Understanding Workers’ Compensation

From: Staffing

Understanding Workers’ Compensation


Workers’ compensation is an employer-financed, no-fault insurance program that compensates employees who have been disabled because of a work-related injury or accident. Every state has enacted some form of workers’ compensation law to protect employees against loss of income and burdensome medical payments resulting from a work-related injury, illness, or disease. Compliance with these state laws may increase in complexity if a case requires coordination with other state laws, or even federal laws. Examples of protected leaves requiring coordination may include the Family and Medical Leave Act (FMLA), or the Americans with Disabilities Act (ADA).

Employers Affected

Most states have made workers’ compensation coverage mandatory, although in Texas it is voluntary. Moreover, most states require employers with at least one employee to carry workers’ compensation coverage; however, some states exempt small employers — although there is not total agreement about what constitutes a small employer. Some states exempt employers with fewer than five employees, some with fewer than four, some with fewer than three. Exempt employers may participate in the state workers’ compensation program if they wish. Employers are cautioned to check with their attorneys before setting up a workers’ compensation program.

Employees Affected

State workers’ compensation laws do not provide coverage to every type of employee. Business owners, independent contractors, real estate salespersons working solely on commission, professional athletes, domestic employees in private homes, farm workers, maritime workers, railroad employees, unpaid volunteers, operators of leased taxicabs, and some others are frequently excluded. Employers should be careful to monitor the status of such persons, especially independent contractors, to make sure they are properly classifying personnel to maintain adequate coverage.

Workers’ Compensation Coverage

Employer-Financed Aspect

Workers’ compensation coverage is employer financed, meaning that workers cannot be required to pay for any of the workers’ compensation premium. Employers also cannot require employees to sign statements that they will not seek workers’ compensation benefits if they are injured or become ill on the job. Any such agreements are invalid and unenforceable. Most states will mandate how much coverage an employer must purchase and what percentage of an employee’s salary the employer must pay if the employee is hurt or becomes ill during the course of employment.

Purchasing Coverage

Most employers purchase an insurance policy to obtain protection from paying workers’ compensation benefits. They may pay one lump sum annually or make regular payments throughout the year to obtain this coverage either from an insurance company or through a voluntary association of insurance companies formed to handle high-risk companies. In most states, workers’ compensation coverage is purchased from a workers’ compensation insurance company. However, North Dakota, Ohio, Washington, West Virginia, and Wyoming require employers to exclusively buy the coverage through a state-operated fund.

In many states, large insurance companies handle most workers’ compensation coverage. Employers who purchase their workers’ compensation coverage from a commercial insurance company should be careful to select a commercial insurance agent capable of representing the company in dealings with the insurer. Even with careful selection of the agent, however, the employer should maintain involvement in the decision of which workers’ compensation coverage to purchase since this decision can ultimately affect the employer’s liability. Ideally, the workers’ compensation agent should be familiar with the employer’s specific industry and thus be able to determine the most appropriate insurer. The agent must also know what discounts are available and how to negotiate the best discounts from the insurer. Employers with a multistate workforce should make certain the agent they select can write out-of-state policies.

Companies in high-risk categories — companies with a poor safety record and above-average number of complaints — may be required to purchase their workers’ compensation insurance through state insurance pools, similar to high-risk health or automobile insurance pools. Generally, state insurance pool coverage is more expensive coverage through a commercial insurance company.

Providing Self Insurance

Self-insuring companies pay many workers’ compensation premiums. Self-insuring companies incur the actual costs of paying benefits to injured employees, rather than paying an up-front fee to an insurer for the insurer to take over the risk of providing benefits to injured employees. Except for North Dakota and Wyoming, self-insurance by the individual employer is a viable alternative in all states for companies of a certain size. Smaller companies — which are not allowed to self-insure in many states — have the option of joining a pool of other small employers, usually as part of a trade association, to form a unit large enough to provide self-insurance under state requirements.

Views of the viability of self-insuring differ. Since the employer pays all costs for employee benefits and for administering the insurance program, a major accident or a large number of claims could result in serious financial problems. However, employers can purchase excess insurance, which provides insurance for claims over a specified amount. Companies that insure themselves have more control over their own workers’ compensation program in such things as being able to determine when an injury qualifies for workers’ compensation. Self-insurance may be considerably less expensive than insurance purchased from a commercial insurer. Additionally, self-insurance may be particularly beneficial for trucking, manufacturing, construction, and similar industries where premiums per employee are usually very high.

No-Fault Aspect

There is no liability in workers’ compensation. Benefits are paid regardless of who is to blame for the injury or job-related illness — with certain restrictions. When benefits are paid the employer is not admitting liability for the injury or illness, and the employee is paid without resorting to a lawsuit.

For purposes of workers’ compensation payment, injury is any harmful change in the body as a result of work activities. This could be a direct trauma or a gradual wearing down of a body part through repetitive movement or minor traumas.

Work-related illness can be caused by exposure to toxic substances, to unhealthful working conditions, or by the elements. Whether the injury or illness was the result of the employee’s own negligence is of no consequence, liability hinges on the mere fact that the injury or illness was work-related.

Covered Injuries and Illnesses

The legal language concerning workers’ compensation is that the injury or illness must arise out of and be in the course and scope of employment.

By law, the injury or illness must occur within both of the following:

  • During the time and at the place of employment, as applicable.
  • Out of an activity that is an inherent part of the employment and directly or indirectly furthers the employer’s interests.

Injuries occurring while employees are at lunch in a company-sponsored cafeteria may be covered and injuries sustained by telecommuting employees in the course of their duties are also covered. Injuries sustained by an employee while merely entering an employer’s premises would be covered, as would injuries sustained by an employee while changing clothes or washing up before or after work in an employer’s locker room or similar facility.

Occupational diseases — that is, any ailment or disease caused by the nature or circumstances of the employment — are covered if they are presumed to arise out of the employment or if the nature of the employment is such that a hazard of contracting a disease is inherent in the employment.

The following are injuries and job-related illnesses that are not covered under workers’ compensation:

  • Accidents resulting from an employee’s willful misconduct.
  • Injuries occurring while traveling to or from work unless the employee was on an errand for the employer, with the following exceptions:
    • Employees who are required to travel in the performance of their work (such as salespeople) are covered while traveling.
    • Injuries that occur in the company parking lot or while using company-provided transportation are also covered by workers’ compensation.
  • Injuries resulting from the influence of drugs or alcohol.
  • Injuries or illnesses resulting from a violation of known safety rules.
  • Injuries resulting from voluntary participation or attendance, for example, voluntarily attending an athletic event during work time. However, injuries sustained during required recreational or social activities or during acknowledged or permitted physical activities on company premises may be covered.
  • Injuries occurring at parties, picnics, and similar functions.
  • Intentional self-injury. In some circumstances, intentional injuries by third parties may not be covered, for example, an estranged spouse that went to the employment site of a wife or husband to hurt that person. While the employee was injured at work, the reasons for the injury were personal to the employee. On the other hand, if a store clerk were injured by the actions of a thief, there likely would be coverage because the work of the employee resulted in the injury.
  • Psychological injuries arising out of any personnel action (including demotion or termination) are not considered personal injuries and are thus not covered — unless the personnel action was intended to inflict emotional harm. If it can be proved that the predominant contributing cause of the mental or emotional disability was an event or events occurring as part of the employment, the disability may be covered. In some states, purely psychological injuries are not covered, unless they are tied to a physical ailment.

Note: Employees who unjustifiably refuse to accept recommended medical treatment may be denied compensation or have their compensation suspended.

Coverage Provided

Workers’ compensation insurance packages tend to be standardized.

Basic coverage provides for all necessary medical treatment including, but not limited to, the following:

  • Diagnostic procedures.
  • Medical supplies and equipment.
  • Rehabilitation costs.
  • Replacement of lost wages, usually up to two-thirds of the employee’s salary, for personal injuries caused by accidents arising out of and in the course of employment.

If an employee’s disability is classified as permanent, additional benefits are provided, as are death benefits if the accident results in death.

Most policies also provide liability insurance in case a worker’s family sues for damages resulting from a workers’ compensation claim. Benefits are sometimes available for retraining the employee. Coverage is usually provided for certain occupational diseases as specified in the state laws.

Injured workers are typically referred to a doctor or health plan of the employer’s choosing. Employees who indicate they do not like the doctor provided by the employer or the insurance company may have the right to see another doctor. If the injury is serious, the employee usually has the right to a second opinion.

In some states, after an injured employee has been treated by the insurance company’s doctor for a certain period, usually 90 days, the employee may have the right to transfer treatment to the employee’s own doctor or health plan, with the cost paid for by the workers’ compensation insurance company.

Note: All employers have an obligation under the Occupational Safety and Health Act’s (OSH Act) General Duty Clause, § 5(a)(1) to keep their workplaces free from recognized serious hazards, including ergonomic hazards. This requirement exists whether or not there are voluntary guidelines. The Occupational Safety and Health Administration (OSHA) will cite employers for ergonomic hazards under the General Duty Clause or issue ergonomic hazard letters as part of its overall enforcement program. OSHA encourages employers to implement effective programs or other measures to reduce ergonomic hazards and associated musculoskeletal disorders. Employers should contact OSHA or another industry and labor organization for information regarding how to establish an effective ergonomics program.

Advantages and Disadvantages of Workers’ Compensation

The workers’ compensation system is designed to protect both employers and employees. Some of the advantages for employers who participate in the system are as follows:

  • Employer liabilities under the workers’ compensation system are limited. In exchange for the benefits guaranteed by the workers’ compensation laws, employees lose the right to sue employers for covered injuries. However, employees still may be able to sue if the injury was caused by someone other than the employer, such as an independent contractor or a defective product. In addition, some states permit an employer to be sued by a wrongdoer for contribution if an employer’s negligence contributed to an employee’s injury, although the recovery may be limited.
  • The laws specify the types of benefits employers must pay employees.
  • Planning for liability coverage is easier because costs are predictable.

Some disadvantages for employers who participate in the system are as follows:

  • Employers with frequent accident records may incur high premiums.
  • Filing requirements may increase administrative burdens.
  • False workers’ compensation claims are time consuming.
  • An employee may be permitted to file a lawsuit against the employer (outside the realm of workers’ compensation) depending on the employer’s conduct, for example, if an employer intentionally injured an employee.

Americans with Disabilities Act Claims

The exclusive-remedy provisions in workers’ compensation that protect employers from liability in case of occupational illness or accidents do not bar employees from pursuing Americans with Disabilities Act (ADA) claims. Applying the exclusivity provision to a state workers’ compensation law with the intent of barring an individual’s ADA claim would violate the Supremacy Clause of the U.S. Constitution and seriously diminish the civil rights protection Congress granted to persons with disabilities. However, in some states, the workers’ compensation exclusive remedy provision may bar disability discrimination claims under state antidiscrimination law. In addition, the statements made by a claimant or claimant’s physician regarding an inability to work may be used against the claimant in an ADA lawsuit where the claimant maintains to be qualified and able to perform all essential job functions notwithstanding conflicting assertions made during workers’ compensation proceedings.

Benefit Claim Procedures

Employees’ Responsibilities

When a worker is injured or contracts a work-related illness, the worker must first report the event to the employer.

Most states require the employee to report the work-related sickness or injury as follows:

  • Within two to 20 days after occurrence.
  • As soon as the injury or illness is discovered in situations where the illness or injury occurs over time (as with breathing problems or carpal tunnel syndrome).

After reporting the illness, employees should seek necessary medical treatment. Then, while using employer provided forms, the worker must file a claim with the employer’s insurance company or with the self-insuring employer.

The required written report of the accident should contain all of the following information:

  • Employee’s name and address.
  • Time, place, nature, and cause of the injury.
  • Signature of the employee or a representative.

Employees also have certain rights under some state laws, including the right to a workers’ compensation lawyer if medical claims are rejected. Some states require an employer to formally post these rights.

Employers’ Responsibilities

Employers are responsible for obtaining the best type of workers’ compensation coverage available. Additionally, upon receipt of an employee-provided notice of a work-related accident or illness, an employer must:

  • Regard Every Accident Report as a Serious Incident. If an employer suspects that an illness or injury report is false, the employer must continue to consider the report to be a serious incident. Importantly, employers may be sued upon the failure to properly respond to a legitimate report.
  • Respond to the Employee’s Needs. Employers should ensure that the ill or injured employee receives all necessary medical help. If necessary, an employer should accompany the injured employee to the medical provider.
  • Provide Information on Available Insurance. Employers must inform the injured or ill employee that insurance is available to provide coverage for the situation.
  • Document the Incident. Within 24 hours of the incident, employers must provide written details documenting exactly what happened.
  • File an Accident Report. Employers are ultimately responsible for filing the accident report with the insurance company providing workers’ compensation coverage. The employer must follow up with the employee to ensure the report is filed within the time limit. Whenever possible, the report should be completed in the employee’s own handwriting and should include the statement, “This is a true, correct, and complete statement,” above the employee’s signature. The supervisor should also sign and date the completed form. If an employee will not cooperate with the employer’s procedures for filing the accident report, the lack of cooperation should be noted on the report: “Employee was requested to complete and sign this report as a true and complete statement of this alleged incident, but refused to do so on this date.” Accident reports must contain the following:
    • The accident date and time.
    • The specific place of accident.
    • Details of how the accident happened.
    • Job activity, machines, and products involved.
    • Precise description of the injury.
    • The names of any witnesses.
    • The supervisor’s name.
    • The date and time incident was reported and to whom (such as name and title).

Note: Reports should be careful not to state as a “fact” any information that is not actually known to be valid.

For example, if no one witnessed the asserted accident, the report should document, “Employee states . . . but there were no witnesses.” If the employee claims to be injured or ill without providing any medical documentation of that fact, the nature of the injury should be stated as “unknown — employee asserts to having . . . but no medical documentation of that diagnosis was received.” Alternatively, the employer might assert, “employee reports pain.” If the employer fails to take these steps, the employer may be held liable for issues that would not be considered valid, factual issues but for the employer’s concede.

  • Designate an Employee Contact Person. A specific individual must be designated to communicate with the injured or ill employee and this individual should be identified on the report. An employee contact person should be able to explain the benefits available to the employee and should follow up with the employee’s medical provider to monitor the employee’s status.
  • Investigate the Accident. Employers must investigate the accident or illness to determine how it happened and to ensure there is no recurrence. An efficient investigation would include, but not be limited to, the gathering of material evidence, taking pictures, and talking to witnesses. Employers must determine whether the accident was work related and gather all possible information to convince an insurer that the incident was indeed work related. Employers are also responsible for gathering any information relevant to a possible claim that a negligent third party or piece of defective equipment contributed to the accident.
  • Monitor the Accuracy of Claims Reporting to the National Council on Compensation Insurance.Employers should ensure that they monitor claims reporting. Inaccurate claims affect an employer’s premium. Employers should also monitor any insurers’ audits of company payroll to ensure that workers are properly classified, thus further controlling premium costs.