How workers' compensation insurance works (2023)

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Workers' compensation insurance pays vital benefits to employees when they are injured or sick on the job. Workers' compensation benefits include medical treatment and ongoing care, payments to cover lost wages, and even death benefits.

In most states, businesses are required to purchaseworkers compensation insurancefor their employees, possibly even if they only have one employee.

What is workers' compensation?

Workers' compensation provides wages and medical expenses to people who are injured on the job. Employers pay for workers' coverage. Employees do not contribute to the fund.

Workers' compensation is paid if the employer or insurance company confirms that the injury or illness was work-related. If the insurance company or employer denies the workers' compensation claim, a workers' compensation judge decides the case.

In addition to paying for injuries and rehabilitation, workers' compensation can compensate a family after a work-related death.

Quick facts about workers' compensation

  • Workers' compensation programs were established by state law or within state constitutions beginning in 1911
  • Today, each of the 50 states and the District of Columbia has its own workers' compensation program.
  • With the exception of Texas and Wyoming, workers' compensation insurance coverage is required in all states.
  • Farmworkers, domestic workers, and independent contractors are generally excluded from the workers' compensation insurance requirement.
  • Total paid worker benefits were $62.9 billion in 2018, according to a November 2020 National Academy of Social Security survey.

What does workers' compensation insurance cover?

Let's take a closer look at the benefits covered by workers' compensation insurance.

medical expensesincluding hospital visits, medications, and emergency operations, all are covered by workers' compensation.

  • lost wagesis partially covered when the employee needs to take time off work to recover from a work-related illness or injury.
  • disability benefitsit is available if the injury resulted in partial or permanent disability.
  • continuing carecosts, such as physical therapy, are covered by workers' compensation.
  • death benefitsgenerally includes funeral costs and bereavement benefits for the worker's family.

Workers' compensation is paid regardless of fault, and workers' compensation laws typically prevent employees fromsue your employers for a work injuryor disease

Related: The best commercial insurance companies

Does workers' compensation cover Covid-19?

Depending on your status and your occupation, you may be eligible for workers' compensation for Covid-19 if you were exposed to the virus at your workplace. According to the National Conference of State Legislatures:

  • Seventeen states and Puerto Rico have taken steps to expand workers' compensation coverage to include Covid-19 as a work-related illness.
  • Several states have enacted Covid-19 workers' compensation legislation for certain types of workers. Minnesota, Utah, and Wisconsin limit coverage to first responders and healthcare workers. Illinois, New Jersey, and Vermont cover all essential workers. California and Wyoming cover all workers.
  • California and Kentucky have taken executive action to offer coverage to other essential workers, such as grocery store employees.

What Doesn't Worker's Compensation Insurance Cover?

Employees are covered by workers' compensation regardless of how many hours they work.

However, there are exceptions that may result in the denial of a claim for workers, including:

  • Commuter:Travel to and from work is generally excluded from workers' compensation coverage. A person may be covered if they are in a company car or do not have a physical office, such as a street vendor.
  • Poisoning or drug abuse:Many states exclude workers' compensation if the injured party was intoxicated and contributed to the injury.
  • Fight in the workplace:If an injury occurs during a fight with a colleague, workers' compensation may not cover the injuries. An exception is if the fight was about work.

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Where to buy workers' compensation insurance

Should You Buy Workers' Compensation Insurance For Your Employees? You have different options depending on your state: you can buy workers' compensation from private insurance companies or you can buy it from a state agency, or you can have both.

Private workers' compensation insurance companies set their own rates and approve or deny clients. You can get a better price from a private insurance company than from a state treasury.

If you can't buy the workers' compensation coverage you want from a private insurance company, you can look at a government-funded program.

In a state-funded competitive labor market program, private insurers and state-funded programs compete for clients.

(Video) Workers Compensation - Know THIS BEFORE buying Workers Compensation Insurance!!

In monolithic state-sponsored workers' compensation programs, businesses have no choice but to obtain workers' compensation from a state-sponsored program. Ohio, North Dakota, Washington, and Wyoming are examples of states with monolithic state-funded workers' compensation programs.


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How Much Does Workers' Compensation Cost?

Workers' compensation premiums are based on employees' job classifications, and these classifications reflect the risk of the job. For example, a construction worker or an electrician would be considered high risk jobs. Other high-risk jobs include police officers, firefighters, loggers, and telecommunications repairmen.

The company's paycheck and any prior workers' compensation claims also affect workers' compensation premiums.

Workers pay insurance costsan average of $1 for every $100 in wages, according to The Hartford. This average varies considerably from state to state.

"If there's confusion about workers' compensation, it's usually about how the premium is determined in part by the number of employees on the payroll," says Andrew Dalton, associate vice president of small business workers' compensation industry at The Hartford. "Each year, state law generally requires each insurance company to work to conduct an audit of the premium paid."

"It's important to note that this audit is required, and it's important to make sure the business owner is accountable to their employees throughout the year," Dalton says.

The audit looks at the company's last year's payroll and determines whether the premiums were overcharged, undercharged, or exactly right. It also determines what the next year's premium will be. This audit may result in the business owner receiving a refund or credit or owing more in their workers' premium.

How to File a Workers' Compensation Claim

The first step in filing a workers' compensation claim is for the employee to inform the employer of their work-related illness or injury.

The employer must then notify the insurance provider and the state board of workers' compensation, if necessary.

(Video) Workers Compensation Insurance Explained

In addition, the employer must report serious occupational injuries to the Occupational Safety and Health Administration.

Workers' compensation claims can be disputed if an employer does not believe the injury or illness was caused by work. And the employee may have to appear before a workers' compensation board to argue in favor of receiving workers' compensation benefits.

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Risk Control for Workers' Compensation Claims

By working to control your company's exposure to workers' compensation claims, you can keep track of future premiums.

"There are many things that can help a business owner control the risk associated with employee injuries," says Dalton. "He doesn't want to leave these things to chance, and he wants to make sure that he has security protocols and procedures in place and that his company has taken steps to reduce the kinds of things that can cause harm."

Training employees on workplace safety is a key approach to minimizing workplace injuries and accidents. Many states offer discounts on workers' compensation insurance if the company implements a workplace safety program. This security program may include:

  • Written security standards and policies
  • safety inspections
  • Preventive Maintenance
  • safety training
  • First aid

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"The best way to make sure you have the right insurance for your business, including workers' compensation, is to speak with a licensed independent agent," says Dalton at The Hartford. "They work every day to understand what's right for every type of business out there. Business owners have a lot to keep track of, and insurance is one of those things you need to consult an expert about."

Frequently Asked Questions About Workers' Compensation Insurance

Who pays workers' compensation?

Employers pay for workers' compensation insurance through a government program or through a private insurance company. Employees do not contribute to this coverage.

Workers' compensation pays for missing wages, medical treatment, disability leave, and rehabilitation.

How long does workers' compensation last?

States may limit the duration of workers' compensation payments. Those limits can be between three and seven years, depending on the state, according to The Hartford.

However, some states stop workers' compensation when an employee turns 65.

Are workers' compensation benefits taxable?

Workers' compensation payments and benefits are not taxable.

That said, if the injured party receives pension, Social Security Disability Insurance or Supplemental Security Income benefits, the person may have to pay taxes on a portion of the benefits, according to The Hartford.

(Video) Your Guide to the Basics of Workers’ Compensation & Claims


Which of the following situations would not be covered by workers compensation? ›

Intentional acts: When a worker intentionally causes their workplace injuries or illnesses, they are not covered under a workers' comp insurance policy. Illegal activities: Employee injuries due to illegal activities at the worksite are not covered by an organization's workers' compensation insurance policy.

How does workers compensation and employers liability work? ›

Both policies cover workplace injury, only the different aspects of it. Workers compensation covers the costs related to the injury without alleging any liability on the employer's side. Employer's liability insurance covers expenses if the employer gets sued for punitive damages.

What is the most common method used by employers to obtain workers compensation coverage? ›

Usually, businesses obtain workers' compensation protection from one of four sources: private insurance carriers, like EMPLOYERS®, state insurance funds, self-insurance, or self-insured groups.

What is the primary objective of workers compensation? ›

The primary objective of the unit is to return the injured or ill employee(s) to gainful employment as quickly as possible.

Which situation qualifies a workers compensation coverage? ›

You must be an employee. Your employer must carry workers' comp insurance. You must have a work-related injury or illness. You must meet your state's deadlines for reporting the injury and filing a workers' comp claim.

Under what situations an employer is not liable to pay compensation to the employee? ›

the injury is self-inflicted; the death or incapacity results from the injury (including all occupational diseases which are specified in the ECO) that the employee has falsely claimed to be free of to the employer; or.

How do employers determine compensation? ›

Compensation entails more than just salary or what you earn per hour. Although employers may vary regarding how compensation is determined, they generally consider the external market, a candidate's experience and skillset, how much talent is competing for the role, and an internal formula.

Is Workers Compensation an expense or liability? ›

Workers compensation insurance payable is a liability account that contains the unpaid amount of insurance premiums owed by an employer to its workers compensation insurance provider.

What is liability for employee benefits? ›

Employee Benefits Liability insurance provides coverage to an employer for errors or omissions in the employer's administration of its employee benefit program. For example, if a new employee requests to receive medical insurance through the employer and the employer failed to add the new employee to the plan.

What is the best way to compensate employees? ›

Make sure you pay staff enough to motivate them and reward them for their contribution, and do so in a way that is appropriate for their job. That can include base pay and other forms of compensation, such as commissions, bonuses, and stock options.

What three benefits are commonly provided by a company as compensation given to employees? ›

10 Most Commonly Offered Employee Benefits
  • Health Insurance Benefits. This one is a no-brainer. ...
  • Life Insurance. ...
  • Dental Insurance. ...
  • Retirement Accounts. ...
  • Flexible Spending Accounts (FSAs) or Health Savings Accounts (HSAs) ...
  • Paid Vacation and Sick Time. ...
  • Paid Holidays. ...
  • Paid Medical Leave.
Feb 17, 2017

What are 4 common compensation methods? ›

The four primary direct forms of compensation are salary, hourly, commission and bonuses. Beyond direct compensation, there is indirect compensation, such as benefits and equity-based programs, which is just as important a part of your plan.

What are the three methods used for funding workers compensation? ›


There are three basic methods available for employers to obtain the required workers' compensation protection: state insurance funds, private insurance, and self-insurance through insurance pools.

What are the most common objectives for a compensation program? ›

There are four basic objectives of compensation: focusing your employees efforts, attracting quality employees, retaining top performers, and motivating your employees.

Which of the following is true about workers compensation insurance? ›

Which of the following is true of workers' compensation? Workers' compensation is only awarded for injuries resulting from the job.

Which scenario is an example of workers compensation? ›

If you get hurt on the job, your employer is required by law to pay for workers' compensation benefits. You could get hurt by: One event at work. Examples: hurting your back in a fall, getting burned by a chemical that splashes on your skin, getting hurt in a car accident while making deliveries.

What would be an example of an employees compensation and benefits? ›

Employee benefits are any form of indirect compensation paid to employees over and above regular salaries or wages. This can include health insurance, retirement benefits, and paid time off, for example.

Which of the following is true of the cost to the employer for workers compensation? ›

Which of the following is true of the cost to the employer for workers' compensation? The compensation mostly covers minor injuries such as sprains and strains than dramatic injuries.

Which of the following would not be covered under employers liability insurance? ›

However, employers' liability insurance does not cover legal costs from employee lawsuits charging discrimination, sexual harassment, or wrongful termination. To cover these situations, an employer would need to purchase a separate type of policy called employment practices liability insurance (EPLI).

Is the employer liable for everything the employee does during the working day? ›

Under a legal doctrine sometimes referred to as "respondeat superior" (Latin for "Let the superior answer"), an employer is legally responsible for the actions of its employees. However, this rule applies only if the employee is acting within the course and scope of employment.

Can an employer sue an employee for a mistake? ›

There is no law in California that prevents an employer from suing an employee. However, the employer must have an extremely compelling reason to sue in order to succeed – and that does not usually include poor performance or unintentional carelessness.

Who decides your compensation? ›

In most cases, it is the employer that is going to be creating the salaries for all employees that they are hiring. Employers have the freedom to decide what kind of salary they want to offer depending on the position, the person, and their financial position.

What is employee compensation based on? ›

Employee compensation refers to the monetary value an employee receives in exchange for their work for your company. It includes the amount of money on the employee's paycheck (or base salary), mandatory employee benefits paid through taxes, bonuses and performance incentives, and other perks.

What should compensation be based on? ›

At most companies, compensation is based on performance. If an employee shows that they're worth their salary and more, they get a raise (and a bonus, depending on the job and company).

Is compensation part of payroll? ›

Payroll typically involves payments of regular salary and wages, commissions and bonuses. Compensation is broader than pay as it includes all of the benefits and perks that companies provide to employees on top of income.

Do employees count as liabilities? ›

So basically, from a CFO's perspective all the employees are liabilities.

Is paying an employee an asset or liabilities? ›

By accounting rules, the cost of workers is treated as an expense on the income statement. In fact, personnel expense is one of the highest costs a company incurs.

How do you calculate employee liability? ›

To determine each employee's FICA tax liability, multiply their gross wages by 7.65%, as seen below. These are the amounts you withhold from employee wages and send to the IRS. Now, onto calculating payroll taxes for employers. You need to match each employee's FICA tax liability.

What are examples of employee liabilities? ›

Employee Liability means all claims, including claims for redundancy payments, unlawful deduction of wages, unfair, wrongful or constructive dismissal compensation and any demands, actions, proceedings and any award, compensation, damages, fine, loss, order, penalty and costs and expenses reasonably incurred in ...

What is considered a liability at work? ›

Generally, if an employee caused harm while performing work duties or acting on the employer's behalf, the employer will be found liable for its employee's acts.

What are the 3 types of compensation? ›

The total compensation offered to an employee may be broken down into direct, indirect and intangible compensation.

What type of compensation is best? ›

What are the Best Forms of Compensation for Your Employees?
  1. Base pay package. Base pay package refers to the standard compensation an employee receives for working a previously set number of hours. ...
  2. Equity package. ...
  3. Bonuses. ...
  4. Commission. ...
  5. Benefits and Perks. ...
  6. Non-Financial Compensation.
Oct 31, 2022

How do you keep compensation fair? ›

Developing a Fair Compensation Plan
  1. Create an Outline. ...
  2. Manage Compensation Effectively. ...
  3. Develop a Market-Based Approach. ...
  4. Establish Pay Ranges. ...
  5. Implement & Communicate Across the Workplace.
Sep 30, 2022

What are the most important employee benefits? ›

Most Desirable Benefits According to Employees

If you want your benefits package to remain competitive, you'll want to offer health insurance, some disability and life insurance, and probably a retirement plan, such as a 401(k).

What is a good benefit package? ›

While this can differ depending on who you ask, the standard in most industries consists of health insurance, dental insurance, flexible spending accounts, retirement savings plans, vacation time, and additional paid time off for events like family medical leave, maternity leave, and sabbaticals.

What is a compensation strategy? ›

A compensation strategy is how your organization approaches pay and benefits. This includes setting salary ranges, determining how raises and bonuses are calculated, and identifying which benefits you want to offer to your staff.

What is an example of a compensation strategy? ›

Common compensation strategies include: Overtime pay. Variable salary based on experience or longevity. Employee health care.

Which are the three primary ways in which employees are paid? ›

There are three primary ways that businesses compensate their employees:
  • Hourly wages.
  • Fixed annual salary.
  • Commission.

What strategy could help contain workers compensation costs? ›

The best way to reduce the cost of your workers' comp claims is to prevent accidents from happening in the first place. Introducing workplace safety training can have a big impact on the number of incidents that occur on your premises, so it's well worth investing in regular staff safety training.

How do you answer what are your compensation objectives? ›

Best approach to answer "what are your compensation expectations?”
  1. Research the position (and location) ...
  2. Know what you need to get. ...
  3. Give them a range. ...
  4. Emphasize your flexibility. ...
  5. But ask a bit high… ...
  6. Be honest. ...
  7. Understand why you deserve it. ...
  8. Be ready to negotiate.
Apr 7, 2023

What are the factors affecting compensation? ›

Demand and Supply of Labour– It is one of the most important factors that affect the compensation of employees. If the demand is more than the supply, the compensation will be higher. Industry Standards– No employee would like to join a company whose compensation is below the industry standards.

What is the pay structure? ›

Pay structures, also called salary structures, are organized levels, or grades, of employee salaries divided by job type. Pay structures typically incorporate salary ranges for each pay grade, meaning each pay grade is bracketed by a minimum and maximum salary amount.

Which best describes workers compensation insurance? ›

Workers' compensation insurance is a type of business insurance that provides benefits to employees who suffer work-related injuries or illnesses. Specifically, this insurance helps pay for medical care, wages from lost work time and more.

Which of the following are benefits paid under workers compensation? ›

California workers' compensation benefits include: medical treatment for your work-related injury. wage loss or temporary disability benefits. permanent loss of function or permanent disability benefits.

Which of the following situations would not be covered by workers compensation quizlet? ›

B - Pain and suffering are not covered under Workers' Compensation.

What injuries are not covered by workers compensation in California? ›

Injuries from repetitious mental trauma. Injuries suffered during participation in an off-duty recreational activity. Injuries suffered when an employee's conduct violates company policy. Injuries suffered while a worker was committing a serious crime.

Which of the following is not a type of claim that will be covered by employers liability insurance? ›

However, employers' liability insurance does not cover legal costs from employee lawsuits charging discrimination, sexual harassment, or wrongful termination. To cover these situations, an employer would need to purchase a separate type of policy called employment practices liability insurance (EPLI).

Which of the following is not a component of compensation? ›

Not a component of compensation of employee is contribution to social security schemes.

Which of the following injuries would be compensable under Workers Compensation insurance? ›

Examples of Compensable Injuries

Slip and fall injuries. Cumulative trauma or repetitive stress injuries, like carpal tunnel or arthritis. Temporary or permanent disability. Occupational disease.

Which of the following is not part of an employee's total compensation? ›

35) Total compensation only includes salary and incentives; not benefits.

Which of the following is included under Workers Compensation insurance in most state? ›

There are five basic types of workers' compensation benefits that include medical care, temporary disability benefits, permanent disability benefits, supplemental job displacement benefits, and death benefits. Injured workers may be entitled to one or more of these benefits.

What is coverage for those who Cannot work due to an injury? ›

What is Disability Insurance? Disability Insurance is part of the State Disability Insurance (SDI) program. It provides partial wage replacement benefits to eligible California workers who are unable to work due to a non-work-related illness, injury, or pregnancy. DI benefits are paid for a short period of time only.

Can an injury be recordable but not compensable? ›

Some cases may be OSHA recordable, but not compensable.

Can you get pain and suffering from workers comp in California? ›

Workers' compensation benefits do not include damages for pain and suffering or punitive damages.

What are examples of employee benefits liability claims? ›

With that in mind, here's a list of some of the benefits covered by Employee Benefits Liability insurance.
  • Dental insurance.
  • Disability insurance.
  • Health insurance.
  • Unemployment insurance.
  • Life insurance and other voluntary benefits.
  • Maternity leave.
  • Retirement plan benefits.
  • Social Security benefits.

Which of the following is included under workers compensation? ›

It provides medical care, death, disability, and rehabilitation benefits for workers who are injured or killed while on the job.

What should be included in compensation? ›

What should be included in a total compensation statement?
  • Salary/hourly rate.
  • Medical benefits coverage—include amount paid by employee and employer.
  • Flexible spending account information.
  • Paid leave—include vacation/sick/PTO, holiday, personal, bereavement, military pay, jury duty, etc.
  • Disability insurance.

What is included in total compensation? ›

Total compensation consists of base salary, bonus pay, employee benefits, perks, commissions, lifestyle spending accounts, and tips.

What components make up an employee's total compensation? ›

It includes the employee's base salary (how much you pay the employee as either the hourly rate or their annual salary), the total dollar amount of the fringe benefits you offer (health insurance, paid time off, retirement plan, profit sharing, gym membership, etc.), bonuses and/or commissions.


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