Understanding US Workers’ Compensation

When you’re expanding your business to the United States, one critical aspect you cannot afford to overlook is workers’ compensation insurance. As an international business owner, navigating the complex web of state-by-state requirements can feel overwhelming, especially when each state operates like its own country with unique rules and regulations.

The stakes are higher than most international businesses realize: according to the National Safety Council’s latest data, the average cost for all claims combined for accidents that occurred in 2021-2022 was $44,179; motor vehicle crashes, the leading cause of costly claims, average $90,914 per incident. Without proper coverage, you’re exposed to potentially devastating financial liability that could derail your American expansion dreams before they begin.

The High-Stakes Reality: Why Workers’ Compensation Matters More Than You Think

Understanding workers’ compensation isn’t just about compliance—it’s about protecting your most valuable asset: your people. The US Bureau of Labor Statistics reports that total employer compensation costs for civilian workers averaged $46.14 per hour worked in March 2024, with benefits comprising 31.2% of total costs. When injuries occur, these costs can skyrocket.

The financial reality of workers’ compensation in 2024:

• Average Monthly Premiums: While Insureon’s small business customers pay an average of $45 monthly for workers’ compensation coverage, 23% pay less than $30 per month
• Head and CNS Injuries: The most costly claims involving the head or central nervous system averaged $91,844 per claim
• National Average: On average, in 2024, employers pay 90 cents per $100 of payroll, down from 93 cents per $100 in 2023

The State-by-State Landscape: Where Compliance Gets Complicated

The Universal Truth (Almost)

Every single US state except Texas mandates that companies purchase workers’ compensation coverage. However, the implementation varies dramatically. As FindLaw’s comprehensive guide explains, “Because state laws regulate workers’ comp, you’ll need to research the laws in your state to find the requirements for your business.”

Employee Threshold Requirements by State

Understanding when coverage kicks in is crucial for international businesses planning their US workforce. Here’s the breakdown:

Understanding the Table Categories

Employee Threshold: The minimum number of employees that triggers the requirement for workers’ compensation insurance.

Special Requirements: Additional considerations or exemptions that may apply.

State Fund Available: Whether the state operates its insurance fund alongside private options (Competitive) or exclusively (Monopolistic).

Monopolistic: States where you MUST purchase through the state fund only.

The Monopolistic States: Where Your Options Are Limited

Four states and two territories operate as monopolistic workers’ compensation jurisdictions. According to The Hartford’s comprehensive guide, these states require you to purchase coverage exclusively through state-run funds.

The Big Four Monopolistic States

Ohio – Managed by the Ohio Bureau of Workers’ Compensation (BWC), which provides coverage to more than 280,000 employers and processes over 185,000 new claims annually. According to Sheakley, Ohio has the largest state fund in the nation with an estimated value of more than $19 billion in assets.

North Dakota – All coverage must be purchased from North Dakota Workforce Safety & Insurance (WSI). The state uses its classification system rather than NCCI codes.

Washington – The Washington State Department of Labor & Industries manages all workers’ compensation. Washington developed its own risk classification system tailored to the state’s businesses and industries.

Wyoming – Coverage must be obtained through the Wyoming Department of Workforce Services. Wyoming uses the North American Industry Classification System (NAICS) for classification codes.

Additional Monopolistic Jurisdictions

According to IRMI’s definition, monopolistic state funds also include Puerto Rico and the US Virgin Islands.

The Monopolistic Catch: Stop Gap Coverage

Here’s a crucial detail many international businesses miss: workers’ compensation purchased from a monopolistic state fund does not include employers’ liability insurance. This means you’ll need additional “stop gap” coverage—an often-overlooked requirement that can leave businesses exposed to lawsuits beyond standard workers’ compensation claims.

The Texas Exception: A Double-Edged Sword

Texas stands alone as documented by the Texas Department of Insurance: it’s the only state that doesn’t mandate workers’ compensation insurance. However, this freedom comes with significant trade-offs.

The Benefits:

• No mandatory premium payments
• Flexibility in designing injury benefit programs
• Ability to self-insure workplace injuries

The Risks:

• Loss of legal protection against employee lawsuits
• Potential for unlimited liability in injury cases
• Higher out-of-pocket costs for serious injuries

When Texas Requires Coverage: Private employers who contract with government entities must provide workers’ compensation coverage for employees working on those projects.

Competitive State Funds: More Choices, More Complexity

Twenty states offer competitive workers’ compensation systems where you can choose between state funds and private insurance carriers. According to Progressive Commercial’s analysis, these states are: California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maine, Maryland, Minnesota, Missouri, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, and Utah.

Advantages of Competitive Markets:

• Price Competition: Multiple insurers competing for your business
• Service Options: Various levels of customer service and claims management
• Coverage Flexibility: Tailored policies for specific industry needs
• Bundle Opportunities: Combining workers’ compensation with other business insurance

Deep Dive: Cost Factors That Will Impact Your Budget

Premium Calculation Fundamentals

Your workers’ compensation premiums are calculated using a sophisticated formula based on several key factors that international businesses must understand to budget effectively and identify cost-saving opportunities.

1. Industry Classification Codes Every job type receives a classification code that reflects its risk level. The National Council on Compensation Insurance (NCCI) maintains these codes for most states, though monopolistic states use their systems. These codes can dramatically impact your premiums, with office workers typically classified at rates under $1 per $100 of payroll, while high-risk occupations like roofing or tree trimming can exceed $10 per $100 of payroll. Proper classification is crucial because misclassification can result in significant premium adjustments during audits, potentially creating unexpected financial exposure for expanding businesses.
2. Payroll Calculations Based on current Bureau of Labor Statistics data, total employer compensation costs for civilian workers averaged $46.14 per hour worked in March 2024, with benefits accounting for $14.41 (31.2%) and wages $31.72 (68.8%). Your workers’ compensation premium is calculated based on your total payroll, but there are essential caps and exclusions that international businesses should understand. Many states cap the wages used for premium calculation at a certain amount per employee (often around $50,000-$60,000 annually), meaning you won’t pay premiums on executive salaries above these thresholds. Understanding these nuances can help you more accurately forecast costs as you scale your US operations.
3. Experience Modification Rate (EMR) Your claims history directly impacts your premiums through the Experience Modification Rate, which can significantly increase or decrease your costs based on your safety performance. An EMR of 1.0 represents average experience for your industry, while rates above 1.0 increase premiums and rates below 1.0 provide discounts. For new businesses without a claims history, you’ll start at 1.0, but this rate will adjust after you’ve been in operation for about three years. International companies with strong safety cultures in their home countries often find they can achieve favorable EMRs in the US market, creating a competitive advantage through lower insurance costs.
4. State-Specific Base Rates Each state sets baseline rates that reflect local economic conditions, medical costs, and regulatory environments. For example, California’s Department of Insurance recently lowered the annual benchmark rate from $1.41 to $1.38 per $100 of payroll—a 2.1% decrease effective September 1, 2024. These rates are reviewed annually and can fluctuate based on statewide claims experience, changes in medical costs, and regulatory adjustments. Understanding these rate trends can help international businesses time their expansion decisions and budget for multi-year growth plans in specific states.

Regional Cost Variations

According to recent data from Kickstand Insurance, the average cost of workers’ comp per $100 of payroll varies widely according to state, ranging from as low as $0.35 to as high as $1.83 per $100 of payroll in 2021. These dramatic variations can significantly impact your expansion strategy, as choosing to establish operations in a low-cost state versus a high-cost state could mean the difference between paying $3,500 versus $18,300 annually for every $1 million in payroll. The variation reflects fundamental differences in state regulatory approaches, with some states favoring business-friendly policies while others prioritize more generous worker benefits. This variation reflects differences in:

Medical cost inflation, which varies significantly by region, directly impacts claim costs since medical expenses typically comprise 60-70% of total workers’ compensation costs. Legal environment and litigation frequency are linked, as states with more plaintiff-friendly court systems tend to have higher settlement amounts and legal costs. State benefit levels, where states with higher statutory benefits for permanent disability or death benefits naturally have higher premium costs to fund these enhanced protections. Regulatory approach, including how aggressively states pursue rate reductions and whether they allow innovative cost-containment programs that can reduce overall system costs.

Industry-Specific Risk Factors

According to National Safety Council data, industries face vastly different cost structures that international businesses must factor into their US expansion planning. The data reveals stark contrasts that can dramatically impact your insurance budget and overall operational costs. Understanding these industry-specific risks allows international companies to better prepare for the actual cost of doing business in America and implement targeted safety measures that can help control these expenses.

High-risk industries face significantly above-average costs, with motor vehicle operations leading at $90,914 average claim cost per incident, reflecting the severe nature of transportation-related accidents. Manufacturing operations with burn risks average $63,119 per claim, particularly relevant for international manufacturers establishing US production facilities. Construction and height-related work average $51,047 per claim for falls and slips, making this a critical consideration for international construction or industrial service companies. Heavy machinery operations average $46,902 per claim for caught-in or caught-between accidents, a common concern for manufacturing and industrial businesses expanding to the US.

Lower-risk industries typically enjoy more favorable rates and include professional services, technology and software development, financial services, and administrative and office work. However, even these lower-risk industries face unique challenges in the US market, including ergonomic injuries from prolonged computer use, stress-related conditions that may be compensable in certain states, and travel-related incidents for employees who frequently visit client sites or attend business meetings.

Out-of-State Operations: A Critical Compliance Matrix

This area trips up many international businesses. The principle is straightforward but the implementation is complex: if your employees work in a state, you need coverage in that state.

Multi-State Coverage Requirements

As Illinois Workers’ Compensation Commission clearly states: “If an out-of-state company conducts business with its employees in Illinois, i.e., does any work at all in Illinois, even if all the workers reside in the same state as the company, that company must provide a workers’ compensation insurance policy that includes Illinois coverage for those workers.”

This pattern repeats across all states. Massachusetts regulations require “Out-of-state employers operating in Massachusetts must provide workers’ compensation coverage for all employees working in the Commonwealth.”

The Section 3A Strategy

Most private insurance policies include a “Section 3A” that lists covered states. However, monopolistic states require separate coverage, creating a compliance challenge for businesses operating across multiple states.

Penalties: The Severe Cost of Non-Compliance

The penalties for failing to carry workers’ compensation insurance have become increasingly severe, reflecting states’ commitment to protecting workers.

Financial Penalties by State

Illinois: According to the Illinois Workers’ Compensation Commission, employers who knowingly and willfully fail to obtain insurance face fines up to $500 for every day of non-compliance, with a minimum fine of $10,000. Since 2006, the Commission has collected over $7 million in fines.

California: California law makes it a criminal offense not to provide workers’ compensation for your employees.

Wyoming: Penalties could result in a misdemeanor charge with a fine up to $1,000 and up to a year in prison.

Massachusetts: Substantial penalties apply, with potential stop-work orders and personal liability for business owners.

Beyond Fines: The Business Impact

The most significant risk isn’t the fine—it’s the loss of legal protection. Without workers’ compensation insurance, injured employees can sue for damages, potentially seeking compensation far exceeding what workers’ compensation would have provided.

Industry-Specific Strategies for International Businesses

Technology and Professional Services

International tech companies expanding to the US benefit from relatively low workers’ compensation rates due to office-based work environments, but this doesn’t mean they can ignore the complexities of multi-state compliance and emerging risk factors. The rise of remote work has created new challenges around determining which state’s laws apply when an employee works from home, particularly when their home office is in a different state than their employer’s primary location. Companies must also address the growing concern of ergonomic injuries from prolonged computer use, repetitive stress injuries, and mental health claims that are increasingly being recognized as compensable workplace injuries. Remote work coverage requires careful consideration to ensure home-office injuries are covered under your policy, as traditional workplace definitions may not automatically extend to employee residences.

Multi-state teams present unique compliance challenges that require sophisticated coordination, especially for international companies that may have employees scattered across numerous states, each with different workers’ compensation requirements. The complexity multiplies when considering that an employee traveling for business may be subject to the workers’ compensation laws of the state where the injury occurs, not necessarily where they’re based. Proper contractor classification has become increasingly critical as the gig economy expands and regulatory agencies scrutinize the distinction between employees and independent contractors more closely. Misclassification can result in significant retroactive premium assessments and penalties, making this a crucial area for international businesses to navigate carefully with proper legal and insurance guidance.

Manufacturing and Distribution

International manufacturers face higher rates but can implement strategic cost-control measures that not only reduce premiums but also create safer, more productive work environments that enhance their competitive position in the US market. The key lies in understanding that workers’ compensation costs are primarily within management’s control through proactive safety investments and cultural changes. Companies that view safety programs as investments rather than expenses often see returns through reduced premiums, lower turnover, improved productivity, and enhanced reputation among both workers and customers.

Safety programs represent the most effective long-term strategy for controlling costs, involving comprehensive safety training, proper equipment maintenance, and creating a culture where workers feel empowered to report hazards without fear of retaliation. International manufacturers often find that their home-country safety standards may exceed US requirements in some areas while falling short in others, requiring a thorough assessment and adaptation of existing programs. Return-to-work programs can significantly reduce claim costs by developing modified duty options that allow injured workers to remain productive while recovering, reducing both disability payments and the costs of hiring temporary replacements. Medical provider networks, where allowed by state law, enable companies to direct injured workers to preferred healthcare providers who understand the importance of timely treatment and appropriate return-to-work timelines, helping to control both medical costs and time away from work.

Professional Services

Consulting firms, financial services, and other professional service providers typically enjoy favorable rates compared to the manufacturing or construction industries. Still, they face unique challenges that require specialized attention and strategic planning. The seemingly low-risk nature of office environments can create complacency around workers’ compensation planning, but professional services businesses often have exposure that’s less obvious than traditional workplace hazards. The increase in business travel, client site visits, and off-site meetings creates variable risk exposures that require careful policy design and ongoing management.

Client site coverage presents complexity for international professional services firms, as employees may work at client facilities with different safety standards, equipment, and hazard profiles than their home office environment. International consulting firms must ensure their coverage extends appropriately to all client locations where employees might work, including construction sites, manufacturing facilities, or other high-risk environments that dramatically differ from traditional office settings. Travel-related risks have become increasingly significant, encompassing not just transportation accidents but also injuries that occur in hotels, client facilities, and temporary work locations, requiring careful coordination between workers’ compensation coverage and business travel insurance. Ergonomic programs have gained importance as professional services firms recognize the long-term costs of repetitive stress injuries, carpal tunnel syndrome, and back problems that can develop over time in office environments, particularly as remote work arrangements may lack proper ergonomic equipment and setup.

Building a Safety Culture: Beyond Compliance

The most successful international businesses understand that workers’ compensation is not merely a regulatory requirement but an opportunity to build a competitive advantage through superior safety performance and employee engagement. Creating a robust safety culture goes far beyond meeting minimum compliance standards. It becomes a strategic differentiator that attracts top talent, reduces operational costs, and enhances your company’s reputation in the American marketplace. International companies often discover that American workers expect a higher level of safety focus and employee protection than they may have experienced in other markets, making safety culture development both a compliance necessity and a talent retention strategy.

Proactive safety management requires establishing employee-driven safety initiatives that empower workers to identify and address potential hazards before they result in injuries. This approach includes forming safety committees with representatives from different departments and levels of the organization, ensuring that safety concerns can be communicated effectively throughout the company hierarchy. Regular training programs should be implemented that go beyond basic OSHA requirements to include industry-specific hazards, emergency response procedures, and continuous education about evolving safety best practices. Thorough incident analysis of both actual injuries and near-miss events provides valuable data for preventing future accidents and demonstrates to employees that management takes safety concerns seriously.

Effective return-to-work programs benefit everyone involved by helping injured employees return to productivity sooner through modified duty assignments that accommodate their recovery limitations while maintaining their connection to the workplace and income stream. These programs typically result in lower disability payments and reduced costs for hiring temporary replacement workers, while also improving employee morale and loyalty. Many states actively encourage or require return-to-work efforts, and insurance carriers often provide premium discounts for companies with demonstrated return-to-work success, creating multiple financial incentives for implementing these programs. The key to successful return-to-work programs lies in early intervention, clear communication between management and healthcare providers, and flexibility in creating meaningful modified duty positions that contribute to business objectives while respecting medical restrictions.

The Strategic Value of Expert Partnership

Successfully managing workers’ compensation compliance while establishing a thriving US business operation demands deep expertise in American employment law, state-specific regulations, and insurance market dynamics that most international companies lack when entering the market. The intricate web of state-by-state requirements, coupled with the potentially devastating financial and legal consequences of non-compliance, transforms professional guidance from a luxury into a business necessity. International businesses that attempt to navigate these waters alone often find themselves facing unexpected costs, regulatory violations, and operational disruptions that could have been easily avoided with proper expertise from the outset.

The Foothold America Advantage

At Foothold America, we’ve spent nearly a decade perfecting the art of transforming complex US employment compliance into streamlined, manageable processes that accelerate rather than hinder your business growth. Our proven methodology has helped hundreds of international companies establish successful US operations across more than 25 states, giving us unparalleled insight into the challenges you’ll face and the strategies that deliver results.

Our Employer of Record services provide immediate, comprehensive compliance across all US jurisdictions from the moment you decide to hire your first American employee, eliminating the months of research, setup, and regulatory navigation that typically delay market entry. This instant compliance capability allows you to capitalize on market opportunities and respond to competitive pressures without the traditional barriers that slow international expansion. Whether you’re conducting market testing with a single employee or building a substantial US presence with dozens of team members, our services seamlessly scale with your ambitions and adapt to your evolving business needs. Our experience across all 50 states means we understand the regulatory nuances, cultural expectations, and operational challenges that can derail international businesses, from monopolistic state requirements to multi-state compliance coordination.

Most importantly, we recognize that workers’ compensation compliance isn’t a one-time setup task but an ongoing operational requirement that demands continuous attention as your business grows, regulations evolve, and your workforce expands into new states and industries. Our ongoing support ensures that you remain compliant and protected as your business evolves, while our proactive approach to regulatory changes means you’ll always be ahead of new requirements rather than scrambling to catch up after they take effect.

Conclusion: Your Gateway to Successful US Expansion

Understanding and properly implementing workers’ compensation insurance isn’t just about avoiding penalties—it’s about building a foundation for sustainable success in the American market. The complexity can seem daunting, but with the proper knowledge and partners, it becomes a manageable component of your expansion strategy.

The US market offers tremendous opportunities for international businesses willing to invest in proper compliance and employee protection. By taking workers’ compensation seriously from the outset, you’re not just meeting legal requirements—you’re demonstrating the commitment to your workforce that American employees expect and that successful businesses deliver.

As you embark on or continue your US expansion journey, remember that every successful international business started with the same challenges you’re facing. The difference between those that thrive and those that struggle often comes down to how well they navigate these fundamental requirements while maintaining focus on their core business objectives.

Ready to transform workers’ compensation compliance from a challenge into a competitive advantage? Contact Foothold America today to discover how our expertise can accelerate your US expansion while ensuring complete compliance across all 50 states. Your American success story starts with getting the fundamentals right—and we’re here to make sure you do exactly that.