Is Workers Comp Required in Texas? Small Business Facts | LSM Agency

Workers compensation Texas small business: what the law actually says

If you own a small business in Texas, you have probably heard conflicting things about workers compensation for Texas small businesses . Some people say it is required; others say Texas lets you skip it entirely. Both statements are partly true, and the distinction matters more than most business owners realize. Getting this wrong can expose your company to a lawsuit that wipes out everything you have built.

Texas is the only state that makes workers comp optional for most employers

Every other state mandates workers compensation coverage for businesses with at least one or a handful of employees. Texas is the lone exception. Under the Texas Labor Code, most private employers can legally choose not to carry workers compensation insurance. The Texas Department of Insurance refers to employers who skip coverage as "non-subscribers."

That sounds like a money-saving opportunity. In practice, it is a calculated gamble with enormous downside risk, and for many small businesses in Lubbock and across West Texas, the math does not work out.

When workers comp is legally required in Texas

The opt-out rule has real exceptions. Coverage is mandatory in these situations:

• Government contractors: any business holding a public contract with a Texas state agency or a political subdivision (city, county, school district) must provide workers comp for all employees working on that contract.
• Certain licensed trades: some state licensing boards, including those governing motor carriers and construction contractors on specific public projects, require proof of coverage before issuing or renewing a license.
• Federal contractors: businesses performing work under federal contracts in Texas must follow federal regulations, which effectively require coverage.

If your business bids on City of Lubbock projects, Lubbock ISD work, or any State of Texas contracts, you almost certainly need workers comp whether you want it or not.

What happens if you skip coverage as a non-subscriber

This is where the "optional" label becomes dangerously misleading. When a Texas employer opts out of workers comp, it loses a powerful legal protection called the exclusive remedy doctrine . Under that doctrine, an injured employee covered by workers comp can only seek benefits through the workers comp system. They cannot sue the employer in civil court, and they cannot claim the employer was negligent.

Non-subscribers lose that protection entirely. An injured worker can file a civil lawsuit against the business and, critically, the employer cannot use three of the most common legal defenses in Texas tort law:

• Contributory negligence: arguing the employee was partly at fault.
• Fellow servant rule: arguing a coworker caused the injury.
• Assumption of risk: arguing the employee knew the job was dangerous.

A single serious injury lawsuit in Texas civil court can easily reach $500,000 to several million dollars once you factor in medical bills, lost wages, pain and suffering, and legal fees. For a small business with a handful of employees, that is a business-ending number.

What workers comp actually covers (and what it costs)

Workers compensation in Texas pays for four main categories of loss when an employee is hurt on the job:

• Medical benefits: all reasonable and necessary medical treatment for the work-related injury, with no dollar cap under Texas law.
• Income benefits: typically 70% of the employee's pre-injury average weekly wage, subject to a statewide maximum that the Texas Department of Insurance adjusts annually. In 2024 the maximum weekly income benefit was around $1,066 .
• Impairment benefits: a lump sum or ongoing payment if the injury results in permanent physical impairment.
• Death benefits: payments to eligible family members, plus up to $10,000 for burial expenses, if a worker dies from a job-related injury.

Cost for small businesses varies widely by industry. Office-based businesses in Lubbock might pay as little as $0.30 to $0.50 per $100 of payroll . A roofing contractor or oilfield services company could pay $5.00 to $15.00 per $100 of payroll or more, because the work carries a much higher injury risk. Your actual rate depends on your classification code, your payroll size, and your claims history (called an "experience modifier").

How the experience modifier affects your premium

Once your business has been carrying workers comp for three years, the insurer calculates an experience modification factor, often called an "e-mod." A clean safety record can push your e-mod below 1.0, reducing your premium. A history of frequent or severe claims pushes it above 1.0, increasing it. For a small business paying $20,000 a year in workers comp premium, the difference between an e-mod of 0.85 and 1.20 is roughly $7,000 per year . Safety programs pay for themselves.

Non-subscriber alternatives: do they actually work?

Some larger Texas companies have built non-subscriber benefit plans, sometimes called "occupational accident programs," that cover injured workers outside the workers comp system. These plans can be structured under ERISA, which gives the employer more control over benefit design and claim management.

For most small businesses in Texas, though, these programs are not practical. They require significant administrative infrastructure, legal expertise to set up properly, and enough scale to make self-insurance viable. A plumbing company with eight employees or a Lubbock retail shop with twelve workers does not have the resources to run an effective non-subscriber program. The risk of a catastrophic injury remains, and the legal exposure without the exclusive remedy protection is real.

For most small businesses, purchasing a workers comp policy through a licensed carrier is simpler, more predictable, and far less risky than going without.

Texas notification requirements for non-subscribers

If a Texas business decides to operate as a non-subscriber, the law requires specific disclosures. The employer must:

• File a notice with the Texas Department of Insurance each year, officially declaring non-subscriber status.
• Post written notice in the workplace informing employees that workers comp coverage is not provided.
• Provide written notice to each new employee at the time of hire.

Failing to file or post these notices does not mean you accidentally get workers comp protection. It means you are out of compliance with state law and face additional penalties on top of the civil liability exposure. Non-subscriber status is a formal election, not a passive default.

Practical steps for small business owners in Lubbock

If you are evaluating workers comp for the first time or reviewing your current coverage, a straightforward approach looks like this:

• Identify your employee count and payroll: workers comp premiums are calculated per $100 of payroll, so you need accurate payroll numbers by job classification.
• Check your contract requirements: review any active or pending government contracts to see if coverage is contractually mandated.
• Review your industry class codes: insurers assign classification codes that reflect injury risk. Make sure your employees are classified correctly, because misclassification can lead to premium audits and unexpected bills.
• Compare multiple carriers: workers comp rates are regulated in Texas, but carriers still price differently based on their appetite for certain industries. Working with an independent agent means you get quotes from several companies, not just one.
• Invest in a safety program: even a basic written safety policy and documented training can help defend against claims and, over time, lower your e-mod.

For businesses already carrying commercial insurance, workers comp fits naturally alongside your general liability and commercial property policies. Bundling coverage through one agent simplifies the renewal process and can improve coordination when a claim touches more than one policy.

If you are a contractor in the area, the nuances of coverage for subcontractors and certificate requirements are worth understanding in detail. Our post on contractor insurance in Lubbock walks through those specifics.

Get the right coverage for your Texas business

Workers compensation is one of the more complicated commercial lines because the rules, rates, and consequences vary so much by industry and situation. At LSM Agency , we are an independent insurance agency serving small businesses throughout Lubbock and West Texas. That means we compare rates across multiple carriers to find coverage that fits your payroll, your industry, and your budget. We do not work for one company; we work for you.

Whether you are figuring out workers comp for the first time, re-evaluating a non-subscriber arrangement, or just shopping your renewal, we can help you understand the real cost and the real risk before you decide. Get a quote online or call us at (806) 577-4198 to talk through your options.