What Is Workers’ Compensation Insurance?
Workers’ compensation insurance provides coverage to employees who suffer injuries or illnesses as a result of their employment. The United States government has its own workers’ comp program that covers federal employees. For everyone else, state law dictates the rules and regulations that govern workers’ comp requirements for your business.
While the guidelines can vary considerably by state, in general, workers’ compensation is a “no fault” form of insurance. This means that it doesn’t matter whether the employer was at fault for the employee’s injury or illness for it to be covered.
In addition, workers’ comp covers employees during all work-related activities. It doesn’t matter if an incident takes place on-site at your company’s physical location or not.
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What Does Workers’ Compensation Cover?
When an employee gets injured on the job, the employer’s responsibility extends well beyond the initial treatment. There are a few different things that are covered by a workers’ compensation insurance policy, including the following:
- Immediate Medical Treatment - When an employee becomes injured or sick at work, it is the employer’s responsibility to provide the worker with initial treatment. This includes things like hospital or clinic visits, ambulance rides, and associated costs.
- Lost Wages - Depending on the severity of the illness or injury, your employee may not be able to work for a while. Lost wages can be a tremendous burden in these situations, which makes it especially beneficial that workers’ comp covers these costs. (Note: Most workers’ compensation policies allow business owners to choose whether they receive fixed-dollar protection or a percentage of an employee’s lost wages.)
- Ongoing Care - In some extreme situations, an employee may become gravely injured in a way that forces them to pursue long-term care, such as surgery with a lengthy recovery time. Whether that employee returns to work with your company or not, your workers’ compensation policy should cover whatever care they require.
- Death Benefits - Unfortunately, there are occasions where an employee’s work-related injury or illness causes their premature death. In this situation, workers’ comp can cover the employee’s funeral costs and death benefits.
- Legal Fees - If you and an employee have a dispute regarding whether an injury or illness is work-related, your workers’ compensation policy may cover your legal expenses. (Note: This only applies to businesses that acquire workers’ comp insurance with employer’s liability coverage.)
What Are the Limits of Workers’ Comp?
There are some situations where workers’ compensation insurance does not apply. One of the most common situations is when an employee was intoxicated by alcohol or drugs at the time of the incident.
Self-inflicted injuries are also not covered, nor are those inflicted during a fight started by the employee or injuries or illnesses that occur outside the job.
Finally, if the injured employee suffered their ailment while violating company policy, workers’ compensation insurance will likely not cover it.
How Does Workers’ Compensation Insurance Vary by State?
Every state has its own set of rules and regulations regarding workers’ compensation, and there can be a great deal of variance in how each state interprets these benefits. In fact, the state of Texas doesn’t even require employers to have workers’ comp insurance.
Depending on where your company is located, there can be major differences in the level of benefits available for employees, what’s covered, and how injuries and illnesses are assessed and treated. It’s important to acquaint yourself with your state’s particular regulations regarding workers’ comp. If you operate in multiple states or plan to expand to more states, you’ll need to be familiar with the unique requirements in each location.
Aside from these general items, there are four main areas where states diverge when it comes to workers’ comp insurance. These differences concern how states handle businesses that fail to comply with coverage requirements.
- Number of employees: Some states base their workers’ comp violation fines on how large your company’s employee pool is. For example, a business with only a few employees will be subject to far smaller fines than a large corporation that employs many people.
- Criminal charges: There are a handful of states — including California, Illinois, Massachusetts, Michigan, and Pennsylvania — that have the option to pursue criminal charges against owners of noncompliant businesses.
- Intentional noncompliance: In some states, penalties can increase dramatically if a court determines that you intentionally violated workers’ compensation laws, or if you were purposefully inaccurate in describing how many employees you have or the nature of your business.
- Length of noncompliant term: Finally, there are some states that base penalties for employers without workers’ compensation insurance on how long the company has been in noncompliant status. The longer you operate your business without workers’ comp coverage, the more you’ll pay in fines.
How Much Does Workers’ Compensation Coverage Cost?
The cost for workers’ compensation insurance varies widely based on the state or states where you operate and the nature of your business.
When looking at workers’ compensation costs on a state-by-state basis, you can see that some states are far more expensive than others. For example, Alaska is the most expensive state, with premiums reaching $2.74 per $100 in payroll expenses. Texas, which does not require businesses to carry workers’ comp insurance, has the lowest premiums, with rates of just 75 cents per $100.
The industry you operate in also play a large role in determining the costs of your policy. For example, high-risk jobs in fields like natural resources and construction have similarly high workers’ compensation premiums, costing the average business owner in excess of $1 per employee hour.
On the other hand, in industries with little risk, like sales and other office work, the cost can be less than 25 cents per employee hour.
How Can You Lower Your Workers’ Comp Costs?
Fortunately, there are a few ways entrepreneurs can lower their company’s workers’ compensation premiums. While you can’t change the nature of your business, there are some options available to business owners looking to decrease their financial commitment to workers’ comp.
- Reduce risk: Even if your company doesn’t have the cash to hire a separate risk manager, tasking someone with keeping a vigilant eye on mitigating risk can save you money on workers’ comp. Some methods of reducing business risk include making sure your employees are familiar with accident prevention methods, setting up a “safety committee,” and posting all injury and illness rules and regulations where employees can easily access the information.
- Use merit credits (where available): These are not available everywhere, but in states that do allow them, they can provide a big benefit for small businesses. You can acquire these credits by remaining claim-free for a certain period of time, or by participating in safety seminars, drug-free employer programs, or other risk mitigating activities.
Other tips for trimming down your workers’ compensation commitments include making sure you avoid assigned risk insurance pools for companies with adverse track records. You may also consider raising your deductibles and taking full advantage of coordinated disability plans, if available.
Workers’ compensation insurance can be a surprisingly detailed and nuanced issue for many businesses. The lack of consistency from state to state can make it difficult to navigate the requirements, costs, and coverages, especially for businesses operating in multiple states.
Workers’ comp is a vital piece of the puzzle when it comes to the insurance needs of most businesses, and it’s sometimes every business owner should take the time to understand. If you take care in the way you set it up, it’s possible to acquire workers’ compensation insurance that provides the protection you need without breaking the bank.