If you’re starting a business or already running one, you’ve probably come across the term “workers compensation insurance.” It shows up in contracts, business licenses, and often in conversations with accountants or lawyers. But that one question keeps coming up: Do I really have to have workers compensation insurance?
The answer is not always straightforward. It depends on many things — like where your business is located, what kind of work you do, whether you have employees, and even how those employees are classified. The goal of this article is to walk you through all of that in a way that’s simple, clear, and easy to understand.
Whether you’re a sole trader, a small business owner, a contractor, or someone hiring your first employee, this guide will help you figure out if you need workers compensation insurance — and why it matters if you don’t have it when you should.
What Is Workers Compensation Insurance?
Let’s start with the basics.
Workers compensation insurance is a type of insurance that pays benefits to employees who get hurt or become ill because of their job. It can cover medical bills, wages while the worker recovers, rehabilitation, and sometimes even funeral costs if someone dies from a work-related injury.
If you’re an employer, this insurance protects your workers and your business. Without it, you could be forced to pay all these costs yourself — out of pocket. And in many places, operating without the required insurance is against the law and could result in fines or legal action.
So, Do You Have to Have Workers Compensation Insurance?
Now to the big question. And the honest answer is: it depends.
There are several factors that determine whether or not you need this insurance. Let’s break them down.
1. Where Your Business Operates
The rules are different depending on the country — and even within the same country, they can vary from one state or territory to another.
For example:
In Australia, each state and territory has its own workers compensation laws. In New South Wales (NSW), Victoria, and Queensland, you’re legally required to have coverage if you employ any workers.
In the United States, every state has its own rules. Some states require workers compensation for just one employee. Others may not require it until you have two, three, or more employees.
In Canada, most provinces require you to register for workers compensation insurance if you hire workers, but there may be exceptions for family-run businesses or independent contractors.
So, the first thing you should always do is check with your local workers compensation authority. This will tell you whether your business legally needs coverage.
2. Whether You Have Employees
In most places, the law is clear: if you hire employees, you must provide workers compensation insurance. This includes:
Full-time workers
Part-time workers
Casual or seasonal workers
Apprentices and trainees
Even if someone only works for you one or two days a week, you still might be required to insure them.
Some employers make the mistake of thinking they can skip insurance if they only hire people for a short time. But the law usually doesn’t care how long someone works — if they’re an employee, they should be covered.
3. How Workers Are Classified
Sometimes businesses hire people as “contractors” thinking they don’t need to provide workers compensation. But the law doesn’t always go by titles. What matters is how the working relationship functions.
If someone:
Works under your direction
Uses your tools and equipment
Is paid regularly
Works only for your business
Then they might be considered a “deemed employee” — even if you call them a contractor. That means you could still be responsible for providing workers compensation.
If you’re unsure, it’s best to ask a professional or check with your local authority. Misclassifying workers can lead to penalties and back payments.
4. Whether You Are a Sole Trader or Company Director
If you’re a sole trader (working for yourself with no employees), you usually don’t need workers compensation insurance for yourself. However, keep in mind that if you get injured on the job, you won’t be covered. You may want to take out a separate personal injury or income protection policy instead.
If you’re the director of a company, you may or may not be covered by your own workers compensation policy. Some regions allow company directors to be included in the policy, while others do not require it unless the director is also doing manual work.
Again, check the specific rules for your area.
What Happens If You Don’t Have Workers Compensation Insurance?
If you are required by law to have insurance but you don’t, the consequences can be serious. Here’s what can happen:
Fines and penalties: Most states and countries impose large fines on businesses that operate without the required insurance. In some places, it can even be a criminal offense.
You pay out of pocket: If a worker is injured and you don’t have insurance, you’re responsible for all the costs — medical bills, lost wages, legal fees, and possibly compensation for pain and suffering.
Legal action: An injured worker may be able to sue you if you don’t have the right insurance. Legal battles can be long, expensive, and damaging to your reputation.
Business shutdowns: In some cases, authorities can shut down your business until you comply with insurance laws.
The bottom line: even if the chance of injury seems small, not having insurance is a big risk.
Why Workers Compensation Insurance Is a Good Idea (Even If Not Required)
Let’s say you fall into a group that’s not legally required to carry workers compensation insurance. Maybe you’re a sole trader, or you only work with independent contractors.
Even in those cases, having insurance can still be a smart move. Here’s why:
1. Accidents Happen
No matter how careful you are, accidents can still occur. A slip, a fall, a back injury, or even something like carpal tunnel syndrome can lead to time off work and high medical bills. If you’re not insured, you may have to cover these costs yourself.
2. Protects Your Team and Builds Trust
If you do have workers, offering workers compensation insurance shows that you care about their safety and well-being. This builds loyalty and helps you attract better employees. People want to work where they feel protected and valued.
3. Peace of Mind
Running a business comes with enough stress. Having the right insurance in place lets you focus on growing your business without constantly worrying about “what if” something goes wrong.
4. Client and Contract Requirements
In many industries, clients and government contracts require you to have workers compensation coverage before they’ll work with you. Having insurance already in place gives you a competitive edge.
How Much Does Workers Compensation Insurance Cost?
Costs vary depending on your location, the type of work you do, and how much you pay your employees. Generally, industries with more physical risk (like construction or manufacturing) pay more than low-risk ones (like retail or office work).
Your insurer will look at your payroll and your business activities to calculate your premium. The more risk involved in your business, the higher the premium. But the protection it provides is worth every cent.
If you’re unsure what your rate might be, most insurers or state websites offer online calculators or quotes.
How to Get Workers Compensation Insurance
Getting covered is usually a simple process:
Find an authorised provider – Each state or territory usually has a list of approved insurers. Some have government-run systems (like icare in NSW, Australia), while others work through private insurers.
Estimate your annual wages – You’ll need to give your insurer an estimate of how much you plan to pay your workers.
Describe your business activities – Be clear and honest about what kind of work you do. This helps your insurer classify your business correctly.
Review your coverage each year – Things change, so it’s important to update your insurer if you hire new staff, grow your payroll, or change your type of work.
Keep records – Maintain accurate payroll and work records in case you’re ever audited.
Conclusion
So, do you have to have workers compensation insurance?
If you have employees — even just one — the answer is likely yes. The rules can vary depending on where you’re located and how your business is set up, but in general, most businesses that hire people need to be covered.
Even if you’re not legally required to carry workers compensation insurance, it’s still a good idea to think about the protection it offers. One serious injury without insurance could cost your business everything.
Take the time to understand the rules in your area. If you’re unsure, speak to an insurance expert or check with your local workers compensation authority. A small step now can save you from big problems later.
Related topic:
Do Independent Contractors Need Workers’ Comp?
Do Self-Employed People Really Need Workers’ Comp Insurance?
What Is the Best Workers’ Comp Insurance for Small Businesses?
