Here's something that surprises a lot of California business owners: you need workers' compensation insurance the second you hire your first employee. No "wait until you have five employees" rule. No grace period. One employee equals mandatory coverage. And if you're a licensed contractor? The rules just got even stricter—you might need coverage even if you work solo.
California takes workers' comp seriously. We're talking criminal penalties, six-figure fines, and the state literally shutting down your business if you don't comply. But understanding the requirements doesn't have to be complicated. Let's break down exactly what you need to know.
Who Needs Workers' Comp Insurance in California?
The basic rule is simple: if you have employees, you need workers' compensation insurance. California doesn't have an employee threshold like some other states. Whether you employ one person or one thousand, coverage is mandatory.
This includes part-time workers, seasonal employees, and even family members if they're on your payroll. The only major exception? True independent contractors—but we'll get to why that's a minefield in a moment.
For licensed contractors, California recently tightened the screws with SB 216. This law requires all licensed contractors to carry workers' comp insurance regardless of whether they have employees. Originally set to take full effect in January 2026, SB 1455 pushed the implementation date to January 2028. However, certain high-risk contractor categories—including concrete (C-8), HVAC (C-20), asbestos abatement (C-22), and tree service (D-49)—already had to comply starting in 2023.
Who's Actually Exempt?
The exemption list is shorter than you'd think. Here's who can skip workers' comp coverage:
Sole proprietors and business partners aren't automatically covered by workers' comp, though they can purchase voluntary coverage for themselves. Corporate officers who own at least 15% of the company stock can also opt out of coverage by filing the proper exemption paperwork. This applies to both for-profit and nonprofit corporations.
True independent contractors don't need to be covered under your policy because they're not your employees. They're responsible for their own insurance. Unpaid volunteers working for nonprofit organizations are also generally exempt.
Now, about those independent contractors—this is where businesses get into serious trouble. California uses the strict "ABC Test" to determine if someone truly qualifies as an independent contractor. The worker must be free from your control and direction, performing work outside your usual business operations, and running their own established trade or business. Miss any part of that test, and the state considers them an employee. Deliberately misclassifying employees as contractors to dodge workers' comp requirements is illegal and will cost you far more than the insurance premium.
What Happens If You Don't Comply?
California doesn't mess around with workers' comp violations. Operating without required coverage is a criminal misdemeanor. You're looking at potential jail time of up to one year, a minimum fine of $10,000, or both.
But the criminal penalties are just the beginning. The state can hit you with civil penalties of up to $100,000. Courts determine the actual amount based on your number of employees, typically ranging from $2,000 to $10,000 per employee at the time an injured worker files a claim.
Here's what really hurts your business: stop orders. If the Division of Labor Standards Enforcement catches you operating without coverage, they'll issue a stop order immediately prohibiting you from using employee labor until you get insurance. Violating a stop order is another misdemeanor, punishable by up to 60 days in jail and a $10,000 fine. The DLSE can also tack on penalties of $1,000 per employee on your payroll when the stop order was issued, maxing out at $100,000.
For licensed contractors, SB 291 introduced even stricter penalties: $10,000 maximum for sole owner licensees, $20,000 for partnerships, corporations, LLCs, or tribal businesses, and $30,000 for repeat violations. Your contractor's license is also at risk—the Contractors State License Board can suspend or revoke it for non-compliance.
What Does Workers' Comp Actually Cost?
Workers' comp premiums in California are calculated based on your payroll and industry classification. The state's average advisory pure premium rate for 2025 is $1.52 per $100 of payroll, reflecting an 8.7% increase from the previous year. That means if you have $100,000 in annual payroll, you're looking at roughly $1,520 in base premium before adjustments for your specific industry risk level.
High-risk industries like construction, roofing, and logging pay significantly more—sometimes three to four times the base rate. Desk jobs and low-risk businesses pay less. Your claims history also affects your rate through an experience modification factor.
California's workers' comp system is expensive—among the costliest in the nation. The state paid out $4.7 billion in medical losses in 2023 alone. Why so high? It's not just treatment costs. California claims stay open longer than in other states, and medical-legal expenses have surged due to increased per-page record review costs and more medical-legal services per claim.
Understanding Benefits Your Employees Receive
When an employee gets injured on the job, workers' comp covers their medical treatment, temporary disability payments while they're unable to work, permanent disability benefits if they don't fully recover, and vocational rehabilitation if needed.
The temporary total disability (TTD) rates adjust annually. For injuries occurring in 2026, the maximum TTD rate is $1,764.11 per week, up from $1,680.29 in 2025. The minimum rate is $264.61 per week. These benefits are typically two-thirds of the employee's average weekly wage, subject to those maximum and minimum caps.
As of February 1, 2026, California employers must provide employees with a written notice of their right to workers' compensation benefits, along with other workplace rights. This is part of new transparency requirements designed to ensure workers know their protections.
How to Get Started with Workers' Comp Coverage
Getting workers' comp coverage before you need it is non-negotiable in California. You have three main options: purchase a policy from a private insurance carrier, get coverage through the State Compensation Insurance Fund (a state-run option), or if you're a large employer with strong finances, you might qualify to self-insure.
Most small businesses go with a private carrier or the state fund. Shop around—rates vary significantly between insurers. Make sure you accurately classify your employees by job type because misclassification can lead to audits and back premiums.
If you're a licensed contractor facing the new requirements, don't wait until the 2028 deadline. Getting coverage early gives you time to shop for the best rates and ensures you're compliant if regulations change again. Some insurers offer better rates for contractors with clean safety records and formal safety programs.
Bottom line: California workers' comp requirements aren't optional, and the penalties for non-compliance can literally shut down your business. Whether you're hiring your first employee or you're a solo contractor preparing for the 2028 mandate, getting proper coverage protects both your workers and your business. The cost of insurance is always less than the cost of getting caught without it.
