Texas small business owner reviewing workers comp exemption rules and labor code requirements

Texas Workers Comp Exemptions: Who Can Legally Opt Out? (2026 Guide)

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Short Answer: Texas law lists only three specific categories of employees who are exempt from workers’ compensation coverage: domestic workers, casual workers, and farm or ranch employees . However, the biggest exemption isn’t about who you hire—it’s about whether you, as the business owner, choose to carry coverage at all. Texas is the only state where private employers can legally opt out of the workers’ comp system entirely.

The Three Employee Exemptions Under Texas Law

Texas Labor Code Section 406.091 clearly defines who is exempt from workers’ compensation coverage :

1. Domestic Workers

A person employed as a domestic worker is not subject to the Texas Workers’ Compensation Act . This typically includes housekeepers, nannies, and gardeners working in a private residence.

Important: The exemption applies only to domestic workers engaged in employment “incidental to a personal residence” . If you run a cleaning business and hire employees, they are not exempt—they are employees of your business.

2. Casual Workers

A casual worker engaged in employment incidental to a personal residence is also exempt . The key word here is “casual”—this means irregular or occasional work, not ongoing employment.

Real-world example: If you hire someone to help you move furniture in your home one weekend, they may qualify as a casual worker. But if you run a moving company and hire helpers regularly, those workers are not exempt.

3. Farm and Ranch Employees

Farm or ranch employees are exempt under Section 406.091(a)(3), with certain exceptions under Subchapter H . However, this exemption does not apply to all agricultural workers.

What counts as a farm or ranch employee: The law defines agricultural labor as “the planting, cultivating, or harvesting of an agricultural or horticultural commodity in its unmanufactured state” . Migrant and seasonal workers are treated differently under Subchapter H.

What the Exemption Actually Means

Here’s where many business owners get confused.

Being exempt does NOT mean:

  • You can’t provide coverage
  • The employee can’t get benefits
  • You’re protected from lawsuits

Being exempt DOES mean:

  • The law does not require you to cover that employee
  • If you choose not to cover them, you do not lose your common-law defenses under Section 406.033

Critical point: Even if an employee is exempt, you can voluntarily provide coverage. Section 406.091(b) says an employer “may elect to obtain workers’ compensation insurance coverage for an employee or classification of employees exempted from coverage” . If you do this, you accept the rights and responsibilities of the workers’ comp system for that employee.

The Real Exemption: Owner/Executive Exclusion

The most impactful exemption for small business owners isn’t about employees—it’s about you.

Under Texas Labor Code Section 406.097, a sole proprietor, partner, or corporate executive officer of a business that has workers’ comp coverage is entitled to benefits as an employee—unless specifically excluded by endorsement .

What this means in practice:

If you own 25% or more of a corporation, you can be excluded from coverage . This lowers your premium because your payroll is removed from the calculation.

For sole proprietors and partners: You are automatically included in coverage if your business has a workers’ comp policy—unless you file the proper endorsement to exclude yourself .

Why this matters: Many small business owners don’t realize they’re paying premium on themselves. If you don’t want coverage for yourself, you need to specifically exclude yourself through a policy endorsement.

Who Is NOT Exempt (Even If You Think They Are)

Independent Contractors

This is the biggest misconception in Texas workers’ comp.

A 1099 does not make someone an independent contractor for workers’ comp purposes . Texas Mutual is explicit: “A 1099 alone does not confirm that someone is an independent contractor” .

The Texas Workforce Commission uses a test to determine worker status. Key factors include:

Independent contractor characteristics :

  • Does not receive instructions or training
  • Has significant investment in their own business
  • Is hired for a specific job with no continuous relationship
  • Sets their own hours and supplies their own tools
  • Receives payment per job and can realize profit or loss
  • Can advertise their business to the public

Employee characteristics :

  • Receives instructions on when, where, and how to perform the job
  • Is trained by a more experienced person
  • Has no investment in the business
  • Is dependent on the employer for work
  • Can be let go at will

The legal protection: Texas Labor Code Section 406.145 allows a hiring contractor and subcontractor to file a joint agreement with the Texas Department of Insurance, Division of Workers’ Compensation . Once filed, the subcontractor is legally an independent contractor and not entitled to coverage through the hiring contractor.

But here’s the catch: If the hiring contractor exercises too much control—scheduling work in logical sequence, directing where to work—the joint agreement can be challenged. The law allows control over “hours of labor” for scheduling purposes without creating an employee relationship .

Building and Construction Contractors on Public Projects

If you’re a building or construction contractor working on a public project for a governmental entity, you must certify in writing that you provide workers’ comp for every employee on the project .

This requirement flows down through subcontractors. Each subcontractor must provide a certificate to the general contractor, who provides it to the government entity .

What’s covered under “building or construction” :

  • Erecting or preparing to erect a structure (building, bridge, roadway, utility facility)
  • Remodeling, extending, repairing, or demolishing a structure
  • Improving real property through similar activities

What’s NOT covered: Maintenance employees of an employer whose primary business is not building or construction .

Industries That Must Carry Coverage in Texas

While Texas generally allows opt-out, several industries are required by law to carry workers’ compensation :

  • Public employers (cities, counties, state agencies)
  • State universities
  • Companies contracting with government entities
  • Building and construction contractors for public employers
  • Motorbus companies
  • Motor carriers providing transportation over public highways
  • Liquid propane gas and compressed natural gas dealers
  • Employers of inmates in work furlough programs

If you work in any of these industries, the “optional” nature of Texas workers’ comp doesn’t apply to you.

The Non-Subscriber Trade-Off

Texas gives employers the choice to go without workers’ comp. But choosing non-subscriber status carries serious consequences.

What you lose as a non-subscriber :

  • You lose protection from most lawsuits by injured employees
  • You cannot use contributory negligence as a defense
  • You cannot use assumption of risk as a defense
  • You cannot use fellow employee negligence as a defense

The Texas Legislature’s bill analysis explains: “An employer that opts out of the workers’ compensation system—known as a nonsubscriber—may be sued by its employees for damages based on employer’s negligence related to an on-the-job injury” .

What you cannot do: A non-subscriber may not ask employees to sign pre-injury waivers relinquishing their right to sue .

When Exempt Employees Can Still Be Covered

Just because an employee is exempt doesn’t mean you can’t cover them. Section 406.091(b) allows voluntary coverage .

Why you might choose to cover exempt employees:

  • Retention: Offering coverage is a benefit that attracts workers
  • Safety: Covered employees may report injuries earlier
  • Liability protection: Even exempt employees can sue for negligence

Important distinction: If you obtain coverage for exempt employees, you accept the rights and responsibilities of the workers’ comp system for those employees . The exemption doesn’t follow them forever.

What About Employees Who Want to Opt Out?

Texas law allows employees to retain their common-law right of action by notifying their employer in writing that they do not want to be covered under the Act .

This is different from the employer exemption. An employee who opts out is choosing to keep their right to sue at common law rather than accept workers’ comp benefits.

Employer tip: If an employee opts out, document it properly. This creates a clear record of their choice.

FAQ

Is workers’ comp mandatory for small businesses in Texas?

No. Texas is the only state where private employers can legally opt out of workers’ compensation for most employees . However, certain industries and government contractors must carry coverage .

Can I use a 1099 to avoid workers’ comp in Texas?

No. A 1099 alone does not determine independent contractor status for workers’ comp purposes . If you control how, when, and where the work is done, the worker is likely an employee regardless of the tax form.

What employees are exempt from Texas workers’ comp?

Texas Labor Code Section 406.091 exempts domestic workers, casual workers engaged in employment incidental to a personal residence, and farm or ranch employees .

Can I exclude myself from workers’ comp as a business owner?

Yes. Sole proprietors, partners, and corporate officers with at least 25% equity ownership can be excluded through a policy endorsement . General and limited partners can also be excluded under the Texas Workers’ Compensation Manual .

What happens if I don’t have workers’ comp and my employee gets hurt?

Your employee can sue you directly. You cannot use contributory negligence, assumption of risk, or fellow employee negligence as defenses . Damages can include pain and suffering with no cap.

Do I need workers’ comp for a family member working for my business?

It depends on the employment relationship and whether they qualify as an exempt employee. Farm and ranch family members may be exempt, but other family members working in your business likely are not.

The Bottom Line

Texas law provides specific exemptions for domestic workers, casual workers, and farm/ranch employees . But the bigger exemption is the one that applies to you as an employer—the choice to opt out of workers’ comp entirely.

That choice comes with a trade-off. You save premium dollars, but you lose legal defenses if an employee gets hurt .

For most small business owners, the exemption list matters less than the control test. If you control how your workers do their jobs, they’re employees—regardless of what the 1099 says . And if they’re employees, the question isn’t whether you can afford workers’ comp. It’s whether you can afford to go without it.

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