Understanding Workers’ Compensation

ouch 1434056Last year, workplace injuries affected thousands of employees and cost U.S. companies more than $110 billion. Chances are, your firm will eventually have to deal with a workplace injury — which means that you will also have to deal with a workers’ compensation claim.

Think of workers’ comp as a legal compromise: In return for compensating employees who require medical treatment or who miss work due to a workplace injury, employers avoid potentially costly lawsuits. Workers’ compensation also protects employees who might not be able to support themselves or their families because of a work-related injury.

1. Who Qualifies for Benefits?

Workers’ compensation laws rely on a "no fault" rule that provides benefits regardless of who is responsible for a workplace injury. There are exceptions, however, for employees who hurt themselves due to reckless behavior or drug or alcohol abuse. In addition, employees who cause self-inflicted injuries or injure themselves while off-duty or while engaged in a criminal act usually do not qualify for benefits.

There are also a wide variety of state laws regarding what types of employees qualify for workers’ comp benefits. Some states exclude contractors and consultants, volunteer workers, farm workers, domestic servants, and certain other groups. States also enforce different rules about whether part-time employees qualify for benefits.

2. Insurance Issues

Every state except Texas requires employers to purchase workers’ comp insurance, which covers an injured empoyee's medical expenses and lost wages. There are different state rules regarding how much coverage a firm must buy, what percentage of an injured employee's wages a firm must pay if they are unable to work, and how long a firm must cover an injured employee. Some (but not all) policies include liability insurance that protects employers against lawsuits related to a workplace death or injury.

Insurance sales methods also vary from state to state. A few states require employers to purchase insurance through a single state agency, while others allow private insurers to offer workers’ comp policies. In addition, many states operate insurance pools for firms that can't afford standard coverage — such as those with poor safety records or a long history of workers’ comp claims. Some states allow certain types of firms to self-insure if they have the financial resources to cover potential claims.

3. Your Responsibilities as an Employer

If one of your employees is injured, you must immediately file a workers’ compensation claim with your insurance carrier, which will then notify the appropriate state agency. Although it varies by state, a state agency typically reviews cases to determine whether a claim is valid and what benefits the injured worker should receive. State governments, along with private insurers, also investigate possible insurance fraud and keep detailed statistics on workplace injuries and compensation claims.

first aid kit 14166954. What Happens When You Don´t Have Enough Workers´ Compensation Insurance?

Because workers´ compensation is heavily regulated on the state level, the workers´ compensation system ensures that businesses carry enough insurance to cover the costs of work-related injury. So unlike most types of business and personal insurance, it´s very difficult to find yourself underinsured.

Workers´ compensation insurance is directly related to the size of your work force and is calculated by your payroll. As long as your total payroll amount is correct and you are insured with a reputable carrier, it is very difficult — and theoretically impossible — to be underinsured for workers´ compensation. Each state performs mandatory audits to ensure that companies are carrying the appropriate level of workers´ compensation coverage.

5. What You Need to Know About Workers’ Compensation Insurance?

Workers' compensation benefits provide coverage for medical expenses as well as reimbursement for lost wages when employees are injured on the job. Workers' compensation coverage includes two types of protection: workers' compensation and employer's liability. The workers' compensation portion of the policy pays for claims made by employees, and the employer's liability portion pays the cost of defending lawsuits filed against the company by an employee or an employee's family. 

Workers´ compensation insurance may not be at the top of your list of things to think about, but it should at least be on that list for three reasons:

  1. Workers' compensation insurance is required by law in all 50 states.
  2. Workers' compensation insurance can protect your business from lawsuits. Without the right coverage, an injured worker might sue your business to recover medical costs, disability costs and damages.
  3. If you understand how the system works, you can take advantage of simple ways to reduce workers' compensation costs.
    Getting Covered

Each state enacts its own workers' compensation statutes, so you need to check with your state insurance commissioner's office or your insurance agent to find out about rules that govern your business.

Depending upon where you live, you can buy coverage through a state-run fund or a private insurer; some states offer a choice of either. If your state doesn't offer a state-run insurance fund and you can't qualify for private insurance, you will be insured by an assigned-risk pool.

Cutting Workers' Compensation Costs

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Workers' compensation premiums depend upon the nature of your business, the jobs your employees perform and the number of hours they work. Each job type is assigned a classification code. Riskier work is classified as such and assigned a higher premium. Thus, you might pay 48 cents in premiums for every $100 in payroll that goes to a clerk in a retail store. By contrast, a truck driver's premiums might set you back $9 per $100 of payroll. But there are ways to control your costs. Try these strategies:

  • Review your classifications to make sure you're using the proper codes. Ask to review your case with your state workers? compensation rating bureau. If you aren't satisfied with the result, request an onsite inspection and rating.
  • Consider a deductible. More than half of states allow small companies to cut premiums by paying a deductible on workers? comp claims. Paying deductibles, which typically range from $100 to $1,000 per claim, can reduce your premiums by as much as 25 percent.
  • Check your payroll. Most states don't require you to include overtime in the payroll numbers used to compute your premiums. If your state is one of them, make sure you don't figure in overtime.

Stay out of the Pool

If you're in an assigned-risk pool due to a poor safety record or unusually high risk, you’ll pay high premiums for relatively poor service. Find out why you're in the pool. If the problem is your firm's safety record, you should take steps to improve safety and reduce the chance of accidents in your workplace. Enhancing workplace safety will improve your workers’ quality of life as well as your bottom line. Consider some of the following ideas:

  • Give each employee a workplace safety manual that details rules and safe work practices.
  • Conduct regular inspections of the facility to identify and correct hazards such as poor lighting, unsafe warehouse conditions and ergonomically incorrect work stations.
  • Communicate to employees the importance of safety in the workplace. Award and recognize safe operations.
  • Write safety procedures and distribute them to anyone who drives a vehicle for your business.
  • Keep detailed records of all accidents and set quantifiable goals for improvement.
  • Create return-to-work programs for injured employees and stay in close contact with employees who are out.
  • Use ergonomic products. The right chairs, keyboards, mats and tables can sharply reduce claims.

Provide protective equipment. Goggles, helmets, gloves and other safety gear make sense in many situations.

How Much Does Workers’ Compensation Cost?

The cost of workers´ compensation insurance is determined by the workers´ compensation board in your state. Although base ratesvary slightly from state to state, the basic process each state uses to calculate base rates is similar. 

Each type of occupation is assigned a risk classification. Risk is determined by two factors: the frequency of on-the-job injury and the severity of injury. Severity is measured by both medical payments and indemnity benefits (payments made directly to the injured employee to compensate for losses suffered as a result of an accident).

In California, for example, roofers have the highest occupational risk classification, and office clerks have the lowest. Obviously the occupational hazards of a roofer are much different and quite a bit higher than those of an office clerk. Therefore, workers´ compensation rates are much higher for roofing companies than for administrative companies.

To arrive at a base rate for workers´ compensation insurance, each classification is translated into a dollar amount, which is then multiplied by 1 percent per $100 of the total payroll for that employee. For example, the office clerk classification in California is roughly $1.25 per $100. So if that employee is paid $500 per week, the workers´ compensation insurance premium for that employee costs roughly $6.25 per week.

Workers´ compensation insurance carriers can reduce or increase base rates based on a number of factors. The most important factor is the employer´s safety history. Another important factor is whether or not the employer offers health insurance to their employees.