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What is Workers Compensation Insurance

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Workers' compensation, commonly referred to as "workers comp," is a government-mandated program that benefits workers who become injured or ill on the

What is Workers Compensation Insurance

What Is Workers' Compensation?

Workers' compensation, commonly referred to as "workers comp," is a government-mandated program that benefits workers who become injured or ill on the job or as a result of the job. 

It is effectively a disability insurance program for workers, providing cash benefits, healthcare benefits, or both to workers who suffer injury or illness due to their jobs. In the U.S., the individual states handle workers' compensation. 

The required benefits vary greatly state by state. Texas is the only state that does not require employers to maintain workers' compensation insurance.

Understanding Workers' Compensation

Workers' compensation benefits may include partial wage replacement for the period during which the employee cannot work. The benefits may also include reimbursement for healthcare services and occupational therapy. 

Most workers' compensation programs are paid for by private insurers, from premiums paid by the individual employers. Each state has a Workers' Compensation Board, a state agency that oversees the program and intervenes in disputes. 

Federal workers' compensation programs cover federal employees, longshore and harbor workers, and energy employees. Another federal program, the Black Lung Program, handles death and disability benefits for coal miners and their dependents

Workers' Compensation Benefits

Requirements for workers' compensation vary from state to state, and not all employees are covered in some states. Some states, for example, exclude small businesses from the mandate for coverage. Others have different requirements for various industries. 

The National Federation of Independent Businesses (NFIB) summarizes each state's worker compensation requirements.

Salary Replacement

The salary replacement paid to an employee under workers' compensation is typically less than the person's total salary. 

The most generous programs pay about two-thirds of the person's gross salary.

Workers' compensation benefits are not usually taxable at the state or federal levels, compensating for much of the lost income.

Taxes may be due to recipients who also have income from the Social Security Disability or Supplemental Security Income programs.

Healthcare Cost Reimbursement and Survivor Benefits

Most compensation plans offer coverage of medical expenses only related to injuries incurred directly from employment. For example, a construction worker could claim compensation for an injury suffered in a fall from scaffolding but not for an injury incurred while driving to the job site.

In other situations, workers can receive the equivalent of sick pay while on medical leave. If an employee dies due to a work-related incident, workers' compensation makes payments to the worker's dependents.

Recipients Waive the Right to Sue

By agreeing to receive workers' compensation, workers give up their right to sue their employer for negligence. This compensation bargain is intended to protect both workers and employers.

Workers are giving up further recourse in exchange for guaranteed compensation, while employers consent to a degree of liability while avoiding the potentially higher cost of a negligence lawsuit.

Special Considerations

An employer may dispute a claim for workers' compensation. In that case, the Workers' Compensation Board may be asked to resolve the dispute. Disputes can arise over whether the employer is liable for an injury or illness.

Workers' compensation payments are also susceptible to insurance fraud. An employee may falsely report that an injury was sustained on the job, exaggerate the severity of an injury, or invent one.

The National Insurance Crime Board asserts that there are "organized criminal conspiracies of crooked physicians, attorneys, and patients" who submit false claims to medical insurance companies for workers' compensation and other benefits.

The Independent Contractor Exception

In most states, only regular employees are eligible for workers' compensation, not independent contractors. That was one of the main points of contention in the debate over a California ballot measure that sought to extend employee benefits to drivers for ride-sharing apps like Uber and Lyft.

Like the so-called "gig economy," the issue of workers' compensation and other benefits for contract workers isn't going away. In 2020, about 17 million Americans worked full-time as contractors, and more than 34 million worked part-time or occasionally as contractors.

Types of Workers' Compensation

In the U.S., individual states handle workers' compensation rules. The U.S. Department of Labor houses an Office of Worker's Compensation Programs. Still, it is responsible only for the coverage of federal employees, dockers and harbor workers, energy employees, and coal miners.

The lack of federal standards for workers' compensation has resulted in highly varied policies for the same kinds of injuries from state to state.

Identical injuries can receive radically different compensation depending on where a worker resides. A paper by the Occupational Safety and Health Administration flatly calls workers' compensation a "broken system." It estimates that 50% of workplace injury and illness costs are borne by the individuals who suffer them. Low-wage and immigrant workers often don't even apply for benefits.

Workers' Compensation Coverage A vs. Coverage B

There are two types of workers' compensation coverage, called Coverage A and Coverage B.

Coverage A includes all of the state-mandated benefits that an injured or ill employee receives from the employer's insurance. It covers salary replacement payments and medical care, rehabilitation, and death benefits as necessary. All states except Texas have such benefits, although they vary widely from state to state, and many states exclude some employees from eligibility.
Coverage B pays benefits that exceed the minimums required by Coverage A. They usually are paid only as of the result of a successful lawsuit brought by the employee for negligence or other misconduct by the employer.
Workers who accept workers' compensation generally waive the right to sue their employers, agreeing to a "no-fault" contract. However, several states' state legislation and court rulings have restored the employees' right to sue in various strictly-defined circumstances. Thus, an employer may purchase a policy combining Coverage A and Coverage B.

Who Pays Workers' Compensation Insurance Premiums?

The employer pays the workers' compensation insurance premiums. There is no payroll deduction for Social Security benefits. The employer is required to pay workers' compensation benefits as established by individual state laws.

How Much Does Workers' Compensation Cost?

The cost of workers' compensation insurance varies by state, as do the mandated benefits. There are also different rates depending on whether the employees covered perform low-risk or high-risk jobs.
The fees for the insurance are based on the company's payroll numbers. Just as examples:
  • In California, workers' comp costs an average of 40 cents for every $100 in payroll for low-risk workers and $33.57 for high-risk jobs.
  • In Florida, the average is 26 cents per $100 for low-risk jobs and $19.40 for high-risk jobs.
  • In New York, the average is 7 cents per $100 for low-risk jobs and $29.93 per $100 for high-risk jobs.

How Do You Apply for Workers' Compensation?

The rules for applying for workers' compensation vary by state. In general, a worker with a job-related injury or illness should: Write down the details of the injury or illness, with photos and the names of witnesses when possible.

Report the injury or illness to your employer. The employer should take it from there, filing your claim with the insurer.
  • You can follow through with the employer's insurance company to ensure a claim is filed.
  • You can appeal the decision with your state's workers' compensation board if your claim is denied.

Who Is Exempt From Workers' Compensation?

Generally, only salaried employees are eligible for workers' compensation, not contractors or freelancers. Beyond that, every state writes its own rules. For example, Arkansas excludes farm laborers and real estate agents from eligibility. Idaho excludes domestic workers. Louisiana excludes musicians and crop-dusting airplane crew members.

Conclusion

Every state (except Texas) requires employers to provide workers' compensation coverage to at least some employees. The states write the rules, so there are many exceptions and exemptions. Contractors and freelancers are rarely covered, and many states exclude certain professions from the mandate or limit the benefits' scope. Most states have online sites that can help determine if workers' compensation insurance covers you. For example, the state of Florida's Division of Workers' Compensation has information on its program, links to the necessary forms, and a database that can tell you whether your employer has coverage.

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