What Is Workers' Compensation Insurance?
Workers' compensation (workers' comp) is a state-mandated insurance program that provides benefits to employees who suffer work-related injuries or occupational illnesses. It covers:
- Medical expenses — hospital bills, prescriptions, physical therapy
- Lost wages — typically 60–70% of the employee's average weekly wage
- Rehabilitation costs — vocational training if the employee can't return to their prior role
- Death benefits — funeral expenses and survivor benefits in fatal cases
In exchange for these "no-fault" benefits, employees generally give up the right to sue their employer for workplace injuries.
Is It Legally Required?
In most states, yes. The specific requirements vary:
| Requirement | States |
|---|---|
| Required for ALL employers | CA, NY, IL, PA, MA, CO, OR, and most others |
| Required at 3+ employees | GA, NC, NM, WI, SC |
| Required at 4+ employees | FL (construction: 1+) |
| Required at 5+ employees | AL, MS, TN, MO |
| Monopolistic state fund | OH, ND, WA, WY |
| Optional | TX (but highly recommended) |
How Are Rates Calculated?
Workers' comp uses a specific formula:
Premium = (Payroll ÷ 100) × Class Code Rate × Experience Modifier
Class Codes (NCCI)
The National Council on Compensation Insurance (NCCI) assigns 3-4 digit codes to occupations based on their risk level:
- 8810 (Clerical): ~$0.20 per $100 payroll
- 8742 (Sales): ~$0.30 per $100 payroll
- 5190 (Electrical): ~$3.50 per $100 payroll
- 5551 (Roofing): ~$12.00+ per $100 payroll
Experience Modification Rate (EMR)
Your EMR compares your company's claims history to the industry average:
- EMR = 1.0 — Average safety record
- EMR < 1.0 — Better than average (premium discount)
- EMR > 1.0 — Worse than average (premium surcharge)
Average Costs by Industry
| Industry | Avg. Annual Cost per Employee |
|---|---|
| Office/Clerical | $200–$400 |
| Retail | $500–$1,000 |
| Manufacturing | $1,200–$2,500 |
| Construction | $2,500–$5,000+ |
| Roofing | $5,000–$10,000+ |
How to Reduce Workers' Comp Costs
- Implement safety programs — OSHA-compliant training reduces claims frequency
- Return-to-work programs — Get injured employees back sooner with modified duty
- Classify employees accurately — Don't overpay by misclassifying low-risk workers
- Manage your EMR — A strong safety record pays for itself over time
- Shop multiple carriers — Rates vary 15–30% between insurers