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How Does a Workers’ Comp Settlement Work?

Updated Jan 09, 2024

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Workplace injuries are a reality for your business because workers can be injured while performing numerous tasks. The United States Bureau of Labor Statistics reported 2.8 million nonfatal workplace injuries in 2022, including traumatic injuries from workplace machinery and repetitive-use injuries, such as carpal tunnel syndrome. 

Most states require that businesses carry workers’ compensation insurance, a type of business insurance. Workers’ comp covers the financial losses you would incur following an injury on the job. When there’s more severe or permanent harm, a settlement often will result in a lump sum or structured payment plan to the employee. 

Here’s a look at how workers’ comp settlements work and what you need to know.

What’s a workers’ comp settlement?

When an employer has workers’ compensation insurance, it notifies its insurer when an employee suffers an injury. Typically, the insurer coordinates payments for medical expenses, lost wages and rehabilitation costs. 

In the workers’ compensation claims process, the insurer may pay workers’ comp benefits directly or via a settlement. When an insurer pays benefits directly ― without a settlement ― the injured worker often receives money to cover the injury’s hard costs. For example, the insurance will pay existing medical bills but won’t necessarily cover future medical bills. 

However, the injured employee may choose not to accept the workers’ compensation benefits they’re offered. They may instead opt to hire an attorney to get a more significant workers’ comp settlement that considers their immediate and future financial and medical needs. 

A workers’ comp settlement considers the following: 

  • The injured employee’s future healthcare costs 
  • The money the employee needs to sustain household costs 
  • Attorney costs

Attorney costs drive up the settlement value and provide the worker with proper representation. It’s standard for an attorney to work on a contingency basis and be paid after a successful settlement.

Most settlements allow injured workers to choose a lump sum or a structured payment. Employees with substantial medical bills will likely opt for a lump sum. Those who must pay for medical care over a longer term may prefer a structured payment.

What expenses do workers’ comp settlements cover?

Workers’ comp will pay for the following types of expenses in a settlement:

  • Attorney fees
  • Disability payments
  • Medical bills
  • Ambulance rides
  • Surgery
  • Future medical treatments
  • Lost wages and future lost wage costs
TipBottom line

When determining how much workers’ comp coverage you need, learn your state’s requirements and consider your workers’ ages, the risks they face and your business’s financial risks.

What is the workers’ compensation settlement process?

Workers’ compensation is legislated and governed at the state level. Some states have stringent workers’ compensation rules, while others ― like Texas ― don’t require you to maintain a workers’ compensation policy. Consequently, your workers’ compensation settlement process and deadlines will likely differ depending on your state.

In general, most settlement process steps will be similar for employees and employers and include the following.

Employees’ workers’ compensation settlement process

These are the essential steps an employee will follow to receive a workers’ compensation settlement:

  1. Notify your company of an injury.
  2. Receive medical attention.
  3. File a workers’ compensation claim.
  4. Receive an approved or denied claim.
  5. Hire an attorney if your insurance company is unwilling to offer a settlement.
  6. Calculate the payout.
  7. Negotiate with your insurance carrier.
  8. Take the case to court if the parties cannot reach an agreement.
  9. Receive a judgment.
  10. Accept payout as a lump sum or structured settlement.
TipBottom line

Include a thorough, step-by-step workers’ compensation guide in your employee handbook and ensure your internal human resources (HR) department can help guide the process.

Employers’ workers’ compensation settlement process

Employers should take the following steps during the workers’ compensation settlement process:

  1. Respond to the injury report sent by your employee or their representative.
  2. File the worker’s compensation claim with your insurer.
  3. Respond to the insurer’s decision and participate in any necessary investigations.
  4. Offer a return-to-work program.
  5. Collaborate with your insurer on a settlement.
  6. Determine whether the payout will be a lump sum or a structured payment plan.
  7. If you can’t reach an agreement, hire a business attorney and prepare for a court case.

How is a workers’ comp payout calculated?

Calculating the payout is a significant part of the settlement process. An attorney and HR personnel will consider several factors when calculating a workers’ comp payout: 

  • Existing medical expenses and lost wages: Calculating a payout starts with determining the injured employee’s existing medical expenses and lost wages. These factors are easy to determine because your employee’s bills and income are readily available. 
  • Future medical expenses and lost wages: Calculations get more complicated when factoring in impending medical expenses and lost wages. Attorneys will often speak with doctors to understand necessary future procedures and treatments. For example, your employee might need surgery for a worsening condition or, if ill, may require additional treatment options.
  • Defined rates for specific losses: On top of wages and medical costs ― existing and future ― the attorney will use a defined rate for a specific loss. A specific loss includes the loss of a limb, loss of hearing or sight or paralysis. Every state has a schedule of loss of use to help determine the rate for a specific loss. For example, Michigan’s schedule notes that the loss of a thumb would equal 65 weeks of lost wages while the loss of a leg would be 215 weeks.
FYIDid you know

The best way to avoid workers’ compensation claims is to have robust workplace safety measures in place to prevent workplace accidents from happening in the first place.

How do workers’ comp claim hearings work?

Say your company is deemed at fault in a worker’s injury and the proposed workers’ comp settlement is considered insufficient. In this case, the injured party may hire a personal injury attorney and take their case before a judge in a workers’ comp hearing.

In a workers’ comp hearing, the judge will review case details, such as the circumstances behind the injury or illness. The judge will examine the injured party’s job history and listen to expert testimony about their injuries. The injured employee will likely include pain and suffering calculations in their payout proposal. 

After reviewing all the evidence, the judge will make a determination for all, some or none of what the plaintiff solicited. In most cases, the judgment is for a portion of the plaintiff’s request. The insurance carrier will pay the award as a lump sum or structured settlement, making regular payments to the winning party over time.

Did You Know?Did you know

Many of the best HR software platforms allow you to administer workers’ compensation payments along with medical insurance, employee retirement accounts, commuter benefits and more.

Workers' compensation settlement FAQs

Workers’ comp payments are based on various factors, including how severe an injury was, how much the injury will impact the employee’s work and the employee’s weekly wages. Payouts generally cover a portion of lost wages and the medical expenses incurred by treating the injury. States have specific guidelines on compensation, so an injured employee might be awarded less for a specific injury in one state than in another.

If a dispute occurs between an injured worker and their employer or insurer on a workers’ compensation claim, the worker can take the case to court. Overseen by an administrative law judge, both sides present evidence and arguments on the nature of the injury, the extent of the medical treatment required and the compensation offered. The judge makes the final decision. In most cases, if an employee accepts the original settlement, they can’t take it to court later.

Because most states require you to have workers’ compensation insurance (unless you qualify for a workers’ comp exemption), you won’t pay for the costs associated with an employee’s injury or illness. However, if you don’t have this insurance, you will be 100 percent liable for any injuries on the job.

Even if you have this insurance, you must participate in the workers’ compensation claim process in the following ways:

  • Your HR team must notify the insurance company of the injury to file a claim.
  • In some states, you must notify the state workers’ compensation board.
  • You will work with the insurance carrier to provide incident reports for the claim, a job description with detailed duties and proof of income to determine the average weekly wage the employee receives.
  • If a case goes to court, you are expected to participate in the process and provide details about the employee’s job and employment history.

Employers must have workers’ compensation insurance as a matter of law in most U.S. states. The insurance protects employers and employees from the costs and consequences associated with workplace injuries.

Coverage goes well beyond paying for medical expenses and lost wages. Insurance will also provide for investigation and legal defense throughout a claim. Legal fees can add up quickly and, if you have a robust workers’ compensation policy, you won’t have to worry about this added cost.

The price of workers’ compensation insurance averages 1.19 percent of payroll, so the cost is not particularly high, especially compared to other payroll costs. Depending on your state, the price of not having insurance can reach up to $100,000 in fines.

Mark Fairlie contributed to this article.

Kimberlee Leonard
Contributing Writer
Kimberlee has spent the past 20 years either directly involved in insurance and financial services or writing about it. She’s a former Series 7 and 65 license holder and former State Farm agency owner. As a small business insurance expert, her work can be found on Fit Small Business and Thimble.
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