Workers’ Compensation: What It Is, How It Works, and Who Pays

What Is Workers’ Compensation?

Workers’ compensation, commonly referred to as “workers’ comp,” is a government-mandated program that provides benefits to 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 as a direct result of their jobs.

In the United States, workers’ compensation is handled primarily by the individual states. The required benefits vary greatly state by state.

Texas is the only state that does not require employers to maintain workers’ compensation insurance.1

KEY TAKEAWAYS

• Workers’ compensation is a form of employer insurance coverage that pays benefits to workers who are injured or become disabled as a result of their job. 
• By accepting workers’ compensation benefits, the employee waives the right to sue their employer for damages.
• The compensation may include partial salary repayment and coverage of medical costs.
• Workers’ comp is not the same as unemployment benefits or disability 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.

There are federal workers’ compensation programs that 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.2

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 Business (NFIB) maintains a summary of each state’s worker compensation requirements.3

Salary Replacement

The salary replacement paid to an employee under workers’ compensation is typically less than the person’s full 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 level, 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.4

Healthcare Cost Reimbursement and Survivor Benefits

Most compensation plans offer coverage of medical expenses only related to injuries incurred as a direct result of 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 they are on medical leave. If an employee dies as a result of 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 greater cost of a negligence lawsuit.

Workers’ compensation is available only to employees who are injured on the job. It is not the same as disability insurance or unemployment benefits.

Special Considerations

A claim for workers’ compensation may be disputed by an employer. In that case, the Workers’ Compensation Board may be asked to resolve the dispute.

Disputes can arise over whether the employer is actually 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 an injury.

In fact, 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.5

Independent Contractor Exception

In most states, only regular employees are eligible for workers’ compensation; independent contractors are not. 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.6

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 were working full time as contractors and more than 34 million worked part time or occasionally as contractors.7

Access to workers’ compensation benefits is a key issue for participants in the gig economy. Contractors and freelancers are rarely eligible.

Types of Workers’ Compensation

In the U.S., workers’ compensation rules are handled by the individual states. The U.S. Department of Labor houses an Office of Workers’ Compensation Programs, but it is responsible only for coverage of federal employees, longshoremen and harbor workers, energy employees, and coal miners.8

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

Identical injuries can receive radically different kinds of compensation depending on where a worker resides. A paper by the Occupational Safety and Health Administration (OSHA) flatly calls workers’ compensation a “broken system,” and estimates that 50% of the costs of workplace injury and illness are borne by the individuals who suffer them. Low-wage and immigrant workers often don’t even apply for benefits.9

Workers’ Compensation: Coverage A vs. Coverage B

There are two types of workers’ compensation coverage: Coverage A and Coverage B.

• Coverage A includes all of the state-mandated benefits that an injured or ill employee is entitled to receive from the employer’s insurance. It covers salary replacement payments as well as 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 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 in doing so. However, state legislation and court rulings in a number of states have restored the employees’ right to sue in various strictly defined circumstances. Thus, an employer may opt to purchase a policy that combines Coverage A and Coverage B.10

Who pays workers’ compensation insurance premiums?

The employer pays workers’ compensation insurance premiums.

There is no payroll deduction, as for Social Security benefits. The employer is required by law 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 also are different rates depending on whether the employees covered are performing 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.11

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 in detail, 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 make sure that a claim was filed.

If your claim is denied, you can appeal the decision with your state’s Workers’ Compensation Board.

Who is exempt from workers’ compensation?

Generally, only salaried employees are eligible for workers’ compensation; contractors and freelancers are not.

Beyond that, every state writes its own rules. For example, Arkansas specifically excludes farm laborers and real estate agents from eligibility. Idaho excludes domestic workers. Louisiana excludes musicians and crop-dusting airplane crew members.3

The Bottom Line

Every state (except Texas) requires employers to provide workers’ compensation coverage to at least some of their 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 otherwise limit the scope of the benefits.

Most states have online sites that can help you determine if you’re covered by workers’ compensation insurance. For example, 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.12

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Workers’ compensation insurance provides medical and wage benefits to people who are injured or become ill at work. The coverage is mandated by each state and the wage and medical benefits vary by state. Workers’ compensation is considered a social insurance because it relies on a social contract between management and labor, wherein exchange for purchasing workers’ compensation insurance, business owners are protected from civil suits from their workers who become injured on the job. Yet each party benefits has limitations. Workers’ compensation insurance is purchased by businesses, and is underwritten by insurance companies and, in some states, underwritten by publicly supported state funds.

Workers’ compensation insurance definition

Workers’ compensation provides medical expenses, lost wages, and rehabilitation costs to employees who are injured or become ill “in the course and scope” of their job. It also pays death benefits to families of employees who are killed on the job.

It also pays death benefits to families of employees who are killed on the job. You can also learn more about the workers’ compensation products Nationwide offers here:Standard workers’ compensationFor small, mid-sized, and growing companies.Specialty workers’ compensationWith specialized services and resources for unique markets.Agribusiness workers’ compensationFor commercial agribusinesses, food and fuel operations.

How is the cost of workers’ compensation insurance determined?

Similar businesses in each state, that exhibit comparable workplace injury patterns and costs, are grouped into “classes.” Rates are determined for each class based on the prior five years of loss costs for all businesses within that class. This provides an equitable system where rates are charged commensurate with the actual loss experience of the class of business. Economic factors for each state are then overlaid onto this data to determine the rate for each class in a given state.

A system called “experience rating” allows for modification of the class rates based on the loss history of an individual business. This system provides business owners a significant amount of control over the cost of their workers’ compensation premium – safe businesses are rewarded with lower premiums and unsafe businesses are penalized with higher premiums.

Who is required to carry workers’ compensation insurance?

All states, with a small number of exceptions, require businesses with employees who are not owners, to purchased workers’ compensation coverage for those employees.

Businesses that fail to provide workers’ compensation coverage can face severe and costly repercussions including payment of claims out of pocket, fines and possible imprisonment, as well as possibly losing the right to conduct business in the state.

How workers’ compensation claims work

The injured parties must visit a healthcare professional immediately so a doctor can provide medical reports to support any claims. Employees can then begin the claims filing process with Nationwide, being sure to include any state-mandated paperwork or forms. Once these claims are approved, the recipient will receive their compensation payments and can return to work when they feel they are ready.

The Workmen’s Compensation Act 1923: A Brief Intro

There is no doubt that employees are an organisation’s pillars of success. Thus, it falls upon employers to ensure that their workforce receives proper financial compensation in case they meet with an unfortunate accident at the workplace.

Now, to ensure proper enforcement of this facility, several laws like the 1884 Compensation Act and the Fatal Act of 1885 were implemented. However, they were not enough to financially compensate workers in case they met with harm while performing their duties. Thus, the Indian Parliament passed the Workmen’s Compensation Act in 1923. 

Keep reading to find out how this law can benefit employees!

Workmen Compensation Act 1923 – Definition and Scope

The Workmen Compensation Act 1923 aims to provide financial compensation to employees in case they meet with an unfortunate accident while performing their duties. 

All employees working full-time, part-time, temporarily or casually are liable to receive financial protection under this law. It comes into effect in case they secure injuries, incapacity, and disfigurement or die while performing their duties. 

Front-line workers in the following industries are liable to protection under this law:

• Non-permanent employees of the Railways who do not fall under the sub-divisional, district or administrative offices. 
• Captains and crew members on an aircraft. 
• Labours employed abroad as per Schedule II of the Workmen Compensation Act 1923. 
• Individuals working in construction sites, mines, docks, factories and specific places as per Schedule II of the above mentioned Act. 
• Drivers, mechanics, helpers and any other person associated with working with vehicles.     

According to this Act, any company or establishment operating in the sector highlighted above and having more than 10 employees are liable to abide by its rules.  

Coverage receivable under the Workmen Compensation Act 1923

The type and extent of financial coverage as well as its applicable terms and conditions fully depend on the insurance company that is affiliated with the employer. Here are some basic things which all insurers cover:

• Bodily or other injuries during an accident while on duty
• Temporary disablement 
• Permanent disablement (complete or partial)
• Death due to an accident at work 
• Injury, disease or death resulting from working conditions
• All legal or any other expenses incurred by an employee in the above circumstances  

Workmen’s Compensation Act 1923 – Amount of compensation

According to Section 4 of the Workmen’s Compensation Act 1923, the amount of compensation workers are liable to receive is as follows:

• Temporary disabilities

For temporary disabilities, the Workmen’s Compensation Act 1923 provides financial compensation of up to 25% of the concerned employee’s monthly wages. 

• Permanent total disabilities

In an unfortunate event when an employee suffers from permanent disablement, that individual has the right to receive 60% of his/her monthly wage or Rs.1,20,000, whichever is higher. 

• Permanent partial disabilities

Injuries that fall under permanent partial disabilities are stated in Part II Schedule I of the Act. The payable corpus is a certain percentage of earnings loss by the employee due to his/her injury. 

• Death 

When an employee dies due to an accident at his/her workplace, their family is liable to receive 50% of the deceased’s monthly wages or Rs.1,20,000, whichever is higher. 

Note – Individuals who are liable to receive compensation under the Employees’ State Insurance Scheme of India (ESIC) cannot get financial benefits from the above mentioned Act. 

Updates in the Workmen Compensation Act 1923

Since its inception in 1923, there have been two major changes in the Workmen Compensation Act. They are as follows:

• In 2010, this law’s name was changed to Employee’s Compensation Act.
• On January 3, 2020, the Ministry of Labour and Employment raised the amount on which compensation was calculated as per the Act from Rs. 8,000 to Rs. 15,000.  

Features of the Workmen Compensation Act 1923

Employers are under the obligation to provide financial compensation as per the Workmen Compensation Act 1923 in the following circumstances:

• An accident or injury occurs at the workplace while carrying out a task.
• If the applicant provides proof that the injury or accident that has occurred at the workplace is aggravating his/her medical condition. 
• In case a worker becomes disabled or dies while on duty. 

When is the employer not liable to pay compensation?

As per the Act, employers are not liable to financially compensate their employees under the following circumstances:

• Employee suffers from an injury or accident by disregarding the safety norms.
• Injury resulting in partial or total disablement for less than three days.
• For accidents or injuries under the influence of alcohol or drugs.

Final Word

It is mandatory as per government rules for employers to provide insurance benefits to their workforce under the Workmen Compensation Act 1923. This ensures that even in the case of unfortunate accidents, employees can get financial security, which can help them and their families deal with the situation.    

Frequently Asked Questions

Q1. What to look for while searching for a workmen’s compensation insurance policy?

Ans. The extent of coverage is the most important factor to keep in mind while searching for such a policy. Additionally, employers must also consider the sum insured, optional covers, extra benefits and the claim settlement process.  

Q2. What is the claim settlement process for a workmen’s compensation insurance plan?

Ans. To claim a workmen’s compensation insurance policy, employees must inform the site inspector of the accident or fatality. Then, they must provide all relevant documents to the insurance company and wait for the claim to be accepted. Please keep in mind that the claim settlement procedure can vary across providing companies.   

Q3. What are the documents required to file a workmen’s compensation insurance claim?

Ans. The documents that an employee needs to submit while claiming a workmen’s compensation insurance policy are the completed and signed application form, medical bills, and compensation records. Moreover, for mishaps causing disabilities or death, medical certificates confirming the same need to be submitted.  

Q4. Who is liable to receive compensation when an employee dies?

Ans. According to the law, when an employee dies at the workplace, all his/her dependants are liable to receive financial compensation. This benefit is also applicable in case of accidents causing disablement. 

Q5. Should I purchase workmen’s compensation insurance policy online?

Ans. Yes, it is a smart move to search for workmen’s compensation insurance plans online. This is because employers can tally the pros and cons of several providers before making their final choice.