Texas Workers' Compensation: The Only State Where It's Optional

Texas holds a truly unique position in American employment law: it is the only state in the nation where private employers are not required to carry workers' compensation insurance. In every other state, workers' comp coverage is either mandatory or effectively mandatory (with very narrow exceptions). In Texas, employers can choose to be a "subscriber" (carry coverage) or a "non-subscriber" (opt out entirely). This opt-out freedom comes with significant legal trade-offs that every Texas employer must understand. Non-subscribers lose critical legal protections and expose themselves to direct negligence lawsuits from injured employees — lawsuits where the employer cannot use most traditional defenses. For payroll purposes, workers' comp premiums are calculated directly from payroll data, making this a critical intersection of HR, risk management, and payroll compliance. This guide explains everything Texas employers need to know.

Why Texas Is Unique

Every other U.S. state requires private employers to carry workers' compensation insurance (with limited exceptions for very small employers in some states). Texas has never adopted a mandatory workers' comp requirement for private employers. The Texas Workers' Compensation Act (Texas Labor Code, Title 5, Subtitle A) creates a workers' compensation system that employers may participate in voluntarily, but it does not compel participation.

This traces back to Texas's strong tradition of employer autonomy and limited government regulation. When the Texas Legislature reformed workers' compensation in 1989 (House Bill 1) and again in 2005 (House Bill 7), it maintained the optional nature of the system both times.

As of the most recent data, approximately 68-72% of Texas employers subscribe to the workers' compensation system. The remaining 28-32% are non-subscribers. However, because larger employers are more likely to subscribe, subscriber employers cover approximately 80-85% of Texas workers. Non-subscription is more common among small businesses, particularly in industries perceived as low-risk (such as office-based businesses and retail).

Subscriber vs. Non-Subscriber: Key Differences

The decision to subscribe or not subscribe to the Texas workers' compensation system has profound legal and financial implications. Here is a direct comparison:

Subscriber (Carries Workers' Comp Insurance)

• Employees receive benefits for on-the-job injuries through the workers' comp system — including medical care, income benefits (temporary and permanent), and death benefits — without needing to prove the employer was at fault.
• Employer is protected from lawsuits. Workers' comp is an "exclusive remedy," meaning the injured employee generally cannot sue the employer in civil court for negligence. The employee's sole remedy is the workers' comp system.
• Premiums are tax-deductible as a business expense.
• Employer must comply with DWC reporting requirements — including filing claims, cooperating with the claims process, and maintaining records.

Non-Subscriber (No Workers' Comp Insurance)

• No workers' comp benefits for employees. Injured employees do not have access to the workers' comp system and cannot file claims with the DWC.
• Employees can sue the employer directly in civil court for negligence. Critically, the employer loses three powerful common-law defenses (discussed below).
• No premium cost — but potential lawsuit liability can be far more expensive.
• Must file notice with the DWC and notify employees of non-subscriber status.
• Many non-subscribers maintain alternative benefit plans (occupational injury plans) to provide some coverage for injured workers.

Legal Consequences of Non-Subscription

The most significant consequence of being a non-subscriber is the loss of three common-law defenses that would otherwise be available in a negligence lawsuit. Under Texas Labor Code Section 406.033, a non-subscriber employer may not assert the following defenses:

• Contributory negligence: The employer cannot argue that the employee's own negligence caused or contributed to the injury. Even if the employee was 90% at fault, the non-subscriber employer cannot use this defense to reduce or eliminate liability.
• Assumption of risk: The employer cannot argue that the employee knew the job was dangerous and voluntarily accepted the risk. Even if the employee was fully aware of the hazard, this defense is unavailable to non-subscribers.
• Fellow-servant doctrine: The employer cannot argue that a co-worker's negligence (rather than the employer's) caused the injury. The employer bears responsibility for injuries caused by other employees' negligence.

The loss of these defenses dramatically tilts the playing field in favor of the injured employee. In a non-subscriber negligence case, the employee only needs to prove that the employer was negligent in any degree — and the employer cannot shift blame to the injured worker or to co-workers. This is why non-subscriber lawsuits are often settled for significant amounts, and why plaintiff's attorneys actively seek out non-subscriber cases.

The only defense a non-subscriber retains is that the injury was caused by the employee's willful intent to injure themselves (i.e., a deliberate, intentional self-inflicted injury). Mere negligence or carelessness by the employee is not a defense for non-subscribers.

Notice and Filing Requirements

Whether you are a subscriber or non-subscriber, Texas law requires specific notifications and filings:

Non-Subscriber Filing Requirements

• File DWC Form-005 (Employer Notice of No Coverage) with the Texas Department of Insurance, Division of Workers' Compensation. This form must be filed within 30 days of becoming a non-subscriber (e.g., when you start your business without coverage, or when you cancel an existing policy).
• Post notice to employees. Non-subscribers must post a notice in the workplace — in English and Spanish — informing employees that the employer does not carry workers' compensation insurance. The notice must state that the employer is a non-subscriber and that employees are not covered by the workers' comp system.
• Provide written notice to new hires. Non-subscribers must provide written notice of non-subscriber status to each new employee at the time of hire.
• File annual notice. Non-subscribers must re-file their notice of no coverage with the DWC annually.

Subscriber Filing Requirements

• Maintain active insurance coverage. Subscriber employers must have a current workers' compensation insurance policy in effect at all times. Coverage can be obtained from a private insurer, through the Texas Mutual Insurance Company (the state's insurer of last resort), or through a certified self-insurance program (available to large employers).
• Post notice of coverage. Subscribers must post a notice in the workplace informing employees that the employer carries workers' comp insurance, including the name of the insurance carrier.
• Report injuries to the carrier. When an employee is injured on the job, the employer must report the injury to its insurance carrier within the time frames specified in the policy and by DWC rules (typically within 8 days of receiving notice of the injury).

How Workers' Comp Premiums Are Calculated

For subscriber employers, workers' compensation insurance premiums are calculated based on payroll, making this a direct intersection of payroll management and risk management. The basic formula is:

Premium = (Payroll / $100) x Classification Rate x Experience Modification Factor

Here is what each component means:

• Payroll: Total remuneration paid to employees, including wages, salaries, bonuses, commissions, overtime pay (counted at straight-time rate for premium calculation), and the value of certain benefits. Independent contractor payments are generally excluded (assuming proper classification).
• Classification rate: A rate per $100 of payroll, determined by the employee's job classification code (NCCI code). Higher-risk occupations have higher rates. For example, office clerical work (code 8810) might carry a rate of $0.20 per $100 of payroll, while roofing (code 5551) might carry a rate of $15.00 or more per $100 of payroll.
• Experience modification factor (EMR or "mod"): A multiplier that adjusts premiums based on the employer's actual claims history compared to the industry average. A mod of 1.00 means average. A mod below 1.00 (e.g., 0.85) means fewer claims than average — resulting in lower premiums. A mod above 1.00 (e.g., 1.25) means more claims than average — resulting in higher premiums. New businesses without claims history start at 1.00.

Example calculation: A Texas construction company has $500,000 in annual payroll for workers classified under a roofing code with a rate of $12.00 per $100 of payroll, and an experience mod of 0.95:

• ($500,000 / $100) x $12.00 x 0.95 = $57,000 annual premium

Contrast this with an office-based business with $500,000 in payroll at a rate of $0.25 per $100 and a 1.00 mod:

• ($500,000 / $100) x $0.25 x 1.00 = $1,250 annual premium

The difference in premiums across industries is dramatic, which is one reason why non-subscription is more tempting for employers in low-risk, office-based industries — though the lawsuit risk remains regardless of industry.

Payroll Reporting for Workers' Comp

Because premiums are tied directly to payroll, accurate payroll reporting to your workers' comp carrier is essential. Here are the key payroll reporting considerations:

• Classify employees correctly. Each employee must be assigned to the correct NCCI classification code based on their actual job duties — not their job title. An employee who primarily does office work but occasionally visits job sites should be classified based on their primary duties. Misclassification can result in incorrect premiums (either overpaying or underpaying).
• Report payroll by classification. Most insurance carriers require employers to report payroll broken down by classification code. Your payroll system should be able to generate reports showing total payroll by job classification.
• Overtime reporting: For workers' comp premium purposes, overtime pay is typically counted at the straight-time rate only (not time-and-a-half). For example, if an employee earns $20/hr and works 10 hours of overtime, the overtime premium calculation uses $200 (10 x $20), not $300 (10 x $30). This can result in a meaningful premium savings.
• Annual audit. Insurance carriers conduct an annual premium audit, during which they review your actual payroll records to determine whether the premium you paid was correct. If your actual payroll was higher than the estimated payroll used to set your premium, you will owe additional premium. If it was lower, you may receive a refund. Maintain clean, organized payroll records to make the audit smooth.
• Exclude independent contractors. Payments to legitimate independent contractors are not included in payroll for workers' comp premium calculation. However, if a carrier or the DWC determines that a "contractor" is actually a misclassified employee, that payroll will be included — and back premiums may be assessed. Proper worker classification is critical.

General Contractor Requirements

If you work in the Texas construction industry — whether as a general contractor or a subcontractor — workers' comp has additional practical implications that go beyond the legal minimum.

General contractors are liable for subcontractor injuries under certain circumstances. Under Texas Labor Code Section 406.123, if a general contractor is a subscriber and a subcontractor is a non-subscriber, an injured employee of the non-subscriber subcontractor may be able to pursue a claim against the general contractor's workers' comp policy. This creates significant exposure for general contractors who hire uninsured subcontractors.

As a result, virtually all general contractors in Texas require subcontractors to provide a certificate of insurance (COI) proving they carry workers' compensation coverage before allowing them on a job site. If you are a subcontractor in Texas and you do not carry workers' comp, you will find it nearly impossible to win contracts with reputable general contractors.

Similarly, many large corporate clients, property owners, and government entities require proof of workers' comp coverage from all vendors and contractors, regardless of industry. Even though the law does not require it, the market effectively makes workers' comp coverage a practical necessity for many Texas businesses.

Non-Subscriber Benefit Plans (ERISA Plans)

Many non-subscriber employers — particularly large corporations — do not simply leave their employees with no coverage. Instead, they establish occupational injury benefit plans, often structured as ERISA (Employee Retirement Income Security Act) plans. These are sometimes called "non-subscriber plans" or "alternative benefit plans."

These plans typically provide:

• Medical treatment for on-the-job injuries
• Income replacement (wage continuation) during recovery
• Disability benefits for permanent injuries
• Death benefits for fatal injuries

The advantage of structuring these as ERISA plans is that ERISA preempts state tort law in many situations, potentially giving the employer additional legal protections. However, the legal landscape around ERISA preemption for non-subscriber plans is complex and has been the subject of litigation. Courts have not always agreed on the extent to which ERISA shields non-subscriber employers from Texas negligence lawsuits.

If you are considering a non-subscriber benefit plan, consult with both an employment attorney and an insurance professional who specializes in Texas workers' comp alternatives. These plans must be carefully designed to provide meaningful benefits while also offering some degree of legal protection.

Out-of-State Payroll Considerations

If your Texas business has employees working in other states, you must carry workers' comp coverage in those states, even if you are a non-subscriber in Texas. Every other state requires workers' comp coverage (with very limited exceptions). A Texas non-subscriber that has employees in California, for example, must carry California workers' comp insurance for those employees.

For multi-state workers' comp and payroll management, consider using a provider that can coordinate coverage and compliance across jurisdictions. PDS Payroll specializes in multi-state payroll and can help coordinate workers' comp requirements across state lines. and also offer integrated workers' comp and payroll solutions that simplify multi-state compliance.

Frequently Asked Questions

Is Texas really the only state where workers' comp is optional?

Yes. As of 2026, Texas is the only U.S. state where private employers can fully opt out of the workers' compensation system without meeting any special exemption criteria. Oklahoma had a similar opt-out provision from 2013 to 2016, but the Oklahoma Supreme Court struck it down as unconstitutional in 2016. Texas remains the sole state with this option.

What percentage of Texas employers carry workers' comp?

Approximately 68-72% of Texas employers are subscribers (carry workers' comp). Because larger employers are more likely to subscribe, approximately 80-85% of Texas employees are covered by workers' comp through their employer. Non-subscription is more prevalent among small businesses, particularly in service and office-based industries.

Can I switch between subscriber and non-subscriber status?

Yes. Employers can switch from subscriber to non-subscriber (by canceling their policy and filing the required notice with the DWC) or from non-subscriber to subscriber (by purchasing a policy) at any time. However, switching frequently can be operationally complex and may affect your experience modification factor and ability to obtain coverage at competitive rates.

Do I need workers' comp for independent contractors?

No — you do not need to cover legitimate independent contractors under your workers' comp policy. However, if a person you classify as an independent contractor is later determined to be an employee (by the DWC, the IRS, or a court), you may be liable for back premiums and uninsured injury claims. Proper worker classification is essential.

What is the Texas Mutual Insurance Company?

Texas Mutual is the state-chartered, not-for-profit insurance company that serves as the insurer of last resort for Texas employers who cannot obtain coverage in the private market. It is the largest workers' comp insurer in Texas, covering approximately 40% of the market. Any Texas employer can apply for coverage from Texas Mutual, and it cannot refuse to insure eligible employers — making it the guaranteed option for businesses in high-risk industries or with poor claims histories.

How do premiums affect my payroll costs?

Workers' comp premiums are an employer-only cost — they are not deducted from employee wages. However, because premiums are calculated as a percentage of payroll, they effectively increase your total labor cost per employee. For a construction company paying $12 per $100 of payroll, workers' comp adds approximately 12% to labor costs. For an office business paying $0.25 per $100 of payroll, it adds less than 0.3%. Include workers' comp premiums in your total cost-of-labor calculations when budgeting and pricing services.