Workers' compensation: is state-mandated insurance that pays medical costs and part of lost wages for employees injured or made ill by their work, regardless of who was at fault. In exchange, employees generally can't sue their employer for those injuries.
Key takeaways
- Almost every state requires employers to carry workers' comp; Texas lets private employers opt out.
- Benefits cover medical care, partial wage replacement, disability, rehabilitation, and death benefits.
- Premiums are based on payroll, job class codes, and the employer's claims history.
- Private employers reported 2.5 million nonfatal workplace injuries and illnesses in 2024.
How workers' compensation works
Each state runs its own system (US Department of Labor, Workers' compensation). Employers buy coverage from a private insurer, a state fund, or self-insure if approved. When an employee is hurt on the job, they report it, the employer files a first report of injury with the insurer, and the insurer decides the claim. Wage replacement is often around two-thirds of average weekly wages, subject to state minimums and maximums, after a short waiting period.
Premiums are calculated per $100 of payroll for each class code, which reflects the risk of the work. A roofer's rate is far higher than a clerical worker's. An experience modification factor then adjusts the premium up or down based on your claims history compared with similar employers.
Federal employees are covered separately by the Federal Employees' Compensation Act, administered by the Department of Labor.
Workers' compensation example
A landscaping company has $600,000 in payroll for field crews in a class rated at $6.00 per $100, and $150,000 in clerical payroll rated at $0.20 per $100. Its experience mod is 1.15 after two back injuries last year.
| Field crews, $600,000 / 100 x $6.00 | $36,000 |
|---|---|
| Clerical, $150,000 / 100 x $0.20 | $300 |
| Manual premium | $36,300 |
| After 1.15 experience mod | $41,745 |
Reducing injuries enough to bring the mod back to 1.00 would save about $5,400 a year. Misclassifying field staff as clerical to lower the premium is fraud and leads to audit bills.
Why workers' compensation matters for employers
Workplace injuries are still common. BLS counted about 2.5 million nonfatal injuries and illnesses in private industry in 2024, a rate of 2.3 cases per 100 full-time workers (BLS, workplace injuries and illnesses in 2024), and 5,070 fatal work injuries, one every 104 minutes (BLS Census of Fatal Occupational Injuries, 2024). Each claim brings direct costs and higher premiums for years.
Workers' comp also ties into payroll. Premium audits compare reported payroll by class code to actual payroll, so accurate job coding in your HR system matters. Many payroll providers now offer pay-as-you-go workers' comp, which bills premiums with each payroll and avoids large year-end audit adjustments.
Common workers' compensation mistakes to avoid
Delaying the injury report
Late reporting can raise claim costs and violate state deadlines.
Misclassifying job codes
Premium audits catch it, and the bill comes with interest.
Retaliating against claimants
Firing or disciplining an employee for filing a claim is illegal in every state.
Treating contractors as uncovered
If they're really employees, injuries are your responsibility and you may face penalties for no coverage.
Workers' compensation: questions people also ask
Is workers' comp required?
What does workers' comp cover?
How much does workers' comp cost?
Can an employee sue their employer for a work injury?
Is workers' comp taxable?
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HRTally glossary entries are written by people who have run US payroll, benefits, and HR operations, then checked line by line against primary sources such as the IRS, Department of Labor, EEOC, and Bureau of Labor Statistics. Dollar limits and rates are for 2026 unless stated. We review every entry at least twice a year and whenever a rule changes. This page explains general rules and isn't legal or tax advice; state law can differ. Read our editorial standards.
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<blockquote>Workers' compensation is state-mandated insurance that pays medical costs and part of lost wages for employees injured or made ill by their work, regardless of who was at fault. In exchange, employees generally can't sue their employer for those injuries.</blockquote><p>Source: <a href="https://www.hrtally.com/hr-glossary/workers-compensation/">HRTally HR Glossary, Workers' compensation</a></p>
Written by the HRTally Research Team
Our guides are written and reviewed by people with hands-on US HR, payroll, and HR technology experience. Legal and tax facts are checked against primary sources, such as the Department of Labor, IRS, EEOC, and USCIS, and linked at the end of each guide. Vendors never review or pay for our editorial content.