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Workers’ Compensation: Definition, Coverage and Procedure

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    Workers’ compensation is a state or federally required insurance program that provides employees with cash benefits for workplace-related injuries or illnesses. But just because nearly every state requires workers’ compensation, that doesn’t mean it’s easy to understand. Read what you need to know about how it works, the different forms of coverage and how workers’ compensation varies between states.

    Accidents happen. But that doesn’t mean workplace injuries and illness don’t have the potential to disrupt business continuity and threaten an employee’s livelihood.

    Workers’ compensation (aka “workers’ comp”) helps businesses reduce potential legal costs and gives sick or injured personnel a financial lifeline as they recover. This program is being used now more than ever, given nearly $50 million in workers’ compensation premiums were written in 2022 alone, according to the Insurance Information Institute.

    While maintaining a safe workplace should be one of an organization’s top priorities, even the best safety strategies can’t prevent every incident. Let’s explore how workers’ compensation functions and how it supports employers and employees alike.

    What is workers’ compensation?

    Workers’ compensation is a state or federally required insurance program that provides cash benefits to employees who are injured or become ill because of their work. Use of this benefit also means a worker can’t sue their employer for damages, which protects businesses from additional unexpected costs, too. (Keep in mind some exceptions exist, so it’s vital for companies and individuals to consult a licensed legal professional before initiating any action.)

    The Department of Labor’s Office of Workers’ Compensation Programs administers this benefit to federal employees. Every state — except Texas — requires private businesses to maintain workers’ compensation insurance.

    How does workers’ compensation work?

    Workers’ compensation functions similarly to short-term disability in that it usually provides an employee with a portion of their salary as they recover from a work-related injury or sickness. Certain options may also cover supplemental health care or therapy.

    Even though workers’ compensation is often a state-mandated program, private insurers typically fund the benefit. Covered employers, on the other hand, pay premiums.

    Not every workers’ compensation claim is automatically accepted, either. Businesses could dispute a claim if they:

    • believe the nature of the injury or illness is greatly exaggerated
    • can prove they aren’t liable for the incident
    • suspect another form of insurance fraud

    Again, employers should always consult a licensed legal professional before assuming a claim is invalid.

    What affects workers’ compensation rates?

    The rate of workers’ compensation insurance can be affected by several factors, including:

    • head count
    • industry
    • payroll cost
    • state specifications
    • overall risk and safety records

    An employer’s estimated premium is determined by both a workers’ classification code rate and an experience modification number. These figures may be administered by a state workers’ compensation agency or the National Council on Compensation Insurance.

    Keep in mind these variables can still only provide an estimate of a company’s insurance premiums. Certain providers may provide more competitive rates, or the implications of a company’s classification may change over time.

    What is covered under workers’ compensation?

    Workers’ compensation covers a wide array of costs related to injuries, illnesses and even death. It can also be used to offset the initial costs of a permanent injury.

    Consider how workers’ compensation insurance helps address the following needs.

    Medical care

    In general, hospital visits, treatment and necessary operations are covered by workers’ compensation. The exact coverage to this extent varies based on the severity of an employee’s injury or illness. In some cases, this coverage may provide a lifetime medical event.

    Additionally, a worker may not qualify for medical care under workers’ compensation if their injury or illness was sustained through:

    • gross negligence
    • intentional or self-inflicted harm
    • a gag or drug-related misconduct
    • an unlikely event an employer couldn’t control, like a natural disaster

    Temporary disability benefits

    Certain workers’ compensation insurance allows covered employees to receive a portion of their wages — usually two-thirds — for a relatively short period of time. Individuals who can still physically perform aspects of their job as specified by a doctor may still qualify for temporary disability benefits, too. Plus, temporary disability benefits are typically untaxed.

    Permanent disability benefits

    Employees who meet certain criteria may qualify for permanent disability benefits under workers’ compensation. These benefits are separate from Social Security disability, so certain situations may allow a worker to qualify for both.

    If an employee’s permanent disability claim is validated, they may receive weekly payments through their employer’s workers’ compensation insurance. This provides a huge advantage to employees and dependents who may have had their primary source of income cut by an unexpected catastrophe.

    Supplemental job placement benefits

    If an injury or illness prevents an employee from returning to their previous position, workers’ compensation can cover a portion of the costs associated with training and schooling in a different field. Supplemental job placement benefits (SJDB) are usually administered as a nontransferable voucher that can include payment for:

    • tuition
    • books
    • student housing
    • administrative fees
    • and more

    SJDB only applies in certain cases, such as if an employer can no longer accommodate a worker, given their new restrictions, or if an employee needs a specific level of training and education to assume a different position at the same company.

    Death benefits

    Workers’ compensation, like life insurance, has the potential to offset the financial loss of an employee’s untimely death. In most cases, workers’ compensation may apply to an employee who dies immediately following or shortly after a work-related injury or illness. These benefits can cover a portion of funeral costs and be paid out to an employee’s survivors through regular installments. How long these benefits last depends on the nature of the coverage, but unlike permanent disability, these benefit payments usually don’t last forever.

    Rehabilitation expenses

    To help expedite an employee’s return to work, most workers’ compensation benefits also cover rehabilitative therapy and other aspects of an individual’s recovery. Like SJDB, workers’ compensation can also cover training to help get an employee back to the level of performance — or at least something comparable — they had prior to their injury or illness.

    Other benefits

    Certain workers’ compensation insurance may also cover atypical benefits. For instance, an option may cover travel costs associated with treatment or apprenticeships as part of SJDB.

    Given each state may have more than one workers’ compensation provider, it’s important for employees to understand the benefits at their disposal. Hopefully the chance of needing workers’ compensation is low, but peace of mind is undeniably priceless.

    What are the compliance requirements of workers’ compensation?

    The exact compliance requirements for workers’ compensation varies between states, but for all except Texas, it must be offered in some capacity. Additionally, a state may limit the application of workers’ compensation in certain industries or professions.

    In essence, however, all requirements serve the same purpose: to encourage employers to maintain a safe work environment free of hazards. If OSHA provides the foundation, required workers’ compensation insurance is a contingency or disaster recovery plan for employees. And businesses that fail to offer it may be subject to daily fees or other penalties.

    How does workers’ compensation differ between states?

    No two states maintain the exact same requirements for workers’ compensation. These states require employers to obtain coverage through state funds:

    • North Dakota
    • Ohio
    • Washington
    • Wyoming

    A state could also increase the cost of workers’ compensation depending on the nature of business. For example, insurance for companies in the service industry — such as hotels, retailers and restaurants — could expect higher rates in some states. (After all, service-related injuries and illnesses accounted for 24% of workplace incidents across 2021 and 2022.)

    Who can be exempt from workers’ compensation?

    Since workers’ compensation laws aren’t defined by a single authority, exemptions may also vary between states. Even so, some commonly exempted individuals include:

    • interns
    • business partners
    • independent contractors or self-employed workers

    Some states may also exclude certain operations that are predominantly run by families, such as a farm or small shop.

    In Oklahoma, for example, a commercial truck driver may be exempt from workers’ compensation if they completely own the vehicle they use for work, even if they aren’t designated as an independent contractor.

    Since workers’ compensation requirements vary, it’s crucial for employers to verify with a licensed legal professional if they believe any member of their workforce is exempt.

    Workers’ compensation limits in different states

    As the requirements for workers’ compensation varies, so do the rates and extent of coverage. For instance, an employer may discover a more favorable rate outside the state where they conduct most of their business.

    Regardless of how these rates change, most private employers will have to acquire their workers’ compensation insurance through a commercial provider. As of 2024, North Dakota offers the lowest average rates, whereas New Jersey continually ranks among the highest.

    Keep in mind that, like any form of insurance, workers’ compensation is a competitive industry for providers. An employer should explore all their options before investing.

    How can employers provide workers’ compensation insurance?

    While not providing workers’ compensation isn’t an option for most employers, they should still communicate the extent of the coverage to their workforces. (Keep in mind this may not be a legal requirement in every state.) This should also include a clear procedure for filing an injury or illness claim, as well as an easy-to-use software to readily store and access these documents.

    As part of a company’s health and safety strategy, businesses should designate a team or point person to help ensure accuracy and maintain compliance for reporting incidents. In most cases, an incident should be recorded and filed soon after an employer reports it. Companies should ensure this process is as simple and straightforward for employees as possible.

    At the same time, organizations should require regular training on workplace safety and conduct to reduce the likelihood of accidents and, by extension, claims.

    How do injured employees file a workers’ compensation claim?

    The exact steps for an employee to file a claim will change across states, but employers should establish a consistent process to quickly respond to any incidents. It could be as simple as:

    1. An employee provides notice of a potential claim to their employer, including a complete breakdown of the injury and illness and how it likely occurred.
    2. File the claim as outlined by the specific provider’s policy.

    Since federal employees don’t rely on private providers, they can file their claim through the Department of Labor’s online portal.

    From there, it’s the employer’s responsibility to work in tandem with the provider to administer any cash benefit and effectively manage the claim as long as it remains active. This process will also involve determining what specific benefit is appropriate, be it permanent, rehabilitative or another form of support.

    Ultimately, workers’ compensation exists so even terrible incidents aren’t truly worst-case scenarios.

    Explore Paycom’s resources to learn more about benefits, compliance and more.

    DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.