If you're running a business in Washington, here's something you need to know right away: workers' compensation isn't optional. Even if you have just one employee working a few hours a week, you're required to carry coverage. Washington takes this seriously—and the penalties for not complying are steep. But understanding what's required doesn't have to be complicated. Let's break down exactly what Washington employers need to know about workers' comp requirements, exemptions, and how the system actually works.
Who Needs Workers' Compensation in Washington?
Unlike some states where small businesses get a pass, Washington has no employee threshold. If you employ even one person—full-time, part-time, seasonal, or temporary—you're legally required to provide workers' compensation coverage. This is one of the broadest requirements in the country.
The rule applies to virtually all industries. Whether you run a coffee shop, a construction company, a tech startup, or a landscaping service, if you have employees, you need coverage. The Washington Department of Labor & Industries (L&I) administers the program and takes enforcement seriously.
Here's what surprises many new business owners: you can't just buy workers' comp from any insurance company. Washington is one of only four monopolistic workers' compensation states in the country. That means you must purchase coverage through the state's Department of Labor & Industries—private insurance carriers don't sell workers' comp policies here. The other monopolistic states are North Dakota, Ohio, and Wyoming, but Washington's system is unique in how it calculates premiums and handles claims.
Understanding Washington's Monopolistic State Fund System
The monopolistic system sounds intimidating, but it actually simplifies things. Instead of shopping around for quotes from multiple carriers, you go directly to Washington L&I. They set the rates, handle the claims, and provide the coverage. For 2025, the average premium rate is approximately $1.48 per hour worked—though your specific rate depends on your industry's risk classification.
One thing that catches employers off guard: Washington calculates premiums based on hours worked, not total payroll. This differs from most other states. You'll report the actual hours your employees work, and L&I applies your industry's rate per hour. For 2026, L&I has proposed an average rate increase of 4.9%, though construction employers will see a smaller average increase of about 3%.
There is one alternative to the state fund: self-insurance. If your business has at least $25 million in assets and an approved accident-prevention program, you can apply to self-insure. Self-insured employers cover their own workers' compensation costs directly but must meet strict financial and safety standards. For most small and medium-sized businesses, the state fund is the only practical option.
Important note: because Washington's state fund doesn't include employer's liability insurance (which most workers' comp policies in other states include automatically), you'll want to purchase separate stop-gap coverage. This protects you if an employee sues you over a workplace injury. It's an extra cost, but it's worth having.
Independent Contractors and Exemptions: What Actually Qualifies
Many business owners assume that if they hire someone as an independent contractor and issue them a 1099 form, they're off the hook for workers' comp. That's not how Washington sees it. The state uses extremely strict tests to determine who qualifies as an independent contractor, and simply calling someone a contractor doesn't make it so.
Washington applies a two-tiered approach. First, there's the Personal Labor Test. A worker passes this test if they either bring their own employees to perform the work (and you don't control them), or they bring heavy, specialized equipment and their expertise to operate it (again, without you controlling them). If a worker doesn't pass the Personal Labor Test, you move to the six-part test—or seven-part test if you're in construction.
The six-part test is rigorous. The worker must meet all six criteria to be exempt from workers' comp coverage. They must be free from your control, perform services outside your usual course of business, work outside all your places of business, cover the costs of their principal place of business, be customarily engaged in an independent business, and meet IRS business deduction requirements. Miss even one part, and they're classified as an employee—meaning you need to provide coverage.
Here's the bottom line: having a UBI number, contractor registration number, or issuing a 1099 form doesn't automatically exempt someone. If L&I audits your business and determines you misclassified employees as contractors, you'll be liable for back premiums, penalties, and potentially covering any claims those workers filed. When in doubt, err on the side of treating someone as an employee and providing coverage.
Penalties for Non-Compliance: What Happens If You Don't Have Coverage
Washington doesn't mess around with enforcement. If you fail to carry proper workers' compensation coverage, you can face penalties of up to $250 per day for each day you operate without coverage. That penalty caps at $50,000, but even small businesses can rack up thousands in fines quickly.
But penalties are just the start. If an employee gets injured and you don't have coverage, you're personally liable for their medical bills, lost wages, and rehabilitation costs. Workers' comp claims can easily run into hundreds of thousands of dollars for serious injuries. Without insurance, that comes straight out of your business—or personal—assets.
Washington also penalizes employers who fail to pay legitimate workers' compensation claims. The maximum penalty for claim non-payment is $1,000 or double the amount of premiums incurred, whichever is greater. Recent data from Washington L&I shows they're ramping up enforcement—in fiscal year 2025, the state assessed over $2.9 million in penalties, nearly double the amount from the previous year. They're coordinating between agencies more than ever before, making it harder for non-compliant businesses to fly under the radar.
How to Get Started with Washington Workers' Compensation
Getting coverage is straightforward. You'll register directly with Washington L&I, either online or by phone. They'll assign your business a risk classification based on your industry, which determines your hourly premium rate. You'll then report employee hours regularly (typically quarterly) and pay premiums based on those hours.
Don't wait until you have a workplace injury to get coverage. Set up your account as soon as you hire your first employee—or even before. It's much easier to get compliant from day one than to fix classification issues or pay back premiums later. And if you're unsure whether someone you're hiring qualifies as an independent contractor, contact L&I for guidance. They'd rather help you classify workers correctly upfront than audit you later.
Finally, consider working with an insurance professional or business attorney who understands Washington employment law. They can help you navigate worker classification issues, understand your specific industry's requirements, and make sure you have all the coverage you need—including that stop-gap employer's liability insurance. Workers' compensation is non-negotiable in Washington, but with the right setup, it protects both your employees and your business.
