Workers' comp is optional in Texas: what opting out really means for an employer

The answer for most private employers

In most cases, no. Texas lets private employers choose whether to carry workers' compensation insurance, and the Texas Department of Insurance says coverage is not required in most cases. Employers who opt out are called nonsubscribers, and they still have obligations: they must file a notice with the state, tell their employees in writing and by posting a notice, and report certain injuries. They also give up the protection workers' comp provides against most employee injury lawsuits.

At The Phoenix Insurance we place workers' compensation for Texas employers, and we also talk with owners who are deciding whether to carry it at all. This guide is general information from an insurance agent's point of view, not legal advice. The decision has legal consequences, so talk with an employment attorney as well as a licensed agent before you make it.

Why Texas works differently from other states

In most states, workers' comp is mandatory for employers with employees. Texas operates under an opt-out system, as our workers' comp page explains, so an employer can buy coverage from a carrier, qualify to self-insure, or go without. That choice is unusual, and it often confuses owners who move here or hire their first employee after working elsewhere.

The system is overseen by the Texas Department of Insurance, Division of Workers' Compensation, which regulates coverage and handles disputes between injured workers and carriers through steps such as mediation and contested case hearings. Whether you subscribe or not, the division's rules shape what you must file and when.

The moment this becomes real is usually the first hire. A solo owner or a partnership with no employees rarely thinks about workers' comp. Then the business brings on a part-time helper, an office manager or a technician, and the question arrives with the first paycheck. That is the right time to decide deliberately, because both choices start a clock: a policy needs to be in force before the employee starts, and a nonsubscriber has a filing to make after hiring its first employee.

What a workers' comp policy actually does

Workers' compensation pays benefits to employees hurt on the job, regardless of who was at fault. Our workers' comp page lists the core benefits: medical costs for work-related injuries, including hospital visits, surgery and rehabilitation; disability payments that replace part of lost wages; vocational rehabilitation in some cases; and death benefits for dependents of workers killed on the job.

For the employer, the most important feature is what the policy does to lawsuits. The Texas Department of Insurance explains that coverage limits your liability if an employee sues your business for damages, with an exception when gross negligence results in a fatality. In practice, the injured employee's remedy runs through the workers' comp system rather than a lawsuit against you. For many owners, that predictability is the real product. The premium is a known cost, the benefits are set by the system, and a bad injury does not automatically become a court case that puts the company itself at risk.

• Medical care for work-related injuries and illnesses
• Partial replacement of lost wages while the employee cannot work
• Vocational rehabilitation in some cases
• Death benefits for dependents
• Limits on employee injury lawsuits against the employer, with narrow exceptions

What going without coverage means

A nonsubscriber does not pay workers' comp premium, but it takes on the risk directly. Our workers' comp page notes that employers who opt not to carry coverage may face lawsuits from injured employees. A serious injury can lead to a negligence claim against the business, with the cost of defense and any judgment or settlement falling on the company unless other insurance responds.

Some nonsubscribers set up their own injury benefit plans or buy specialized coverage designed for nonsubscribing employers. Those are legitimate approaches, but they need to be built carefully with an attorney and an agent who understands them. Going without coverage and without a plan is the version that worries me, because it usually reflects a decision nobody actually made; the business simply never bought a policy, and the filings and notices were never done either. If a demand letter or a lawsuit does arrive, what to do in the first ten days from a Dallas litigation attorney is a good place to start.

Filings and notices nonsubscribers must keep up with

Opting out is not the same as doing nothing. The Texas Department of Insurance requires nonsubscribers to report to the state that they do not have coverage, through the division's Employer E-File system. According to the department, those notices are filed between February 1 and April 30 of each calendar year, and also after hiring the first employee and after terminating a Texas workers' compensation policy.

Employees must be told as well. The department requires nonsubscribers to post a notice of no coverage where employees can see it regularly and to give written notice to new employees. Nonsubscribers with five or more employees must also report work-related injuries, illnesses and deaths with more than one day of lost time, within one month and seven days, according to the same page.

• Annual notice of no coverage, filed February 1 through April 30
• A notice after hiring your first employee
• A notice after canceling or ending a workers' comp policy
• A posted workplace notice of no coverage, plus written notice to new hires
• Injury, illness and death reports if you have five or more employees

Questions that usually decide it

There is no universal answer, but the same questions come up with almost every owner I talk to. The answers point most businesses clearly in one direction. An office with a few employees at desks faces a very different injury risk than a shop where people lift engines, climb ladders or drive all day, and the decision should reflect the work your people actually do, not what a friend's company chose.

Pay particular attention to contracts. If a client, landlord or general contractor asks for a certificate of workers' compensation insurance, being a nonsubscriber may cost you the work. And remember that classification matters: our workers' comp page notes that independent contractors may not be covered, and that misclassifying workers can create financial and legal problems.

• How physical is the work, and how often do injuries happen in your industry?
• How many employees do you have now, and how many in a year?
• Do your client contracts or lease require proof of workers' comp?
• Could the business absorb the cost of defending and settling a serious injury claim?
• Are any of your contractors really employees under the rules?
• Do you want a predictable premium or to manage the risk yourself?

What shapes the premium if you buy coverage

Workers' comp is priced from a handful of inputs. Our workers' comp page lists the industry risk classification of the work your employees do, your claims history, your total payroll and your experience modification rate, a factor that compares your claims with those of similar businesses. Frequent claims can raise your rates over time, and a strong safety record can lower them.

That means the cost is partly in your hands. Accurate job classifications, a real safety program, prompt reporting and getting injured employees appropriate care and back to work all show up in your claims history over the following years. Payroll estimates also matter, because the premium is usually adjusted after an audit of actual payroll at the end of the policy term. If your headcount grows quickly during the year, tell your agent rather than waiting for the audit, so the bill at the end is not a surprise and the classifications still match the work people actually do.

If you subscribe, how claims work

An injured worker should tell the employer as soon as possible. Our workers' comp page explains that employers provide the DWC-1 claim form, which goes to the insurance carrier. The Texas Department of Insurance requires covered employers to report to their carrier any work-related injury with more than one day of lost time, and all work-related illnesses and deaths.

Workers' comp also fits into a larger business insurance program. General liability does not cover your own employees' injuries, and a business owner's policy does not include workers' comp. I explain how the pieces fit in business owner's policy or separate policies, and we revisit the whole program, workers' comp included, in each client's annual insurance review.

Talking through the decision with us

Our process is three steps. You share your details: what the business does, how many employees you have and what they do, your payroll, any past injuries and any contract requirements. We review options from more than one carrier and show you what coverage would cost and what it would include, so you can weigh it against the risks of opting out with your attorney. Then you select your coverage and we finalize it, or we help you understand what a nonsubscriber still needs to do.

Our office on LBJ Freeway in Dallas is open 8:30 AM to 5:30 PM, and we work with employers across Texas, including auto repair shops, dealerships, jewelry stores and other businesses with industry programs. If you are about to hire your first employee, call before the first paycheck, not after the first injury. If you already opted out years ago, it is worth checking that the annual filings and workplace notices are current, and whether the reasons behind that choice still hold for the business you run today.

Questions people ask me