Business Owners’ Guide to Workers’ Compensation

What is workers’ compensation?

Workers’ compensation is a type of business insurance that provides benefits to employees who become injured or ill while doing their jobs. The insurance covers the employee’s medical costs, a portion of their lost wages while they’re out of work and their rehabilitation costs so they can return to work or find a new job.

Workers’ compensation insurance also protects the employer by limiting its liability for legal claims in the event an employee sues the business over an illness or injury caused by work-related incidents.

What does workers’ compensation cover?

Workers’ compensation covers the following expenses.

• Wages lost when an employee needs time off from work to recover from their illness or injury
• Medical expenses incurred by the employee to treat their illness or injury
• Vocational rehabilitation and ongoing care costs for the employee if they require care to help them return to work
• Death benefits, such as funeral expenses, if the employee passes away due to a work-related incident or illness

Some insurance policies don’t provide workers’ compensation coverage across multiple states or when employees travel to different states. Under these circumstances, you would need workers’ compensation insurance in each state where your employees work or travel. 

Workers’ compensation is a no-fault system. When an employee receives workers’ compensation for their injury or illness, they give up the right to sue their employer. However, workers’ compensation will not cover your business if you purposefully harm an employee, such as committing assault, battery, fraud, defamation or emotional distress or protect your business if your employee sues you for the following acts:

• Gross negligence
• Wrongful termination
• Malicious intent
• Discrimination
• Failure to promote or provide bonuses

Is there a cap on workers’ compensation?

As with any commercial liability insurance policy, workers’ compensation has a limit or cap on the amount a policy will pay out for a claim. However, workers’ compensation limits are structured differently than other types of insurance policies. These policies place limits on employer liability and employee benefits:

• Employer liability: If an employee claims employer negligence, the employee can sue for damages and workers’ compensation benefits. Workers’ compensation would cover the employer’s legal fees and pay any amount awarded by the court to the employee. The policy limits how much the insurance company will pay depending on the amount the employer chooses when purchasing the insurance.
• Employee benefits: Workers’ compensation would cover the employee’s lost wages, medical expenses and rehabilitation expenses or death benefits to their dependents. There is no limit on the employee’s medical bills, but the state can impose limits on how much is paid in lost wages.

State governments determine which types of employers must carry workers’ compensation insurance as well as the fines for not being covered, guidelines for reporting work-related injuries and medical care requirements. [Related article: How Much Workers’ Comp Insurance Do You Need?]

What injuries qualify for workers’ compensation?

Workers’ compensation covers medical costs or death benefits that result from employee injuries that occurred while the employee was doing their job or acting on your behalf. Examples include injuries or illnesses related to the following:

• Lifting or moving of boxes
• Operation of heavy equipment
• Repetitive motion
• Deliveries
• Falls or slips on a wet or icy floor
• Exposure to hazardous chemicals
• Burns from chemicals or hot materials
• Violent or terrorist acts
• Fires, floods and natural disasters

Different states exclude certain situations from workers’ compensation coverage. Here are some examples of employee actions that would not qualify for workers’ compensation:

• Employee injures themselves intentionally.
• Employee gets injured in a fight with another employee.
• Employee becomes injured due to drug or alcohol intoxication.
• Employee gets injured or dies on the commute to work but not in the course of doing their job.
• Employee experiences emotional injury without an accompanying physical injury.

How much does workers’ compensation insurance cost?

State laws determine the details involving workers’ compensation, including how much it costs. In all applicable states, employers pay for workers’ compensation insurance largely based on a percentage of their total payroll costs. On average, it works out to $1 per $100 of payroll. There are no employee payroll deductions for workers’ compensation insurance.

Below are some other factors besides payroll that affect the cost of workers’ compensation insurance:

• Amount of benefits provided by the insurance
• Types of injuries or illnesses covered by the insurance
• Types of benefits and employee care provided
• Claims history
• Risk level of different employees and industries
• Workers’ compensation class codes

Reducing workers’ compensation insurance costs

Here are some ways employers can reduce their workers’ compensation insurance costs:

• Evaluate and improve the safety of the work environment by checking equipment safety, repairing or replacing defective equipment, providing employees with safety gear and stocking offices with ergonomic equipment.
• Train employees on workplace safety, providing tips on best practices and offering incentives for accident-free work.
• Help injured employees return to their roles more quickly.
• Create an employee wellness program to promote healthy living and fitness.

Do employers have to carry workers’ compensation insurance?

Most businesses with one or more employees require some form of workers’ compensation insurance, except those in Texas, where workers’ compensation is optional. Whether your specific business and employees require this insurance will depend on the type of business and the status of your employees.

The following types of employees are likely to be exempt from a workers’ compensation insurance requirement.

• Family members who are employees
• Part-time employees
• Volunteers
• Government employees
• Commissioned employees
• Independent contractors
• Domestic workers in private homes
• Some types of real estate agents and insurance professionals
• Farm workers
• Maritime workers
• Railroad employees

How to get workers’ compensation insurance

Businesses can purchase workers’ compensation insurance from state-funded programs or private insurance companies. Each state determines its workers’ compensation policy requirements. When you purchase a policy, you’ll need to provide the following information so the insurer can determine your coverage and costs.

• Total number of employees
• Number of employees requiring coverage
• Type of work each employee performs
• Total payroll

Each state has its own rules on what’s covered, how it evaluates different issues, how injured employees receive medical care and which benefits an employee can receive.

How to file a workers’ compensation claim

When an employee becomes injured or ill on the job, the first task is not to file a workers’ compensation claim — it’s to make sure the employee receives proper medical treatment. This may include calling an ambulance to take the injured or ill employee to the hospital.

Following that, the employer and employee have a limited amount of time — usually between 10 and 90 days — to submit the paperwork that’s required for the employee to receive workers’ compensation benefits. The process for filing varies from state to state. However, if the claim isn’t filed within the required time, coverage can be denied.

Employer responsibilities

When an employee is injured or falls ill due to work, the employer must do the following:

• Provide the employee with the required paperwork to report the workers’ compensation claim.
• Provide directions on how to file for workers’ compensation.
• File the insurance claim with the insurance company.
• Report the employee’s injuries or illness as required by state law.

The employer must also provide the employee with information on their rights and workers’ compensation benefits, as well as the procedure for returning to work.

Employee responsibilities

After the illness or injury occurs, the employee must take the following steps:

• Inform the employer in writing of the details relating to the injury or illness, such as date, time, type of injury or illness or how it occurred
• File the formal workers’ compensation paperwork for a claim. In some cases, the employer is responsible for filing the paperwork with their workers’ compensation insurance carrier. However, the employee’s healthcare practitioner must also submit a medical report.

Information to include in a claim

A workers’ compensation claim should include the following information:

• Company information, such as company name, account number and location and policy number)
• Injured employee’s personal information, such as name, date of birth, age, address, phone number and Social Security number
• Details of the work-related incident, such as date, type of injury or illness, cause of injury or illness, estimated number of workdays lost, expected return date and witnesses’ information

How long do workers’ compensation claims take?

The time required to complete a workers’ compensation claim depends on state requirements, the time needed to investigate the claim and other factors. Once the employer files the claim, the insurance provider must determine whether to approve or reject the claim.

If the insurance provider approves the claim, the company will provide the affected employee with payment details. The insurer can deny the claim if it doesn’t qualify for workers’ compensation benefits:

• If the insurance provider approves the claim, the employee can opt to accept the offer to pay their lost wages, medical bills and medicine and disability payments or negotiate a lump-sum settlement or structured settlement. [See how workers’ compensation settlements work.]
• If the insurance provider denies the claim, the employee can opt to appeal the decision or ask the insurer to review their decision.

Note that you may want to talk to a tax advisor about how a workers’ comp claim can affect taxes. 

Kimberlee Leonard contributed to this article.