What it covers, how premiums are figured, and what to do when an employee gets hurt. When you’re ready, a licensed agent can compare options for your business.
Quick answer: Workers’ compensation insurance pays medical bills and part of lost wages when an employee is hurt or gets sick because of their job, and it generally keeps that employee from suing you over the injury. Most states require it once you have employees, and California requires it with just one. Premiums are based on payroll, job classifications, and claims history.
Workers’ comp is a no-fault system. An injured employee doesn’t have to prove the employer did anything wrong, and in exchange, workers’ comp is generally their main remedy against the employer. A policy has two parts: Part One pays the benefits required by state law, and Part Two, employer’s liability, covers certain lawsuits tied to workplace injuries.
Your premium starts with payroll and gets adjusted for the type of work and your claims history.
| Coverage | What It Means | Why It Matters |
|---|---|---|
| Payroll | Premium is charged per $100 of each employee's pay | It's estimated up front and checked against actual payroll later |
| Class code | Each type of job has its own rate | Office work costs far less to cover than roofing |
| Experience mod | A factor comparing your claims to similar businesses | Fewer claims than average can lower your premium |
| Payroll audit | The insurer reviews actual payroll after the policy year | You pay more or get money back based on what really happened |
| Pay-as-you-go | Premium billed with each payroll run | Smoother cash flow and fewer audit surprises |
| Independent contractors | Workers you pay who aren't on payroll | If they don't meet your state's test, they may count as employees |
The right setup depends on your payroll pattern and how much HR support you want.
A traditional annual policy based on estimated payroll, with an audit at the end of the year.
Premium is calculated from each payroll run, which can smooth cash flow and shrink audit adjustments.
A professional employer organization covers your employees under its own policy as part of a bundled HR and payroll service.
Rates depend on your employees’ job classifications and your state’s rate structure, so a café and a framing contractor can pay very different amounts on the same payroll.
Part Two of a workers’ comp policy covers lawsuits that fall outside the workers’ comp system, like a claim from an injured employee’s family. Many contracts require specific employer’s liability limits, often $1 million.
Most businesses with employees. Requirements vary by state, and California requires coverage as soon as you have one employee, full-time or part-time.
It depends on payroll, job classifications, and claims history. Premiums are calculated per $100 of payroll for each class, so office staff cost much less to cover than construction crews.
Not for true independent contractors, but the test is strict in some states, including California. If a worker doesn’t meet the test, they’re treated as an employee, and an injury could leave you paying out of pocket.
It’s a number that compares your past claims to similar businesses. A 1.00 is average, below 1.00 lowers your premium, and above 1.00 raises it. Smaller businesses often don’t have one until their premium reaches a minimum size.
After your policy year ends, the insurer checks your actual payroll by job class. If payroll was higher than estimated, you owe additional premium. If it was lower, you may get money back.
It depends on your business structure and state. Sole proprietors are often exempt, and in many states certain corporate officers and LLC members can choose to include or exclude themselves.
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