the most common questions about the people and businesses eligible for workers' compensation exemptions and how these exemptions work.