Each state has its own workers’ compensation system that is designed to provide replacement income and medical expenses for employees who suffer work-related injuries or illnesses. Benefits may also extend to the survivors of workers who are killed on the job. To pay for this, employers in all but two states—New Jersey and Texas, where workers’ compensation is optional—are required to pay for workers’ compensation insurance for their employees, either though a state fund or a private insurance company. Employees do not pay for workers’ compensation insurance.
Before the first workers’ compensation laws were adopted about 80 years ago, an employee injured on the job had only one recourse: sue the employer in court for negligence—a difficult, time-consuming and expensive process. The workers’ compensation laws changed this by establishing a no-fault system. Although employees can’t sue in court, they are entitled to receive compensation without having to prove that the employer caused the injury. In exchange for paying for workers’ compensation insurance, employers are spared from having to defend lawsuits by injured employees and paying out damages.
An employee who is injured on the job can file a workers’ compensation claim and collect benefits from your workers’ compensation insurer, but cannot sue you in court except in rare cases where you intended to cause the injury—for example, where you beat up an employee. Workers’ compensation benefits are set by state law and are usually modest. Employees can obtain reimbursement for medical and rehabilitation expenses and lost income, but can’t collect benefits for pain and suffering or mental anguish caused by an injury.
EXAMPLE: Sam, a construction worker for the Acme Building Company, accidentally severs a muscle in his arm while using a power saw on an Acme construction site. Since Sam is an Acme employee, he is covered by Acme’s workers’ compensation insurance policy.
Sam may file a workers’ compensation claim and receive benefits from Acme’s workers’ compensation insurer. Under the law of Sam’s state, Sam is entitled to receive a maximum of $2,520 to make up for lost income plus medical and rehabilitation expenses. All of this is paid by Acme’s workers’ compensation insurer, not by Acme itself. This is all Sam is entitled to collect. He cannot sue Acme in court for damages arising from his injuries.
Your workers’ compensation premiums will likely go up if many employees file workers’ compensation claims, but the premiums will almost certainly be cheaper than defending employee lawsuits.
1. ICs Are Excluded
You generally need not provide workers’ compensation for a worker who qualifies as an IC under your state workers’ compensation law. This can result in substantial savings. However, unlike employees who are covered by workers’ compensation, ICs can sue you for work-related injuries.
2. Cost of Coverage
The cost of workers’ compensation varies from state to state and depends upon a number of factors including:
- the size of the employer’s payroll
- the nature of the industry involved, and
- how many claims have been filed in the past by the employer’s employees.
As you might expect, it costs far more to insure employees in hazardous occupations such as construction than it does to provide coverage for those in relatively safe jobs such as clerical work. It might cost $200 to $300 a year to insure a clerical worker and perhaps ten times as much to insure a roofer or lumberjack.
Depending on the state in which you live, you can obtain workers’ compensation insurance from a state fund, a private insurer or both.