Workers Comp in Texas: What the Opt-Out Rule Means for Your Business

Workers compensation Texas opt out: what it actually means

Texas is the only state in the country that does not require most private employers to carry workers compensation insurance . That single fact makes the workers compensation Texas opt out rule one of the most consequential decisions a business owner here will ever make. Whether you run a landscaping crew in Killeen, a construction company in Temple, or a retail shop in Waco, understanding how this opt-out works and what you give up when you use it could protect your business or expose it to a lawsuit that wipes out everything you have built.

How the Texas opt-out system works

Under Texas Labor Code Chapter 406, private employers are free to choose whether to purchase workers compensation coverage through a licensed carrier. Employers who buy coverage are called "subscribers." Employers who skip it are called "non-subscribers." Both paths are legal, but they carry very different legal consequences.

If you are a subscriber, your injured employees generally cannot sue you in civil court for a workplace injury. Their only remedy is the workers comp claim process. That trade-off, called the "exclusive remedy" protection, is the biggest legal shield workers comp provides. The moment you opt out and become a non-subscriber, you lose that shield entirely. An injured worker can take you to court, and Texas law stacks the deck against you in that lawsuit: you cannot argue that the employee was negligent, that a co-worker caused the injury, or that the employee assumed the risk. Those three common defenses are wiped out by statute for non-subscribers.

Who must carry workers comp regardless

The opt-out option is not available to everyone. Some employers in Texas have no choice:

• State and government contractors: Any business performing work under a government contract in Texas is required to carry workers comp for the employees working on that project.
• Motor carriers: Certain trucking and transportation businesses regulated under Texas law must provide coverage.
• Construction contractors on public projects: If you bid on public building projects, coverage is mandatory for all workers on that job site.

Beyond those carve-outs, most private employers in Central Texas can legally opt out. The question is whether that choice makes financial and legal sense for your specific operation.

The real risks of going non-subscriber

Some employers look at the monthly premium and decide the savings are worth it. That math looks very different after a serious workplace injury. Consider a few realistic scenarios for Texas employers:

• A construction laborer falls from scaffolding. Medical costs alone can run $150,000 to $500,000 or more for a serious injury. As a non-subscriber, you pay those costs directly, plus lost wages, plus any jury verdict for pain and suffering. There is no cap on what a jury can award.
• An employee is injured in a company vehicle. If you use vehicles for business, this risk compounds. A single at-fault accident that injures your own worker can produce both a workers comp claim and a third-party liability claim. See our post on commercial auto vs. personal auto in Texas for why coverage gaps matter here.
• A customer or vendor reports a slip-and-fall at your location. That is a separate issue covered by general liability insurance, but it illustrates why one type of coverage rarely handles every exposure a business faces.

The Texas Department of Insurance tracks non-subscriber injury lawsuits, and the average verdict against a non-subscriber employer runs well into six figures. Many small businesses simply cannot absorb that hit.

What non-subscriber alternatives exist

Some larger companies opt out and design their own occupational injury benefit plans under the Employee Retirement Income Security Act (ERISA). These plans can cover medical expenses and some lost wages, but they are complex to set up, require legal and administrative overhead, and still do not restore the exclusive remedy protection. For most small and mid-sized businesses in the Temple-Killeen-Waco corridor, building a self-funded ERISA plan is not practical.

What workers comp actually covers as a subscriber

When you carry a standard workers compensation policy in Texas, coverage generally falls into two parts:

• Part One (Workers Compensation) pays the state-mandated benefits: medical treatment for the work-related injury or illness, income replacement (typically about 70% of the worker's pre-injury average weekly wage, subject to a state maximum), and death benefits to surviving dependents. The Texas maximum weekly benefit for temporary income benefits is adjusted annually by the Texas Department of Insurance. In recent years it has hovered around $1,000 per week, though it changes each year.
• Part Two (Employers Liability) covers lawsuits from injured employees that fall outside the exclusive remedy, such as claims by family members or injuries caused by a third party. Standard limits are $100,000 per occurrence, $100,000 per employee for disease, and $500,000 policy aggregate, but higher limits are available.

The combination of medical, wage replacement, and liability protection in a single policy is why most business owners in Texas, even those who legally could opt out, choose to stay subscribers.

How workers comp is priced in Texas

Texas deregulated workers compensation rates in 1991, which means carriers can set their own pricing rather than following a fixed state rate schedule. That is good news for business owners because it creates real competition. Your premium depends on several factors:

• Classification code: Each type of work gets a code that reflects its injury risk. A clerical worker and a roofer carry very different rates. Misclassifying employees is a common and expensive mistake.
• Your payroll: Premiums are calculated per $100 of covered payroll, so the more you pay workers, the higher the raw premium.
• Experience modification rate (EMR): If your business has a claims history, the state assigns you a modifier. An EMR above 1.0 means your premium goes up; below 1.0 means a discount. New businesses start at 1.0.
• Carrier and endorsements: Because rates are deregulated, shopping across multiple carriers can produce meaningful savings. An independent agency can run those comparisons for you in a single conversation.

Reporting requirements if you opt out

If you decide to become a non-subscriber, Texas law requires you to file a Notice of Non-Coverage (Form DWC005) with the Texas Department of Insurance Division of Workers' Compensation. You must also post a notice in English and Spanish in your workplace informing employees that you do not carry workers comp. Failure to file or post is a separate violation with its own penalties. The filing is not optional; it is the legal notice that tells workers what their rights are and supports the state's oversight function.

How workers comp fits into your broader commercial coverage

Workers compensation does not work in isolation. For most Texas businesses, it is one layer in a stack of commercial policies. A Business Owners Policy (BOP) typically bundles general liability and commercial property, but it does not include workers comp. You buy that separately.

For businesses with larger liability exposures, a commercial umbrella policy can extend limits above your underlying workers comp employers liability coverage and your general liability limits. It acts as a backstop for situations where a jury verdict or settlement runs past your base policy limits.

If you run vehicles for business, make sure your commercial auto coverage is properly set up as well. An injured employee who was driving a company truck when the accident happened may generate both a workers comp claim and an auto claim at the same time.

Get the right workers comp coverage for your Texas business

The opt-out decision is not one you want to make based on a quick internet search or because a competitor says they skip it. The exposure is real, the lawsuits are common, and a single serious workplace injury without coverage can end a business that took years to build.

Winkler Insurance Agency is an independent insurance agency serving employers across Central Texas, including Temple, Killeen, Waco, Belton, Harker Heights, and the surrounding communities. Because we are independent, we compare workers compensation policies across multiple carriers to find pricing and coverage that fits your operation, your payroll size, and your industry. We are not locked into one company's rates.

If you are unsure whether you are properly covered, whether your classification codes are correct, or whether opting out might actually make sense for your business, call us at 254-771-5600 or reach out through our contact page to talk it through. No pressure, just straightforward advice from people who know Texas business insurance.