Understanding Workers' Compensation

Overview

Workers' compensation (WC) is a government-mandated, employer-paid insurance benefit for employees who incur a work-related injury or illness. WC provides wage replacement for time missed from work and covers medical expenses related to the employee's work-related injury or illness. Vocational rehabilitation benefits, such as training or retraining, may also be available when an employee cannot return to their former job as a result of a work-related injury. When a work-related accident or illness results in the death of an employee, WC may provide compensation to the employee's family and cover funeral expenses.

WC was originally conceived as a replacement for the English common law system, which assigned liability for work-related injuries on a case-by-case basis and offered little or no right to compensation for work-related injuries. Lawsuits could be complex, and employers often faced multiple costly lawsuits arising out of the same sorts of injuries. It was a system that failed both parties. By 1949, WC laws were enacted in all 50 states, the District of Columbia and Puerto Rico.

The current WC system is a trade-off. Liability on the part of the employer is absolute; however, the amount of damages awarded under WC might be substantially less than they would have been under the old system. WC is based on the premise that an injured worker should not be required to bear the costs of their injuries—even when the worker's negligence contributed to the injury—and was designed to eliminate the delays, complexities of proof, expense, and inconsistency of results that frequently occurred under the common law system. Generally, WC is an injured worker's exclusive remedy.

See:

Avoid These Common Misconceptions About Workers' Compensation

Workers' Comp Was Exclusive Remedy for Claims Based on Lead Exposure

Assaulted Employee's Claims Barred by Workers' Compensation

Workers’ Compensation Laws

WC insurance laws are primarily a matter of state law for private employers. The federal government does not mandate that states provide a certain minimum level of WC benefits, and the federal WC laws apply only to a few specific populations.

It is important to note that while WC insurance and the Occupational Safety and Health Administration (OSHA) may seem connected, they are not. OSHA does not require or administer WC insurance for employers. The reporting and/or recording of injuries, however, is required by both WC laws and by OSHA.

Federal Laws

Federal government employees come under the Federal Employees' Compensation Act. There are also federal statutes that apply to certain employees, including:

• Individuals engaged in maritime employment (Longshore and Harbor Workers' Compensation Act).
• Railroad employees (Federal Employers' Liability Act).
• Coal miners suffering from black lung disease (Black Lung Benefits Act).
• Nuclear weapons workers (Energy Employees Occupational Illness Compensation Program Act).

See U.S. DOL: Workers' Compensation.

State Laws

Every state in the U.S. requires employers of a certain size to carry WC insurance, with the exception of South Dakota and Texas, where employers may opt out of WC insurance but may then be subject to civil lawsuits without the limits and protections WC insurance carries.

Employers with operations in multiple states will need to ensure they obtain WC insurance coverage in each state where employees are working and comply with each state's WC requirements. Each state has a WC commission or department that is responsible for enforcing the state statutes and ensuring injured workers receive the compensation and benefits to which they are entitled. See State Workers' Compensation Offices.

Coverage Requirements/Provisions

Generally, most state WC protocols require that all employers with a certain number of workers (often one or more) participate in the system. Sole proprietorships may be allowed to opt out. A handful of states allow certain workers to opt out also. In some states, all government entities are subject to the WC system; in others, they are permitted to opt out.

Depending on state law, there are generally three methods an employer can use to obtain the required WC insurance coverage:

• Through an approved private carrier.
• Through self-insurance on state approval of an employer's application.
• Through a state-funded insurance plan.

WC insurance programs share common elements. Victims of workplace accidents and occupational disease (or their surviving dependents) are provided with:

• Medical treatment.
• Vocational rehabilitation.
• Wage-loss indemnification.
• Death and burial benefits on a no-fault/exclusive-remedy basis.

WC laws also typically contain provisions that prohibit employers from retaliating against a worker who has filed a claim or received benefits under WC, or provided evidence in a WC proceeding. See State Workers' Compensation Officials for links to state agencies.

Noncompliance with state WC requirements can result in significant fines, often $10,000 or more, and management can face jail time in some states. In addition, the WC exclusive remedy may be forfeited, and an injured worker can sue the employer, costing the employer much more than it would have paid in WC insurance premiums.

Covered employees

WC insurance generally covers all employees, both exempt and nonexempt, regardless of how long they have worked for the employer or what type of position they are in, with some limited exceptions. Some states exclude independent contractors, volunteers and others who are not considered employees of the employer. It may be difficult, however, to determine who the responsible employer is in some circumstances, as every state has its own definition. See Can an employer be held liable if a temporary agency employee is hurt in the workplace? and Joint-Employer Liability for Texas Workers' Compensation Retaliation Claims.

Individuals working in the U.S. illegally are generally entitled to WC benefits because even though they had no right to employment, they nevertheless were employees. See Court Upholds Workers' Comp Judgment for Undocumented Worker.

States have different qualifiers and disqualifiers, as well as different benefits formulas. Employers are strongly urged to examine the particular WC laws of each state where they do business.

Premium Costs

WC insurance premiums are determined by a number of factors, including the type of work the employee performs, the claims history of the employer and the employer's total payroll. The riskier the work, the higher the premium. An employee operating heavy machinery will have a higher WC rate than a receptionist at the same company. The claims history of the employer, often referred to as the employer's experience rating, can also impact the employer's WC premium costs. The National Council on Compensation Insurance's Experience Rating Modifier, commonly known as MOD or ERM, is used in many states and can significantly increase or decrease the total premium. A reserve is a calculated guess, based on historical data, as to what will be spent on a claim. See ABC's of Experience Rating. Some states have their own job classification systems and experience rating systems. For an example, see California's explanation of premium calculations.

The employer generally bears full responsibility for the payment of WC insurance coverage, except in Washington state.

Relationship with Other Workplace Laws

It is possible for a single work-related injury to afford an employee rights under multiple laws, including the applicable WC statute, the Family and Medical Leave Act (FMLA), the Americans with Disabilities Act (ADA) and similar state laws. See Coordinating Leaves of Absence.

All of the applicable statutory regulations must be reviewed. A work-related injury may create a disability as defined by the ADA. It may also constitute a serious health condition as defined by the FMLA. If more than one statute applies to the situation, the injured worker must be afforded all the rights under each applicable statute. See Employer Erred in Failing to Notify Injured Employee of FMLA Rights and EEOC Enforcement Guidance: Workers' Compensation and the ADA.

The best practice is to first determine the employee's WC rights, then separately determine the employee's FMLA rights and, finally, separately determine the employee's ADA rights. The fact that an employee might be eligible for WC does not affect eligibility for FMLA leave, and the two leaves may run concurrently. See Are employers required to maintain health insurance benefits for employees who are out on workers' compensation leave?

Ordinarily, WC benefits and unemployment compensation (UC) benefits will be mutually exclusive. To be eligible for WC benefits, one must be unable to work. To be eligible for UC benefits, one must be available for work.

Work-Related Injuries and Illnesses

Injuries and illnesses caused by exposure to work activities, materials and equipment in the workplace are generally covered by WC. Some exceptions may apply, such as an injury that occurs while an employee is engaged in fighting or horseplay, or when an employee has disregarded a company policy. State law will typically dictate what is considered "work-related" and any exceptions. See Is an employer liable when an employee on a company-sponsored sports team is injured during an event?

The employer is responsible for injuries and illnesses that arise out of and are in the course of employment. "Arising out of employment" refers to the cause and origin of the injury. "In the course of employment" refers to the time, place and circumstances of the injury. See If an employee slips on ice in the parking lot is, the injury covered by workers' compensation?

Sometimes an incident is clearly work-related, such as a laceration from a tool being used at work. Other times, further investigation is needed to determine if the injury or illness "arose out of employment." For example, it may be difficult to determine where an employee was exposed to a communicable disease, especially if the disease is widespread in the community. See Workers' Compensation Won't Cover Many Coronavirus Claims.

Some states have different rules for firefighters and police, presuming that certain types of injuries for such employees are work-related. Such a presumption is warranted given the specialized dangers and stresses under which police and firefighters operate. See Firefighters and First Responders: Presumptive Workers' Comp Benefits.

Aggravation of a pre-existing condition can get complicated, and once again, state law will vary. Generally, WC may only cover the "new" injury, and determining how much of the condition was pre-existing and how much is new is often a matter of contention between the WC insurance carrier and the employee's representative and/or health care provider. In some cases, a third-party medical examiner will be brought in to offer a neutral opinion. The state WC department is often involved in facilitating such disputes and applying the state statute and case law to a particular claim.

Under some state laws, an employer may initially select the physician who is designated for seeing employees with work-related injuries and illnesses. Employers should inform the injured employee of their options for seeking medical attention.

Reporting/Recording

When a workplace injury or illness occurs, an employer will typically be required to complete an incident report or first report of injury form, providing the insurance carrier or administrator with the relevant details of the incident. Depending on the circumstances, a full investigation may be necessary to determine if the employee will be awarded WC benefits. See How to Administer a Workers' Compensation Claim.

All accidents, regardless of their severity, should be recorded. A small scratch or laceration can develop into a more serious infection. Consult the WC carrier regarding expectations for submitting "report only" incident reports that have not yet resulted in lost time or medical bills. See We have an employee who suffered a minor injury at work and missed a few days. Could we just pay the person for time missed instead of filing a workers' compensation claim?

Managing WC Absences

When an injured employee has filed a WC claim and is out of work, it is important for the employer to keep track of the case and maintain contact with the employee. Regular check-ins with the employee can help keep the employee engaged with the employer and encourage the employee to return to work knowing that the employer is concerned with the employee's well-being and recovery. Some WC cases have a more predictable return to work date than others. When a severe injury or illness occurs, the employee's absence from work may be lengthy. Employers should ensure compliance with other leave laws, and once all statutory time off is exhausted, the employer may ultimately need to terminate the employment relationship if the employee is unable to return to work. Because of the complexity of complying with state WC requirements and local, state and federal leave laws, employers should consult with legal counsel prior to making a termination decision. See Can an employer terminate an employee when FMLA leave has been exhausted if the employee is on workers' compensation or has a disability covered under the ADA and is unable to return to work?

Benefits and Compensation

The benefits of WC to the injured worker include the following:

• No direct cost to the worker for WC insurance coverage (with the exception of Washington state).
• Prompt payment of claims following a work-related injury.
• Travel reimbursement when travel is required for medical care.
• Wage replacement for days lost due to the injury, which is generally excluded from gross income for tax purposes. Most states provide approximately two-thirds of gross pay as the benefit amount.
• Vocational rehabilitation services, if necessary.
• Payments made to an employee's spouse or dependent children in the event of death.
• Anti-retaliation provisions.

Compensation and other benefits may also vary depending on the severity of the employee's injury or illness. Many states differentiate wage-loss benefits in the following terms:

• Temporary total disability—for now, cannot do any job.
• Temporary partial disability—for now, cannot do some jobs.
• Permanent total disability—can never do any job.
• Permanent partial disability—can never do some jobs.

When an employee's disability is determined to be permanent, the state statute will typically establish the monthly benefit amount depending on the severity of the disability. In some cases, a settlement is offered to the employee for expected future lost wages in lieu of continued monthly benefits. Individuals with a permanent disability may also be eligible to collect Social Security disability benefits that are offset by the amount of WC benefits received. See How Workers' Compensation and Other Disability Payments May Affect Your Benefits.

Return-to-Work Programs

Establishing a return-to-work/light-duty program can be effective in minimizing lost time after a workplace injury or illness. Encouraging an injured employee to return to work in a light-duty capacity—that is with job duties that are less physically or mentally demanding—can lessen the chances that the person will become accustomed to not working and therefore less likely to return to work at all. Studies show the longer an employee remains out of work, the less likely the employee is to return to work, which results in higher costs to both the employer and the carrier.

Some state WC programs require employers to develop light-duty programs and notify employees of the availability of light-duty work.

When an employee is eligible for FMLA leave because of their work-related injury or illness, the employer can offer a light-duty assignment, but the employee has the right to refuse and may take FMLA leave instead. However, if the employee accepts a light-duty job in lieu of FMLA leave, the time in the light-duty position cannot be counted against the employee's FMLA entitlement.

See:

How to Create a Return-to-Work/Light-Duty Program

7 Steps to Improve Light-Duty Programs

Return-to-Work Policy

Preventing Fraud

Recognizing and preventing fraud is also an important component of WC. Bogus claims are often made when, in fact, the injury or illness occurred off duty. For example, an employee injured lifting furniture at home or participating in a sporting event may be tempted to falsely claim that the injury occurred doing heavy lifting on the job—especially if the employee otherwise would not have health or disability insurance coverage.

Some red flags for spotting fraud include when an employee:

• Avoids phone calls or other contact from the employer or insurer.
• Has limited availability to attend medical appointments necessary for treatment.
• Has an unwitnessed injury as they approach the end of a seasonal or temporary assignment.
• Claims to be hurt at work but confides to co-workers that they were hurt elsewhere or are otherwise not being untruthful about their WC claim.
• Is viewed on surveillance video or social media being able to engage in activities that contradict their claim of injury.

While some claims and/or employee behavior may be suspicious, it is advisable to treat every WC claim as legitimate until clear and convincing evidence shows otherwise. Employers can share their suspicions, along with any evidence gathered, with the insurance company or state WC board. See Workers' Compensation Fraud Comes in Many Forms.

Trends and New Developments in WC

WC is one of the oldest reforms in the employment law area, and it works remarkably well in comparison with the common law system it replaced. However, new challenges are presented by modern developments in disease and disease prevention, new technologies and machinery, societal changes, and changes in the ideas of how and where work is performed. The states and federal government attempt to address these needs as they arise, creating a gradual accretion of new laws and new administrative strategies for dealing with the issues.

See:

Most California Employees with COVID-19 Presumed Covered by Workers' Comp

Are telecommuters covered under workers' compensation?

More Post-Accident Drug Tests Coming Back Positive for Marijuana

Related Resources

SHRM Resource Hub Page: Workers' Compensation and Safety

Interplay of ADA, FMLA and Workers' Compensation Training

Workers' Compensation Training

Workers' Compensation Rates and Cost Calculations Spreadsheet

National Academy of Social Insurance Research: Workers' Compensation Benefits, Costs, and Coverage