This post was written for businesses based in the United States. If you run a Canadian based company, refer to Do You Have to Provide Workers' Compensation Coverage?
Worker’s Compensation is an insurance providing medical care and/or benefits to any employee that suffers any injuries or illness as a direct result of employment.
Workers' compensation coverage is mandatory in the United States.
How Does Workers’ Compensation Work?
Workers' compensation coverage is governed by state law.
As with many of the tax and payroll rules in the US, each state's system differs a little, and it’s important to know and follow the rules of your state.
However, there is a separate federal workers' compensation system for anyone working for the federal government. For example, employees of the U.S. Post Office would fall under the rule of the federal government when it comes to workers’ compensation.
The overall structure of the workers’ compensation system is very similar from state to state. The main differences lie in the rates paid to injured employees and the employer rules that employees and insurance companies must also abide by.
Not every problem that occurs in the workplace is covered and in some situations coverage can be denied.
Coverage may be denied for injuries:
- Caused by drugs
- Caused by intoxication
- That are felony-related
- That are self-inflicted
- That are the result of a fight started by the employee
- That are a result of a company policy violation
- Occurring off the job or worksite
- Claimed after an employee is terminated or laid off, or
- To an independent contractor.
There are two methods in which workers’ compensation policies are paid.
1. Employers can pay for workers’ compensation through an annual audit. This is the most common payment method. An insurance company that calculates the total payroll completes an audit once a year.
2. PAYG, or Pay-As-You-Go, workers’ compensation is also an option. It is offered to employers so that they can pay their premiums after each payroll. Unlike the first option, PAYG will be the actual workers' compensation amount instead of an estimate.
If an employee files a workers’ compensation claim, that’s not always the end of it.
Employees are sometimes surprised to learn that you, the company they work for, can dispute the validity of the claim. Employers have incentive to dispute any claims they feel are invalid because the rates they need to pay into the system may be affected by the number of claims paid on their behalf.
Once a dispute has been declared, the state workers’ compensation board will investigate the claim and render a decision.
During the investigation process, employees are seen by a physician who performs evaluations on behalf of the state.
While this physician is supposed to maintain an impartial role, employees should realize that, in this case, doctor-patient confidentiality does not exist. Any statements made during the evaluation process could be used by an employer to dispute the claim.
For example, if while receiving care an employee mentions that they got injured off the job, this information can be used by the employer to dispute the claim.
What Do Employers Need to Pay?
Employers need to pay for workers’ compensation insurance based on an employee’s class code. It is against the rules for an employer to ask an employee to contribute to the cost of compensation.
How much an employer pays is based on a specific class code and rate. Your insurance provider will make this calculation.
The type of company you run and your employees’ job responsibilities and will determine your liability.
For example, a construction worker will have a higher risk of injury on the job; therefore the rates would be higher. Likewise, a less dangerous work environment will yield lower insurance rates.
What Are the Risks?
Failure to carry workers' compensation can result in hefty costs for business owners. Lack of insurance coverage could leave employers paying the cost of benefits out of pocket as well as paying any penalties levied by the state.
That's not the kind of setback a growing business needs. These additional costs could be detrimental to a startup or small business.
Employers are required to share coverage details with their employees.
Notices must be posted in a conveniently located area frequented by all employees. This area must be accessible during working hours.
The notices will contain important information about the rights an employee has and provide coverage details. It is here that employees will find instructions for what they need to do if they suffer a workplace injury.
These notices are provided by your insurance company.
As noted above, workers’ compensation is a mandatory requirement in all US states. As a business owner, it’s important that you follow all federal or state requirements and provide your employees with the necessary coverage.
Wagepoint has partnered up with E-Comp to offer Pay-as-you-go workers compensation coverage. If you need assistance setting up a plan or want to learn more, you can contact us here.
📝 Keep on reading! You may also enjoy this post on How to Handle Taxes on Bonus Wages like a Payroll Expert.
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