What Is Workers’ Compensation and How Does It Work?

What Is Workers’ Compensation?

Workers' compensation coverage covers an employee who is injured or suffers an illness while performing job duties. Regulations vary from state to state, but it's recommended that employers with one or more employees carry the insurance to mitigate risk.

About 56 percent of business owners say managing workers' compensation and risk management is their number one HR challenge.¹ Due to its confusing nature, business owners may struggle to understand exactly what workers’ compensation insurance is. Workers' compensation, also often called workers' comp, is insurance that provides employees with certain benefits if they suffer a work-related injury or illness. These benefits include medical expenses, lost wages, and rehabilitation costs. In the event of an employee work-related death, workers' compensation also pays death benefits to the employee's family members. Workers' compensation insurance is mandatory in most states, although rules vary from state to state regarding how many people a business can employ before it is required.

Almost every state in the union requires employers to carry workers' comp coverage. Some states require workers' compensation insurance as soon as the first employee is hired while other states do not require it until an employer reaches a certain number of employees.

Not having workers' compensation insurance where it's mandated can be a criminal offense, and the penalties can be severe. Fines can reach thousands of dollars per day for non-compliance and any loss of revenue due to business closure until coverage is in place. In case of an accident, the penalties can be even higher, as the employer may be responsible for all medical bills, lost wages, and potential litigation.

However, the laws are not only there to protect the employee; they can often help eliminate the liability of an employer from an employee lawsuit related to a workplace injury or illness.

Depending on state requirements, some companies might be exempt from obtaining workers' compensation insurance. For example, Texas does not require most private employers to carry workers’ compensation insurance and is only required for certain industries.

What Does Workers' Compensation Insurance Cover?

Workers' comp coverage helps employees pay for qualified workplace injury or illness expenses. Depending on state laws, these may include:

• Medical services: Covers medical-related expenses needed to treat an injured or sick employee.
• Rehabilitation services: Covers the cost of care needed to get an employee back to work, such as physical or occupational therapy.
• Lost income: If an employee requires time off to recover, workers' comp will cover a portion of the missed wages.
• Vocational training: Covers training that will help a worker develop the skills and education needed to return to work within restrictions, set by a physician, related to the employee's injury or illness.
• Death benefits: A specified amount is paid to the employee's survivors in the event of a work-related death.

Each state determines the amount and duration of workers' compensation benefits and how those benefits are administered.

What Does Workers' Comp Not Cover?

As important as it is to understand what workers’ compensation covers, it's equally valuable to know what it doesn't cover. An injury at work or on the clock does not always equate to being eligible for workers' compensation benefits. There are several situations where a worker can get injured at work, but the accident may not be considered work-related.

If a worker is injured while violating company policy, they may not be eligible for workers' comp. This can include being intoxicated or under the influence of illegal drugs while on the clock. Recreational injuries suffered outside the scope of work, such as falling and breaking a leg while skiing on the weekend, will not be considered work-related injuries. Similarly, a worker who is injured or killed while commuting to and from work is typically not eligible for workers' compensation.

How Does Workers' Compensation Work?

The question, "How does workers' compensation work?" can vary from state to state, though general steps must be taken to make a claim. The injury or illness must be reported to the employer as soon as possible. The employer will contact their insurance carrier to file the claim. The insurance carrier will make all necessary payments once the claim is approved, and a claims adjuster will be assigned to help facilitate the process. All medical-related costs covered are subject to the policy, type of employment, and state laws.

What Qualifies a Worker to Be Eligible for Workers' Compensation Benefits?

For an employee to be eligible to receive workers' comp benefits, the following will need to apply:

• A worker must be an employee of the business. Most business owners such as sole proprietors, and partners may not be eligible unless required by the state or voluntarily choose to be covered by the policy. Consultants, freelancers, independent contractors, and other gig workers may not be entitled to workers' compensation benefits depending on the work performed and if they are covered under their own policy. Employers who misclassify employees as independent contractors to avoid paying workers compensation premiums can also face stiff financial penalties, which vary from state to state.
• The employer must carry workers' comp insurance. Without insurance coverage, there is no workers' comp policy in place to respond to the work-related illness, injury, or death claim. In this situation, an injured worker may have the right to take legal action against the employer. Because of the peace of mind workers' compensation often gives an employer, many businesses will purchase workers' compensation insurance even if they aren't required to do so in their state.
• The injury or illness must be work-related. If an employee's accident, injury, or illness happens in the service of the business, it should be covered by workers' compensation. However, there may be situations when an incident can occur at work, but workers' compensation can be denied, such as when an employee violates company policy.
• The employee must adhere to state or federal deadlines for reporting the incident and filing a claim. Because workers' comp varies from state to state, deadlines for filing a claim will also differ. Federal employees must follow federal guidelines on workers' comp timelines. Even if an employee meets all other criteria, missing the filing deadline could mean they cannot collect workers' comp benefits.

Preventative Measures and Safety Training Programs

Preventative measures and safety training programs are vital to help reduce workplace injuries and workers' compensation costs. In addition, certain employers are required by law to have safety programs in place. By focusing on prevention, businesses can help safeguard their employees and minimize the financial and operational impacts of workplace accidents. Here’s a guide to get you started setting up effective safety programs:

Importance of Preventative Measures

Preventative measures, such as hazard assessments, proper equipment training and usage, and ongoing safety checks, help reduce the likelihood of accidents. When companies invest in safety protocols, they tend to experience fewer claims, lower premiums, and enhanced employee well-being.

Key Steps To Help Set Up a Safety Training Program

1. Identify Workplace Hazards: Start by conducting a thorough assessment of potential risks in your work environment. Identify both physical dangers (e.g., hazardous materials, fall risks) and ergonomic risks (e.g., repetitive stress injuries).
2. Develop a Safety Policy: Create a comprehensive safety policy that outlines procedures for avoiding accidents, handling hazardous materials, using equipment safely, and reporting injuries. This policy should be regularly reviewed and updated to follow safety regulations.
3. Select Training Providers: Partner with professional safety training providers specializing in your industry. Organizations like OSHA and the National Safety Council (NSC) offer industry-specific resources, certifications, and training sessions that educate employees on the best safety practices and requirements.
4. Implement Regular Safety Drills and Audits: Regular drills, inspections, and audits help ensure that safety policies are followed and that employees remain aware of protocols. Document all training sessions, certifications, and audits to stay compliant with regulatory bodies.
5. Leverage Technology for Safety: Consider using technology, such as wearable devices or safety apps, to monitor worker behavior in real time. These tools can alert employees and managers when unsafe conditions or behaviors are detected.

Resources and Training Providers

• OSHA and state plans: The Occupational Safety and Health Administration along with individual OSHA state plans provide extensive training materials, online courses, and in-person workshops focused on workplace safety. They also provide guidance on the regulations employers must follow for workplace safety.
• National Safety Council (NSC): The NSC offers certifications, resources, and customized safety training programs tailored to various industries.
• Paychex PEO Services: Through Paychex Professional Employer Organization (PEO), businesses can have access to safety training programs, safety audits, and receive assistance understanding compliance with legal requirements. These services help employers create safer workplaces.

By implementing a safety training program, businesses can foster a culture of safety, help reduce the frequency of workplace accidents and maintain compliance with certain workplace safety regulations. Investing in these programs helps protect employees and can have a measurable financial impact on workers' compensation costs.

Emerging Trends for Workers’ Compensation

Workers’ compensation policies are evolving as new technologies and workplace dynamics emerge. These trends can help improve safety, reduce costs, and enhance employee care. Here are some key trends shaping the future of workers' compensation:

• Wearable Technology: Devices like smart helmets and vests monitor employee movements by providing real-time safety alerts to prevent injuries.
• Telemedicine: Virtual healthcare services allow injured employees to access treatment quickly. Telemedicine offers convenience and faster claims management, helping both employers and employees.
• Remote Work Impact: Remote workers injured while working away from employer-owned property may be covered under a workers' comp policy if the injury was sustained during employment. Employers can implement ergonomic assessments and mental health resources to help prevent claims and support remote employees' well-being.

These emerging trends—wearable technology, telemedicine, and remote work policies—are shaping the future of workers’ compensation. Employers who adopt these innovations can help enhance safety and care for their employees and manage risks more effectively, which could lead to potential cost savings and improved employee satisfaction.

Can Workers' Compensation Be Purchased as Part of a Package Policy?

While many forms of business insurance may be sold as part of a package, state laws require workers' compensation to be bought as a separate policy.

What Are the Difficulties of Managing Workers’ Compensation?

Workers' compensation insurance can involve large payments that could potentially cause cash flow problems for your business.

That's because payments are often based on an estimate of wages paid to employees based on risk (e.g., it's more expensive to cover electricians than clerical workers). Because premiums are based on estimated payroll, not actual wages, insurers may require a significant upfront payment. And if the estimate is low at the end of the year, you'll have to pay the difference in one lump sum.

However, a licensed insurance agency can provide competitive quotes, possibly secure discounts when bought with other types of insurance with the same carrier, and help you manage your plan more efficiently. Furthermore, integrating your workers' compensation policy with payroll services can provide increased benefits such as no upfront deposits, billing based on actual payroll instead of estimates, and minimizing the risk of paying additional year-end premiums.

Who Pays for Workers' Compensation?

The employer pays workers' compensation premiums. The cost of the premiums will vary depending on several factors including the employer's industry, job classifications, total payroll, and claims history as well as other applicable adjustments. The state where the coverage is issued also plays a role in determining total cost.

Calculating Workers' Compensation Premiums

Workers' compensation premiums are calculated based on employee classification rates and total payroll. Additional factors could affect the rate, such as the company's claims experience and industry type. Also, depending on the state, potential discounts may be available, as well as the possibility of add-ons such as state fees.

If you are a Paychex payroll client, our workers' compensation payment service integrates with payroll to calculate your premiums using actual wages instead of estimates, which can improve business cash flow by eliminating large deposits and reducing your risk of additional premium payments at audit.

Cost Reduction Strategies for Workers' Compensation Insurance

Reducing workers' compensation insurance costs is essential for many businesses. Businesses can help reduce insurance costs by implementing safety programs, managing claims effectively, and using return-to-work policies while protecting their workforce. Below are some strategies that can help reduce costs and improve workplace safety.

1. Implement Comprehensive Safety Programs

Safety programs are one of the most effective ways to help prevent workplace injuries. Exposures to risk and the safety controls that help mitigate them can vary based on industry. For example, restaurant owners can help reduce the risk of slip and fall accidents by having employees wear slip-resistant footwear and correctly placing mats throughout the kitchen and other staff areas. By investing in training and implementing safety controls, businesses can create safer work environments, leading to fewer accidents and the potential to lower premiums.

Paychex’s Professional Employer Organization (PEO) service includes a safety program that helps businesses assess risk and train employees on safety best practices.

2. Establish Return-To-Work (RTW) Programs

Return-to-work (RTW) programs can help employees transition back to work after an injury, reducing the length of time claims remain open and ultimately lowering the cost associated with long-term disability. These programs offer modified or alternative tasks that injured employees can perform during recovery, allowing them to stay productive while healing. Insurers often offer discounts to companies with RTW programs, recognizing the reduction in long-term claim costs.

3. Optimize Employee Classifications and Proper Coding

It’s important to review the classification of your employees for accuracy. Mistakes made by incorrectly classifying employees can increase the risk of overpaying for insurance. By working with your insurance agent or PEO service provider, like Paychex, businesses can receive help to correctly classify their employees. Correct employee coding, based on actual job duties and risk levels, can result in potential savings, especially for businesses with mixed-risk profiles.

4. Effective Claims Management

Properly managing workers' compensation claims can prevent minor issues from turning into long-term, costly claims. This includes timely reporting, thorough investigation of accidents, and regular follow-ups with employees and healthcare providers. A proactive approach to claims management helps resolve issues faster and builds trust with employees, fostering quicker recoveries and minimizing litigation risks.

5. Partnering With a PEO

Working with a PEO like Paychex can help businesses reduce workers' compensation costs through risk management and expert guidance on compliance. Paychex PEO services include access to experienced HR professionals who can advise on safety controls, claims handling, and proper employee coding. By bundling HR, payroll, and workers' compensation services, businesses gain better control over their workers' compensation liabilities and benefit from collective bargaining, which can result in lower insurance rates.

The Role of an Agent in Managing Workers' Compensation

An agent is critical in helping businesses navigate the complexities of workers' compensation insurance. Their expertise helps employers find the right coverage, understand the claim process and remain compliant with state regulations. Here's how an agent can assist throughout the process:

• Finding the Best Coverage Options: Agents work closely with businesses to assess their specific risks, industry needs, and budget. They help compare policies from different insurers, to assist the business with obtaining adequate coverage at competitive rates. An agent’s understanding of industry-specific risks allows them to tailor coverage options that help protect employees and the company from unnecessary financial exposure.
• Assist with Regulatory Compliance: Each state has its workers' compensation regulations, and staying compliant can be challenging for businesses, especially as laws evolve. Agents are well-versed in these regulations and help companies maintain compliance by helping secure adequate coverage, reviewing employee classifications, understanding record-keeping requirements, and claims reporting procedures. This not only helps prevent penalties due to non-compliance with regulations but also helps reduce the risk of businesses over or underpaying for coverage due to employee misclassification or other possible errors.

In summary, an agent is a valuable partner, helping businesses navigate workers' compensation insurance, reduce costs, and stay compliant. By leveraging their expertise, businesses can focus on operations while ensuring employees are protected.

Protect Your Business With the Proper Workers' Comp Coverage

Workers' compensation insurance is mandatory in most states. As an employer, you can set up and manage the right business policy with Paychex Insurance Agency's help.

¹ 2024 Priorities for Business Leaders Survey, Paychex, Inc.

The Paychex Workers’ Compensation Payment Service is offered by Paychex, Inc. and is available in all states except North Dakota, Ohio, Washington, and Wyoming.

Insurance is sold and serviced by Paychex Insurance Agency, Inc., 225 Kenneth Drive, Rochester, NY 14623. CA license #0C28207

Professional employer organization (PEO) services provided by Paychex Business Solutions, LLC (Florida employee leasing license GL7), Oasis Outsourcing, LLC (Florida employee leasing license GL42), and their affiliates, which are licensed or registered to provide PEO services where required by law