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What Is Workers’ Compensation?
Workers’ compensation, also known as “workers’ comp,” provides benefits to workers who become injured or ill on the job due to a work-related accident. Workers' comp covers medical costs, healthcare benefits, income for lost wages, educational retraining, and disability pay.
Workers’ compensation is a state government-mandated program, but the required benefits vary from state to state. Texas is the only state that does not require employers to maintain workers’ compensation insurance.
Key Takeaways
- Workers’ compensation is a form of employer insurance coverage that pays benefits to workers who have been injured or disabled due to a work-related accident, illness, or injury.
- Formerly known as "workman's comp," the compensation covers lost wages, medical costs, disability, rehabilitation, and job retraining.
- By accepting workers’ compensation benefits, the employee waives the right to sue their employer for damages.
- Workers’ comp differs from unemployment benefits and disability insurance.
Understanding Workers’ Compensation
Formerly known as "workman's comp," workers’ compensation provides benefits to those who have suffered due to work-related accidents, injuries, and illness. Workers' comp helps employees while out of work by providing several types of benefits that can include:
- Partial wage replacement
- Temporary and permanent disability
- Medical cost coverage and care reimbursement for healthcare services
- Rehabilitation and occupational therapy
- Displacement benefit that provides for educational retraining and skill enhancement
- Compensation to beneficiaries if the worker passes away due to their job
Private insurance companies pay for most workers’ compensation programs from premiums paid by individual employers. Each state has a Workers’ Compensation Board, a state agency that oversees the program and intervenes in disputes.
Federal workers’ compensation programs also exist, covering federal and energy employees, as well as longshore and harbor workers. Another federal program, the Black Lung Program, handles death and disability benefits for coal miners and their dependents.
Employers cannot require employees to pay for the cost of workers' compensation.
Workers’ Compensation Benefits
Requirements for workers’ compensation vary from state to state, and some states do not cover all employees. For example, some states exclude small businesses from the mandate for coverage, while others have different requirements for various industries. The National Federation of Independent Business (NFIB) maintains a summary of each state’s worker compensation requirements.
Lost Wages and Disability
Workers’ compensation pays for lost wages to an employee but at a reduced amount, meaning less than your total salary. Typically, programs pay about two-thirds of the worker's gross pay.
In many cases, the worker cannot return to work due to the injury, called temporary total disability, and gets compensated while recovering. The worker returns to the job following a period of rehabilitation or therapy. However, some workers get compensated for longer periods if they suffer some type of permanent disability, whether partial or full disability.
Workers’ compensation benefits are not usually taxable at the state or federal level, compensating for much of the lost income. However, you may pay taxes on your workers' compensation benefits if you also receive income from the Social Security Disability or Supplemental Security Income programs.
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 on medical leave. If an employee dies due to a work-related incident, the worker’s dependents receive the workers’ compensation payments.
Recipients Waive the Right to Sue
By agreeing to receive workers’ compensation, workers give up their right to sue their employer for negligence. This concession helps protect both the workers and employers. Workers give 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 injured on the job. It is not the same as disability insurance or unemployment benefits.
Special Considerations
An employer may dispute a workers’ compensation claim since disputes can arise over whether the employer is liable for an injury or illness. In that case, the Workers’ Compensation Board can help resolve disputes.
Insurance Fraud
Workers’ compensation payments are susceptible to insurance fraud. An employee may falsely report that their injury was sustained on the job, exaggerate the severity of an injury, or invent an injury.
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.
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.
Like the so-called gig economy, the issue of workers’ compensation and other benefits for contract workers isn’t going away since gig workers have increased from 2012 to 2021 by nearly 5 million and represent 3% of the workforce.
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., individual states handle workers’ compensation rules. The U.S. Department of Labor houses an Office of Workers’ Compensation Programs. Still, it is responsible only for covering federal employees, longshoremen and harbor workers, energy employees, and coal miners.
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.” It 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.
Workers’ Compensation: Coverage A vs. Coverage B
There are two types of workers’ compensation coverage: Coverage A and Coverage B.
Coverage A
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
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. 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.
Who Pays Workers’ Compensation Insurance Premiums?
The employer pays workers’ compensation insurance premiums. In other words, there is no payroll deduction like there is with Social Security benefits. The employer must pay workers’ compensation benefits as established by individual state laws.
How Much Does Workers’ Compensation Cost?
The cost of workers’ compensation insurance averages $45 per month but 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 insurance fees 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.
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 ensure 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 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.
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 determine if you’re covered by workers’ compensation insurance. For example, Florida’s Division of Workers’ Compensation has information on its program, links to forms, and a database to check whether your employer has coverage.
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