Workers Compensation Insurance

What Employers Need to Know about Workers' Compensation Insurance
All states and the District of Columbia have workers' compensation laws designed to protect employed individuals who get sick, injured, or killed on the job. Employers pay the cost of workers' compensation by purchasing private insurance or state-sponsored insurance, or sometimes by self-insuring. Each state has its own workers' compensation system, so the rules vary. As a business owner, you should know the following facts about workers' compensation.

Workers' compensation is a mandatory state-based insurance program

Workers' compensation is a mandatory state-based social insurance program that provides workers with insurance protection against disability or death that occurs while at work. In most states, the workers' compensation laws are compulsory and require businesses to accept the laws' provisions and provide the specified benefits. In some states, coverage is elective, and employers can opt out of the state workers' compensation system in exchange for the loss of certain liability limitations. Some states exempt businesses with fewer than three or four employees from workers' compensation insurance requirements.

It provides employees with benefits in the event of a workplace injury

Workers' compensation protects workers from workplace injuries, repetitive stress injuries, and occupational diseases. It pays four types of benefits:

  • Medical benefits
  • Disability benefits
  • Survivor's benefits
  • Rehabilitation benefits

Employees who are injured or disabled on the job receive a fixed monetary award. In exchange, they give up the right to sue the business. If an employee dies as a result of a workplace injury, benefits are paid to the employee's family.

Your business is responsible for providing coverage

Businesses are, by law, 100 percent responsible for providing workers' compensation benefits. Your business can't charge a worker for benefits provided under workers' compensation or for any portion of the business's workers' compensation insurance premium.


Keep in mind that your business may be required by the laws of your state to post a notice in the workplace that provides the name of the workers' compensation insurance carrier.

The rules for coverage vary by state

Your state mandates how much coverage you must buy, which employee classifications must be covered, and what percentage of an employee's salary you'll pay if he or she misses work due to a work-related injury.


Failure to carry workers' compensation coverage, when required, may be punishable by fines, civil penalties, criminal penalties, exclusion from public contracts, and cease and desist orders. The rules and penalties vary by state.

All employees generally must be covered

Generally, all employees must be covered under state workers' compensation systems. However, each state excludes certain classifications of workers from among the following:

  • Business owners
  • Independent contractors
  • Casual workers
  • Domestic employees in private homes
  • Farm workers
  • Unpaid volunteers
  • Maritime workers
  • Railroad employees (benefits are received under a separate federal law)
  • Federal government employees (benefits are received under a separate federal law)

Most workplace injuries are covered on a no-fault basis

Most on-the-job injuries are covered by workers' compensation on a no-fault basis. That is, benefits are paid regardless of who is to blame for the accident or injury--the employer does not admit liability for the injury or illness, and the employee receives workers' compensation benefits without having to sue. There are exceptions, though. For example, coverage may be excluded for injuries suffered when an employee's conduct violates company policy.

Some accidents outside the workplace are covered

In most cases, your business is not liable for accidents occurring outside the workplace. However, there are situations when an employee is covered outside the workplace. Employees are covered if they are injured while:

  • Traveling on company business
  • Running a work-related errand
  • Attending a required business-related social event

Injured employees have the right to file for benefits

It is an injured worker's right to claim benefits under workers' compensation for a job-related illness or injury. When a worker is injured on the job, his or her claim is filed with the insurance company (or self-insuring employer). Medical and disability benefits are paid by the insurer according to a state-approved formula.


Your business can't interfere with, coerce, discriminate, fire, or force the resignation of an employee for filing a claim under workers' compensation. Your business can't tell an employee not to file a claim. If an employee can prove that a business in any way harassed or fired him or her for seeking benefits, the employee can file a civil lawsuit seeking substantial damages.


Mandatory state-based social insurance program

Workers' compensation is an insurance program that provides workers with insurance protection against disability or death that occurs during work. This could include a workplace injury or occupational disease. Employees who are injured or disabled on the job receive a fixed monetary award that generally eliminates the need for litigation. Many states allow qualified businesses to self-insure for part or all of the claims. Some states allow smaller companies to form groups to self-insure, that is, pool their risk and liabilities with other companies. Federal employees and interstate commerce workers are protected under federal workers' compensation statutes.


Each state has its own workers' compensation system, so it is important to work with an advisor who is experienced in the state(s) in which your business operates.

Two-pronged coverage protects both the worker and the company

Workers' compensation provides your employees with benefits for medical expenses, lost earnings, disability, and death under the statutory liability coverage. Under the employer liability coverage, your business and your employees are protected from liabilities such as lawsuits filed by an injured employee's relatives (e.g., loss of marital consortium) or from third parties (e.g., an equipment manufacturer being sued by the injured employee).


In most states, the workers' compensation laws require businesses to accept the laws' provisions and provide the specified benefits. However, in some states, employers can opt out of the state workers' compensation system, but in so doing, they lose the benefit of certain liability limitations.


If your business has workers who travel to several states, you may be interested in a third level of protection called "other states insurance," which will provide the business with coverage for requirements in another state (such as a higher benefit limit).

Who must be covered?

All employees generally must be covered under state workers' compensation systems. State workers' compensation acts generally classify workers as employees based on factors derived from the common law. Among the factors considered are whether the employer has the right to control the actions of the worker, and whether the work performed by the worker is part of the regular business of the employer. Independent contractors are not included in the definition of employee, and are not covered under workers' compensation statutes. In addition to independent contractors, most states exclude agricultural employees, domestic employees, and casual employees from the requirement. For more information on the different types of employees, please see the discussion on Worker Classification.


Your business may be required by the laws in your state to post a notice in the workplace that provides the name of the workers' compensation insurance carrier.

Failure to carry workers' compensation coverage may be punishable by fines, civil penalties, criminal penalties, exclusion from public contracts, and/or cease and desist orders. The laws vary by state.

State adopts funding arrangement

There are three funding arrangements available. The state funding arrangement determines the extent to which the state bears some or all of the risk of workers' compensation insurance. The following table shows the various funding arrangements and characteristics:


Funding Arrangement


States Adopting (subject to change)

Monopolistic Funds--state assumes all risk

State fund receives premiums and pays claims. Employers in states using this method must buy the state's workers' compensation insurance policy, though some states give employers the option of self-insuring.

North Dakota, Ohio, Washington, Wyoming

Competitive Funds--state assumes some risk

Insurance companies compete directly with the state funds. Employers have the choice of insuring with competing private insurers, participating in a state-managed insurance fund, or self-insuring.

Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maine, Maryland, Minnesota, Missouri, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Utah

Insurance Company Funds--state assumes no risk

Insurance companies insure employers against workers' compensation claims. State regulation remains; insurance pools exist to cover high-risk customers based on state guidelines

Remaining states

Monopolistic states (state assumes all risk)

In the monopolistic states, the state assumes the risk and pays claims from the state fund. Workers' compensation insurance is generally more stable in states with their own funding arrangements because employers need not worry about the possibility that their insurer will opt out of providing insurance in a given state in a given year. An insurer's decision not to offer insurance in a given state could result in a big headache for those companies with policies written by the withdrawing company.

Competitive fund states (state assumes some risk)

The competitive fund states may offer your business the best opportunity to shop around for coverage. You have the choice between the state fund or a private insurance carrier. While it may seem like more work to compare your choices, you could benefit in the long run.

Insurance company fund states (state assumes no risk)

The third funding arrangement occurs when the state assumes no risk for the workers' compensation insurance. In these states, the funding is handled through insurance companies.

Insurance company premiums based on three factors

Payroll costs

The size of your company's payroll is just one factor used by an insurance company to determine workers' compensation insurance premiums. Payroll costs are generally based on gross wages (straight-time only, not including any overtime premium for hourly workers). Some states cap the compensation amounts for executive management positions in the calculations.


Check the insurance company audit figures to verify that the payroll data don't include overtime premiums that will inflate the payroll amount.

Payroll classification rate

Employee payroll costs are divided into specified categories based on the type of work performed. For instance, clerical employees are grouped and assigned a rating, as are warehouse employees, machine operators, salespeople, etc. Each payroll classification is assigned a rate that is applied to the gross wages for the employee group. The various categories are added to derive a total amount.

Experience-rating modifier

The premium is adjusted by an experience-rating modifier based on your business's claims history. The experience-rating modifier is calculated by a rating bureau, generally once a year, and based on three years' claim experience and excluding the current and previous years. A modifier above 1.0 indicates higher than average claims experience, while a modifier below 1.0 indicates better than average claims experience. The experience-rating modifier serves as an incentive to promote workplace safety by lowering the premium for companies with fewer than average claims.

Ways your company can control workers' compensation premium costs

Don't wait until your premium notice arrives or a workplace incident occurs to assess your workers' compensation policy. There are certain measures you can take to control your company's workers' compensation costs. Some may seem to be time-consuming and a lot of work for you, the company, or your financial advisor, but could be worth it in the end when an employee is injured on the job or the premium payment comes due.

Prevention through education

The best way to prevent or reduce workplace injury and illness is through safety, health education, and training. Education and training in the areas of recognition, avoidance, and prevention of unsafe or unhealthy working conditions in the workplace can help reduce injury and illness and may even increase productivity. A workplace safety committee made up of members from management and labor can be instrumental in identifying and correcting workplace health and safety concerns.


Check with the appropriate labor department and rating bureau in your state. Many offer advice and help in preventing occupational illness, injury, or death in the workplace and may also assist with safety training programs. Many insurance companies now offer workplace safety training programs also. Check with your representative.

Check your company's experience modifier rating

You or your financial advisor may be able to check your company's experience modifier at least once a year. Obtain a copy of the worksheet from the rating bureau or the insurance carrier and check for errors (which unfortunately are not uncommon).

Review insurance company claims data

You or your advisor should review the insurance company's claims data and compare the number of claims to your own records. Also check the claims information for actual claims payments and the estimated future claims reserve.

Be involved in claims settlement

You may find it worthwhile to be involved in the claims settlement process. For example, your business may be able to participate in discussions of proposed claim settlements and review loss reports with the insurance company. This can be a sensitive area because the workers' compensation contract transfers responsibility for handling and settling claims to the insurance company, but check with your agent anyway. Many insurance companies respect and appreciate the attempts of businesses to control costs.

Review employee classification codes

Verify the employee classifications and headcount within each category being used for your policy, and read the classification descriptions carefully. Classifications being used may not accurately describe the work performed by your employees or groups. In addition, you may have certain employees who perform multiple functions across different categories, so you may be able to reclassify employees or groups of employees to other less expensive classification codes.

Monitor claims frequency

Watch the number of claims being filed, not just the amounts. The experience rating factor is based largely on the frequency of claims, so a lot of smaller claims could increase the experience rating even if the total dollar amount of the claims is relatively small. Check with your insurance company; some insurers allow businesses to self-insure for minor claims. While such an arrangement could affect cash flow in the short term, the long-term benefit of reduced future premiums could be achieved.

Check the risk of different business lines (if a multi-line operation)

Generally, the rate modifiers are based on the riskiest line of business. Corporations with subsidiaries may consider moving a high-risk subsidiary to another state (especially if it represents a small percentage of overall operations) or carving out the riskier business line. State law may not require the modifier of a minority interest subsidiary or venture to be applied to the consolidated operations. Your financial or legal advisor can help you here.


Not all employees are covered by workers' compensation

Some states have compulsory workers' compensation laws, while others have elective laws. In compulsory states, companies who employ only a few people (less than a set minimum) may not have to comply with the law, although all other employers do. In elective states, both employer and employee have the right to reject the law. However, if the employer rejects the law, the employer gives up any protection from liability offered under the law as well. Some states require that certain occupations (such as dangerous ones) be covered under workers' compensation, while other occupations are exempted. In addition, many states exclude farm workers and domestic employees from compulsory coverage.

Benefits are paid only for work-related illnesses or injuries

You can't receive workers' compensation benefits unless your illness or injury was work-related. An accidental injury is a compensable injury only if employment was the source of the injury, and the injury occurred during the course of employment. An illness is considered work-related only if it qualifies as an occupational disease. To qualify as occupational, the illness must result from employment and be caused by conditions specific to that employment or occupation. Two examples will illustrate how injuries or illnesses must be work-related:


Example 1: Jill was hurt when she fell down a wet flight of stairs at work while she was walking to a late-morning meeting. She was eligible to receive workers' compensation disability payments because her accident was work-related and happened during working hours at her place of employment. However, if Jill had fallen down a flight of wet stairs at home while she was running to catch a bus to work, her injury would not be compensable because it was only indirectly work-related and occurred away from work outside of working hours.

Example 2: Carol developed a severe skin rash after trying out a new permanent wave solution on a client at her beauty salon. She was eligible to receive workers' compensation disability insurance because her disease was classified as occupational since it was related to her work duties and was specific to her occupation. However, if she had come down with the flu after coming in contact with a client who had it, she wouldn't have been eligible for benefits. Even though she contracted the disease at work, it wasn't specific to her occupation; she (or anyone else) could have contracted it elsewhere.

What benefits does workers' compensation pay?

Disability benefits

If you are injured on the job, you may receive either permanent or temporary disability benefits from workers' compensation. In addition, your disability may be classified as either total or partial. How your benefit is paid, and in what amount, is determined by the law in your state, and depends as well on how severe and permanent your injury is. These benefits can be paid to you weekly, in a lump sum, or both. Permanent disability benefits are often paid in a lump sum according to a schedule determined by the state. Temporary benefits are usually paid weekly, and the amount of benefit you receive is based on your wages at the time you were injured. In most states, you will receive 66 2/3 percent of your wages, although this percentage may be higher for permanent total disabilities. However, your benefit is also subject to a weekly maximum that varies widely from state to state.


Frank broke his leg at work and began receiving temporary workers' compensation disability benefits. At the time he was hurt, he was making $600 per week, so at 66 2/3 percent of his wages, he received a disability benefit of $400, an amount less than his state's maximum weekly benefit of $444. However, had Frank lived in another state, he might have received less.

Medical benefits

Medical care is provided under all state workers' compensation laws. In most cases, the full cost of the injured worker's medical treatment will be paid. A few states, however, limit payments for medical care and restrict the length of time during which medical care can be supplied.

Survivor benefits

If you die as a result of a job-related injury or illness, your survivors may be entitled to receive survivor's benefits based on your wages (minimums and maximums do apply) and the number of surviving dependents. Your survivors may also receive money for burial expenses. Benefits are usually paid to the surviving spouse, as long as he or she does not remarry, and to the dependent children until they reach a certain age.

Rehabilitation benefits

Rehabilitation benefits are not included in each state's workers' compensation laws, but all states do provide rehabilitation under the Federal Vocational Rehabilitation Act. If you become disabled, you may receive physical, mental, or vocational rehabilitation; pay for expenses incurred during rehabilitation; and aids (such as a wheelchair) that you require. Some states, however, impose maximum limits on rehabilitation benefits.

Workers' compensation benefits may affect other benefit entitlements

Social Security disability benefits

If you receive Social Security disability benefits, any disability benefit you receive from workers' compensation may offset (reduce) your Social Security disability benefit. This applies if you are under normal retirement age.

Individual disability insurance policy benefits

Workers' compensation may reduce the amount of benefit you receive from an individual disability insurance policy in two ways. First, some insurance companies require that you make more than $25,000 to purchase a disability insurance policy, because in many states, workers' compensation may pay you up to this amount (or more) if you are injured or sickened on the job. Second, other companies will issue you disability policies, but they will ask you to purchase a social insurance offset rider that will reduce benefits paid to you if you become disabled and begin receiving some type of social insurance (such as workers' compensation or Social Security). If you purchase such a rider, you will pay less overall for disability insurance coverage than you would if you did not purchase the rider.


Liz purchased a private disability insurance policy that would pay her $1,200 a month (60 percent of her earnings) in the event she became disabled. Six months later, she was hurt at work and filed a workers' compensation claim as well as a disability insurance claim. However, because she had purchased a social insurance offset rider, she did not receive any benefit from her disability insurance policy because her workers' compensation benefit was higher (66 2/3 percent of her earnings).

Some policies also limit disability protection (through definition of disability clauses) to disabilities that occur away from work, assuming that workers' compensation will pay for work-related disabilities.

Tax considerations

Workers' compensation benefits are not taxable as long as they are paid under a workers' compensation act or statute. Any benefits paid to your survivors are also tax exempt. However, if you return to work and continue to receive payments, your workers' compensation benefits will then be taxable. If part of your workers' compensation benefit offsets (reduces) your Social Security benefits, that part is considered to be a Social Security benefit and may be taxable according to the rules governing Social Security.

Questions & Answers

How long do you have to work for an employer before you are covered by workers' compensation?

Assuming that your employer and your occupation fall under your state's workers' compensation laws, you are covered as soon as you begin working. Your employer must provide benefits to all employees regardless of how long they've worked for the company or how much they earn.

If you receive workers' compensation benefits and later suffer another disabling illness or injury, will you be able to receive workers' compensation benefits again?

Yes, as long as your injury is determined to be work-related. Workers' compensation is not a onetime benefit. In fact, most states maintain a Second Injury Fund to cover situations such as yours. Because a second injury sustained combined with a first injury often leads to permanent total disability, second injuries often cost the employer more. The Second Injury Fund is set up to protect employers from the increased costs of providing disability benefits to an employee who could be permanently disabled by a second injury.