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Starting a Small BusinessModule 3By Published Editorial policy

Hiring Your First Employee: Do You Need Workers' Compensation?

Learning goal: Know how workers' compensation requirements depend on your state, using Texas as the example, and what to check before your first hire.

Short answer

It depends on your state. Most states require many employers to carry workers' compensation, with thresholds and exemptions that vary. Texas is the notable exception: most private employers can choose, but those without it must report that to the state and give up certain legal protections. Check your state's rules before your first hire.

Read to the end to complete this lesson.

On this page
  1. The Fuller Picture
  2. Key Takeaways
  3. Real-World Example
  4. Common Mistakes
  5. Interactive Exercise
  6. Knowledge Check
  7. Questions to explore next

The Fuller Picture

Workers' comp pays for employees' work injuries and, where it applies, limits the employer's exposure to lawsuits over them. A general liability policy isn't designed for employee injuries. The first hire is the moment to settle the question, because the rules turn on your state and your business.

Key Takeaways

  • The Texas Department of Insurance: "In Texas, private employers can choose to carry workers' compensation insurance coverage, but it is not required in most cases."
  • Texas employers without coverage, called nonsubscribers, must report that to the state and report certain work injuries, per the same source.
  • Coverage "limits liability if an employee sues your business for damages," the Texas page notes, which nonsubscribers don't get.
  • General liability policies aren't intended for workers' compensation or employer's liability, per the Texas Department of Insurance's CGL guide.
  • Rules, thresholds and exemptions vary by state. Check yours with the state workers' comp agency.

Real-World Example

Same first hire, two states

Sam opens a small bakery and hires one employee. In a state that requires coverage for employers of his size, he buys a workers' comp policy before the employee's first day. His friend opens the same bakery in Texas, where most private employers can choose; she decides to buy coverage anyway for the lawsuit protection it brings. If she had chosen not to, she'd have had to report her nonsubscriber status to the state.

Common Mistakes

  • Assuming general liability covers employee injuries.
  • Assuming Texas's rule applies everywhere.
  • Missing the reporting duties that come with going without coverage in Texas.

Interactive Exercise

Before your first hire

Start with your state's workers' comp agency website.

Tick each step as you do it. Your checklist is saved in this browser.

Knowledge Check

Question: In Texas, according to the state's Department of Insurance, what's the general rule for private employers and workers' comp?

Explanation: In Texas, coverage isn't required in most cases, but employers without it must report their status and certain injuries. Most other states require many employers to carry it.

Recommended Insurpedia Tools

  • Coverage Builder: Answer a few questions about your home, vehicles, family and work, and see insurance topics worth researching for your situation, each linked to a plain-English explanation. It doesn’t tell you what to buy.

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Questions to explore next

Questions readers often ask next about this topic:

  • Do I need workers' comp for a part-time employee?
  • Are independent contractors covered?
  • What does workers' comp cost?

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Sources

The factual claims on this page were checked against these sources. Rules and figures change, so check the source itself if you need to confirm the current version.

Educational information, not advice: This lesson is for general education only, not legal, financial, or insurance advice. Actual coverage, discounts, and requirements depend on your policy’s wording, your insurer, and the laws of your state. Confirm specifics with your own insurer or a licensed agent before making a decision. Insurpedia does not sell insurance and does not recommend specific insurers. The Texas workers' compensation rules come from the Texas Department of Insurance, Division of Workers' Compensation; the CGL point from its commercial general liability guide. Other states differ.