Alternative Workers Compensation Mechanisms - What's Happening With Opt-Out?

Workers compensation was created more than a century ago to protect injured employees, and their employers, from lengthy and expensive litigation resulting from workplace injuries, with a focus on return-to-work and defined benefits. Supporters of the state-based system say it continues to work as intended, fulfilling the “grand bargain.” In recent years, the concept of alternative workers compensation mechanisms, or “opting-out” of workers compensation, appeared to be gaining traction and generated debate at workers compensation stakeholder meetings across the country. However, it now seems to be mentioned sparingly, which raises the question—what is happening with opt-out?

Let’s look at the history of existing and proposed alternative workers compensation mechanisms.

Texas and "Opt-In"

As long as there has been a workers compensation law in Texas, the state has not required employers to participate in the workers compensation system. Texas employers that do not participate in the workers compensation system (known as nonsubscribers) are not afforded exclusive remedy protection and may be subject to lawsuits for workplace injuries.

While Texas is often referred to as an “opt-out” state, it is more accurately described as an “opt-in” state, as workers compensation is not mandatory. Employers can choose to “opt-in” by providing workers compensation coverage. In recent years, the number of nonsubscribing employers in Texas has decreased. According to the Texas Department of Insurance, Division of Workers’ Compensation Biennial Report to the 85th Legislature, an estimated 82,260, or 22% of private year-round employers in Texas, were nonsubscribers in 2016, down from 33% in 2014. This is the lowest number of nonsubscribers since 1993.

State Opt-Out Activity

Several states introduced opt-out-related legislation over the years, keeping opt-out on the agenda, although no bills advanced as of the close of 2017.


  • Reform law took effect in 2014
  • Allowed “qualified employers” to use an alternative mechanism to workers compensation
  • The Oklahoma Supreme Court ruled the opt-out law unconstitutional in 2016
  • Additional legislation was considered in 2017 but did not pass


  • In 2015, introduced legislation that would have allowed certain employers to opt-out of workers comp
  • Bills did not advance
  • No new opt-out legislation introduced in 2017

South Carolina

  • In 2015, introduced legislation similar to Tennessee, allowing certain employers to opt-out of workers comp
  • Bills did not advance
  • No new opt-out legislation introduced in 2017


  • A bill was proposed to create a system similar to the Texas system, where workers compensation insurance coverage is not mandatory
  • That bill was not formally introduced in 2017


  • Introduced shell legislation in 2017 proposing to establish an optional alternative system
  • System would finance and administer employee benefits compensation regarding health, disability, and death benefits
  • The bill did not advance

Federal Activity

Along with actions by individual states, there was also activity on the federal level. In October 2015, 10 US senators and representatives sent a letter to then-US Department of Labor (USDOL) Secretary Thomas Perez regarding the state-based system of workers compensation, expressing concerns about state opt-out programs. The USDOL subsequently looked into the issue and released the report in October 2016, “Does the Workers’ Compensation System Fulfill Its Obligation to Injured Workers?” which also discussed some of the recent developments in opt-out. However, no activity has occurred since the 2016 election.

Organizations Addressing Alternative Workers Comp Mechanisms

Despite the Oklahoma Supreme Court’s 2016 decision in Vasquez v. Dillard’s Inc., which struck down Oklahoma’s opt-out law, and the lack of legislative activity in the states, opt-out proponents have stated their intention to continue advocating for opt-out systems.  In the meantime, other organizations have conducted research to assess the viability of alternate workers compensation systems.

For example, in 2016 the International Association of Industrial Accident Boards and Commissions (IAIABC) released the study, “Understanding the Opt-Out Alternative,” which analyzed the opt-out law adopted in Oklahoma, and the proposed legislation in South Carolina and Tennessee, and compared them to traditional workers compensation. The issues compared included indemnity benefits, causation thresholds, dispute resolution processes, and the application of the Employee Retirement Income Security Act to opt-out benefit plans. The IAIABC study, intended to be objective, did not provide any recommendations for a model opt-out law. 

The National Conference of Insurance Legislators (NCOIL) discussed opt-out systems and legislation during its meetings in 2015 and 2016; however, the organization did not take any action on the issue. The National Association of Insurance Commissioners is also monitoring the issue, but has not taken any action at this time.

The Outlook for Opt-Out

While the current state outlook is that opt-out will stay quiet, it remains to be seen whether the topic will become a state legislative issue in 2018. One factor that may impact state-based interest in opt-out is the continued decrease in frequency and the recent declines in loss costs/rates across the states. As the reduced cost of workers compensation is balanced against the risk associated with opting out, the suggested benefits of opt-out may be diminished.

At the federal level, so far there is no activity under the new administration related to opt-out or other alternatives to workers compensation. NCCI will continue to monitor any legislative, regulatory, and judicial activity around this issue and provide updates on any new developments. Only time will tell whether opt-out will become a hot topic again.

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