As far as I know, cover bands don’t have to pay the original band to use their catalog, even though they tour and make money off of it. Why is this allowed, but in other scenarios (sampling music, movie soundtracks, commercials, etc.) you have to pay for the rights to use the song?
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So there are performance rights and recording rights. If you want to perform somebody’s music, either as a live performance or using a recording, you need to obtain performance rights from a PRO (Performing Rights Organization). Most live music venues, radio stations, and even bars that play music over the radio in the venue pay a PRO for the right to play music in their venue. In turn, most musicians and recording companies register their works with a PRO so that it can be played over the radio or in a venue without special licensing.
Recording rights on the other hand are different. If a cover band wanted to record their version of a song and sell it on a CD or stream it on Spotify they would have to get permission first, and the owner of the copyright of that song would be entitled to the profits from the sales and streaming revenue of that track.
So in short, cover bands can play covers in bars and music venues because those venues have already paid a fee to a PRO to be able to play music in their venue. However, cover bands cannot record and release their own version of that song without express permission from the copyright owner and even then the copyright owner gets the writing royalties from the revenue of those recordings.
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