If you're running a business in South Dakota, you might be surprised to learn something unusual about workers' compensation insurance: you're not actually required to have it. South Dakota stands alone with Texas as one of only two states in the country where workers' comp is completely optional. But before you celebrate what sounds like a money-saving opportunity, you need to understand what you're giving up—and what risks you're taking on.
The reality is that while workers' comp might be optional in South Dakota, it's far from unnecessary. Without coverage, you're exposed to potentially devastating lawsuits if an employee gets hurt on the job. Let's break down exactly how South Dakota's unique system works, who's covered, and why most businesses choose to carry coverage anyway.
Understanding South Dakota's Voluntary System
Here's what makes South Dakota different: there's no employee threshold that triggers a coverage requirement. Whether you have one employee or one hundred, the state doesn't mandate that you carry workers' compensation insurance. This applies to businesses of all sizes and across virtually all industries.
But here's the catch that many business owners don't fully grasp: when you opt out of workers' comp, you're also opting out of the legal protections it provides. In most states, workers' comp operates as a trade-off. Employees give up their right to sue their employer in exchange for guaranteed medical coverage and wage replacement, regardless of who was at fault. Employers, in turn, get immunity from costly lawsuits.
In South Dakota, if you don't have workers' comp and an employee gets injured, they can sue you in civil court. There's no cap on damages. They can claim you were negligent, that your workplace was unsafe, that you failed to provide proper training. And if they win, you're looking at potentially unlimited liability for medical bills, lost wages, pain and suffering, and legal fees. This is why the South Dakota Department of Labor and Regulation strongly recommends that all employers maintain coverage.
Who's Exempt from Coverage?
Even when employers choose to carry workers' compensation insurance, certain categories of workers are exempt from coverage under South Dakota law. Understanding these exemptions is important whether you're an employer evaluating your coverage needs or a worker trying to understand your rights.
Domestic servants are exempt unless they work more than 20 hours in any calendar week and for more than six weeks in any 13-week period. So if you employ a housekeeper or nanny part-time, they likely won't be covered under your workers' comp policy even if you have one.
Farm and agricultural laborers are also typically excluded from workers' compensation coverage. This reflects South Dakota's agricultural heritage but creates a coverage gap that farm owners need to be aware of. Independent contractors who have been certified as exempt by the Department of Labor and Regulation don't require coverage either, but misclassifying an employee as an independent contractor can create serious legal problems.
For owner-operators of trucks to qualify as independent contractors, they must meet specific criteria: they need to be responsible for their vehicle's maintenance and operating costs, supply their own personnel, and provide proof of workers' comp insurance for any employees they hire. Real estate agents who meet independent contractor standards are also generally exempt.
Sole proprietors are automatically excluded from coverage but can voluntarily opt in to protect themselves. If you're running your business as a sole proprietor, you might want to consider this option—workplace injuries don't just happen to employees.
What Happens If You Don't Have Coverage?
Since workers' comp isn't required in South Dakota, the state doesn't impose fines or penalties for operating without it. You won't face administrative sanctions or be shut down simply for choosing to go uninsured. This is fundamentally different from the 48 other states where lack of coverage can result in hefty fines, criminal charges, or immediate cease-and-desist orders.
But the absence of state penalties doesn't mean you're in the clear. When an employee gets injured and you don't have workers' comp, they can file a lawsuit in civil court seeking damages for medical expenses, lost wages, and potentially pain and suffering. Unlike workers' comp claims, which have defined benefit schedules and limits, civil lawsuits can result in much larger awards.
Consider this scenario: an employee falls from a ladder at your construction site and suffers a serious back injury requiring surgery and months of physical therapy. With workers' comp, your insurance pays for medical treatment and provides wage replacement benefits according to a set schedule. Without it, that employee can sue you claiming you failed to provide a safe workplace, didn't ensure proper ladder safety training, or were otherwise negligent. If they win, you could be on the hook for hundreds of thousands of dollars—or more.
For employers who do choose to carry coverage, there are compliance requirements. Failing to file required reports or comply with administrative procedures can result in fines up to $500 per violation, though these penalties only apply to insured employers who aren't following the rules—not to businesses that opt out of the system entirely.
How Coverage Works When You Opt In
When you choose to carry workers' compensation insurance in South Dakota, you're buying into a system that provides medical and disability benefits for work-related injuries and illnesses. More importantly, you're gaining immunity from employee lawsuits related to workplace injuries. This is called the "exclusive remedy" provision—workers' comp becomes the employee's only option for recovering damages, and they give up their right to sue you in court.
South Dakota operates as a competitive state, meaning you can purchase workers' comp from private insurance carriers rather than a state-run fund. This gives you options to shop around for the best rates and service. Your premium is based on your payroll, the type of work your employees do, and your claims history.
For business owners and LLC members who opt into coverage, South Dakota sets minimum and maximum annual payroll figures for calculating premiums. As of 2025, the minimum is $54,600 and the maximum is $213,200. This means even if you pay yourself less than the minimum, your premium will be calculated as if you earned $54,600. Similarly, payroll above the maximum doesn't increase your premium further.
Making the Right Choice for Your Business
The fact that workers' comp is optional in South Dakota doesn't mean going without it is a smart business decision. For most employers, the cost of insurance premiums is far less than the potential liability of a single serious workplace injury lawsuit. If you operate in a high-risk industry like construction, manufacturing, or transportation, coverage becomes even more critical.
Consider also that many clients and contracts require proof of workers' comp insurance. If you're bidding on commercial projects or working with larger companies, they'll likely demand that you carry coverage as a condition of doing business. Going without it could cost you opportunities.
South Dakota's voluntary workers' comp system gives you flexibility, but it also puts the responsibility squarely on your shoulders. Weigh the costs against the risks, understand what you're giving up by going uninsured, and make the choice that protects both your employees and your business.
