If you're starting a business in Minnesota or hiring your first employee, you've probably heard you need workers' compensation insurance. But when exactly does that requirement kick in? What happens if you skip it? And are there any exemptions that might apply to your situation? Here's everything you need to know about Minnesota's workers' compensation requirements—without the legal jargon.
Minnesota's One-Employee Rule
Unlike some states that let small businesses wait until they hit a certain employee count, Minnesota doesn't mess around. The requirement is simple: if you hire anyone to perform services for your business, you need workers' compensation coverage. One employee, ten employees, or a hundred employees—it doesn't matter. Even if you're only hiring part-time workers or minors, coverage is mandatory.
This is actually good news for employees. It means almost everyone who works in Minnesota has protection if they're injured on the job. But for employers, it means you need to budget for this coverage from day one—there's no grace period while you're getting started.
Who Can Skip Coverage (Legally)
Minnesota does allow specific exemptions, but they're narrower than you might think. If you're a sole proprietor, you don't need to cover yourself—but you absolutely need coverage for any employees outside your immediate family. Your spouse, parents, and children working in your business are also exempt, regardless of how much you pay them.
Partnerships work similarly. Partners themselves don't need coverage, and their immediate family members are also exempt. But the moment you hire someone outside that family circle, you're required to carry insurance.
For corporations and LLCs, the exemptions get more specific. Executive officers of closely held corporations—those with 10 or fewer shareholders and fewer than 22,880 payroll hours in the previous year—can be excluded if they own at least 25% of the company's stock. The same 25% ownership threshold applies to LLC managers in companies with 10 or fewer members and the same payroll hour limit.
There are a few other carve-outs: household employees earning less than $1,000 in a three-month period from one household don't require coverage. Small nonprofits paying less than $1,000 in total annual wages can skip it. And family farm workers—including the farmer's spouse, parents, and children—are exempt under certain conditions.
The Real Cost of Skipping Coverage
Some business owners think they can skip workers' comp to save money, especially when they're just starting out. That's a costly mistake. Minnesota doesn't just slap you on the wrist for non-compliance—it hits you with serious financial penalties.
If you're caught operating without coverage, you can face fines of up to $1,000 per employee per week for every week they worked without insurance. Let's say you have three employees and you've been uninsured for two months. That's potentially $24,000 in fines—far more than what you'd have spent on the actual insurance premium.
But it gets worse. If an employee gets injured while you're uninsured, Minnesota's Special Compensation Fund will step in to pay their benefits. That's the good news for the worker. The bad news for you? You'll be ordered to reimburse every dollar the fund pays out, plus an additional 65% penalty on top of those benefits. An injury that might have cost your insurance carrier $50,000 could cost you $82,500 out of pocket.
Shopping for Coverage in Minnesota
Here's where Minnesota actually makes things easier for employers: you have options. Minnesota operates what's called a competitive market system. Unlike the four monopolistic states (North Dakota, Ohio, Washington, and Wyoming) where you must buy coverage from a state-run fund, Minnesota gives you choices.
You can purchase coverage from the state-run Minnesota Workers' Compensation Assigned Risk Plan if you have trouble finding coverage elsewhere, or you can shop around with private insurance carriers. This competition means you can compare rates, coverage options, and customer service to find the best fit for your business. Companies with strong safety records often find better rates by shopping the private market.
Your premium will depend on several factors: your industry classification code, your payroll, your claims history, and your company's safety record. High-risk industries like construction or manufacturing will pay more than office-based businesses. But no matter your industry, maintaining a safe workplace and avoiding claims will help keep your premiums as low as possible.
What's Changing in 2026
If you're in the construction industry, pay attention. Starting January 1, 2026, Minnesota is implementing new rules around what are called "zero estimated exposure policies." These policies—sometimes used by contractors who claim they have no employees—have come under increased scrutiny. The new law places additional responsibilities on contractors to ensure proper coverage, so if you're working in construction, make sure you understand how these changes affect your business.
Getting Started with Compliance
If you're hiring your first employee or realize you've been operating without coverage, don't panic—but do act quickly. Start by reaching out to insurance agents who specialize in workers' compensation. They can help you determine your classification code, estimate your premium, and get you coverage that starts immediately.
Even if you qualify for an exemption as a business owner, consider opting into coverage anyway. Workers' comp protects you from medical bills and lost wages if you're injured, and in many cases, the premium is surprisingly affordable for sole proprietors. You can notify your insurer in writing to add yourself to the policy even when state law doesn't require it.
The bottom line? Workers' compensation isn't optional in Minnesota if you have employees. The penalties for non-compliance are severe enough to sink a small business, while the cost of proper coverage is manageable—especially when you shop around and maintain a safe workplace. Get covered from day one, and you'll avoid headaches that could cost you far more than the premium.
