Why Do You Need Workers' Compensation Insurance?

Here’s everything you need to know about workers' compensation and why it’s essential.

Regardless of the type of business or where it’s located, it’s a good idea to have a special type of business insurance called workers' compensation insurance and understand how it works. Like many types of insurance, workers’ comp can be challenging to comprehend. Luckily, this article can shed some light.

In 2020, almost 2 million workers were treated for work-related injuries in the emergency room. In 2021, nearly 6,000 fatal work-related injuries were recorded in the United States.

As you see from these statistics, workplace injuries are common. That’s why it’s crucial for businesses to have workers’ compensation insurance. Workers' compensation insurance (also known as “workman’s compensation) protects your business from financial losses.

In the event of a work-related accident, workers’ comp ensures the injured worker receives the wages and the care they deserve. Workers’ compensation also protects employers from lawsuits brought on by injured workers. For these reasons, workers' compensation is required in most states. In fact, every state besides Texas mandates that employers offer workers' compensation insurance.

1. Who Created Workers’ Compensation?

In the late 19th century, the foundation of what we now consider workers’ compensation was first enacted by Prussian Chancellor Otto von Bismarck under the Sickness and Accident Laws. These laws offered protection to workers in certain quarriers, factories, etc. Eventually, these laws evolved to creating a modern workers’ compensation system.

Unlike chancellors before him, Bismarck focused on employee satisfaction. He aimed to ensure workers were cared for in the event of a work-related injury or illness. Bismarck's laws also kept employees from suing their employers.

Eventually, other countries began to adopt these laws. However, it wasn’t until decades later that the United States passed its version of workers’ compensation, which is what we have today.

2. What Exactly Is Workers’ Compensation?

Workers’ compensation is considered a type of social insurance. It provides pay and medical benefits to people who become ill or are injured at work (or while doing something work-related). It also protects business owners from civil suits brought on by impacted workers. Workers’ compensation even pays death benefits to family members of employees killed due to the job.

It’s important to note that workers' compensation is provided regardless of who is at fault for the injury. Remember that this doesn’t mean you should purposely be careless at work. Workers’ compensation can be revoked if the accident is self-inflicted.

Contrary to popular belief, workers’ compensation isn’t a perk — it’s the law for most states. Failure to provide workers’ compensation can result in penalties in fines. In some states, business owners could face felony charges and lose their businesses altogether.

3. What Does Workers’ Compensation Cover?

Typically, workers' compensation insurance covers the following:

Medical expenses

Workers' compensation insurance covers basic medical expenses, including doctor visits, hospital visits, surgeries, medications, equipment, etc. Unlike other types of insurance, workers’ compensation medical benefits aren’t typically subject to deductibles or co-pays.

Instead, the insurance covers specific treatments and costs until the injured worker reaches maximum medical improvement (MMI). This means the employer has reached a point where additional treatment wouldn’t impact their condition. That said, insurers may continue to cover the medical costs needed to maintain MMI.

Disability benefits

In the event an employee can’t work, disability benefits cover a part of the missed wages. How much that’s covered depends on several factors, including the type of disability and the employee's previous pay. There are several temporary disability benefits, including:

Temporary total disability: An employee will need time off from work but will eventually be able to return. For example, let’s say an employee broke their arm at work. Once their arm is healed, they should be able to return.

Temporary partial disability: This is when an employee can work but at a limited capacity. For example, due to the injury, the employee may only be able to work part-time or only perform some of their functions.

Permanent total disability: This is when an employee’s work-related injury is permanent, and they are unable to return to work.

Permanent partial disability: This is when an employee’s work-related injury is permanent, and they cannot return to work. While there’s a chance this employee may find work again elsewhere, it’ll most likely be something at a lower income.

Continued care

Workers’ compensation insurance also covers injuries that require continued care, like physical therapy, follow-up doctor appointments, etc. In addition to continued care, some insurance covers what’s known as rehabilitation benefits. Rehabilitation benefits include job training, resume assistance, tuition, etc. This is ideal for employees that fall under that “permanent partial disability” category and who can’t return to their current position but may be able to find work elsewhere.

Death benefits

If the injury results in death, workers' compensation insurance will cover funeral expenses, burial costs, etc. Some workers’ compensation will also provide missed wages to the employee's dependents, whether a child or spouse. This is referred to as “survivor’s benefits” and works like life insurance.

Again, these benefits vary from state to state. That’s why it’s essential to make sure you’re up-to-date on what workers’ compensation insurance covers in your area.

4. What Doesn’t Workers’ Compensation Cover?

Now that you know what workers’ compensation insurance covers, let’s discuss what it doesn’t. First, it’s important to note that employees are eligible for workers’ compensation insurance regardless of who is at fault for the injury. But that doesn’t mean there aren’t mitigating factors.

Many states don’t provide workers' compensation if the injured worker was under the influence of a drug or substance during the event. Workers’ compensation may also be excluded if the injury resulted from a physical fight, the employee injured themselves by disregarding protocol, or the injury was done on purpose.

5. Who Needs Workers’ Compensation?

As mentioned, workers’ compensation is required in most states. But even still, there’s a lot of confusion on when/what type of businesses need this insurance. Do companies with only a few employers need workers’ compensation? Do businesses need insurance if they only work with contractors/freelancers? Yes, and yes.

Most laws require employees to buy workers’ compensation insurance as soon as they hire their first employee. When it comes to hiring contract/freelance employees, the law varies. If you live in a state that considers freelancers “employees,” you’ll be required to buy workers’ compensation insurance. Make sure you review your state's laws to ensure you’re in compliance.

It’s important to remember that if an employee is injured at work and you don’t have workers’ compensation, you’ll be responsible for paying the employee’s medical bills, wages, etc. This could end up costing hundreds of thousands of dollars. That’s why workers’ compensation is important, even if you live in a state that doesn’t mandate it.

6. How Are Workers’ Compensation Rates Determined?

You may be wondering exactly how workers’ compensation rates are determined. Insurance companies use a specific formula based on the type of business, the company’s history of accidents, and the total payroll.

Type Of Business

When determining your rates, insurance companies categorize your business based on how likely a workplace accident is to occur. For instance, let’s say the business is a law firm. It’s less likely a workplace accident will occur. On the other hand, it’s more likely a workplace accident will occur at a construction site.

Insurance companies also consider the cost of a potential accident. Going off the example above, a workplace accident on a construction site will require more medical attention and cost more than an accident at a law firm. All of this is considered and analyzed when insurance companies determine rates.

Workplace Accident History

Insurance companies also review a business's accident history when determining workers' compensation insurance rates. Think of this like car insurance. If you have a history of accidents, your insurance rates will likely be higher than if you didn’t, right?

Well, the same can be said about workers' compensation rates. If your business has had a history of workplace accidents, you’ll be charged a higher premium.

Total Payroll

And finally, insurance companies look at the total amount of your business’s payroll. You may be wondering exactly why this matters. Again, it goes back to the likelihood of a workplace accident. The higher the payroll, the more employees you have, and the more likely an accident will happen.

In addition to these factors, insurance companies also look at the state where your employees work and the type of work being completed. This information helps them get an idea of your business and its risks. The higher the risk, the higher the premium. The lower the risk, the lower the premium.

7. How Do Workers’ Compensation Claims Work?

If an employee becomes injured or ill from a work-related cause, they have a certain amount of time to report that to the employer. How much time the employer has can vary. But if they don’t report it in that time frame, they may miss out on their workers’ compensation benefits.

Employees must provide medical reports from a healthcare provider when filing a claim. Depending on the state, they may need to provide additional documentation. If the claim is approved, the employee will receive compensation. If denied, the employee can appeal.

8. How To Keep Workers’ Compensation Rates Low?

While necessary, workers’ compensation can be expensive for employers. According to research, the average business will pay $1 per $100 of payroll for workers’ comp. But thankfully, there are ways for you to keep the cost to a minimum.

As previously mentioned, workers' compensation rates are determined by several different factors. One of those factors is whether the business has a history of accidents and, if so, how often. To keep your rates low, focus on finding ways to make your business a safer place to work — here are a few ideas:

Train Employees Well

This may sound simple, but it’s a great place to start. Well-trained employees with a comprehensive understanding of their job are less likely to make mistakes that could lead to injuries. If you don’t already, consider creating a detailed onboarding process led by experienced managers.

Safety Initiatives

One of the best ways to keep employees safe is by implementing safety initiatives. For instance, you could conduct regular safety training sessions. During these trainings, make sure you reinforce safety tips and protocols.

Consider creating flyers with easy-to-read tips and hanging them around the office. In addition to helpful tips, include information about the company’s workers’ compensation insurance. It’s important your employees know what’s available, especially new employees.

Reward Safe Behavior

It’s no secret people respond well to rewards. They’re a great way to acknowledge good work and encourage employees to keep it up. So, consider rewarding employees for safe behavior. These rewards don’t have to be anything grand. You could give out gift cards, send a positive email, offer longer lunch breaks, etc.

Encourage Breaks

There’s a common misconception that employees should be productive all day. The truth is workers need breaks. Not only do they benefit the employee, but the employer as well. Research shows that breaks can increase productivity and creativity and improve mental health and well-being. It can also combat burnout, which could prevent mistakes and potential injury.

Join A PEO

A professional employer organization (PEO) can help your business implement safety protocols and navigate workers’ compensation insurance. In some cases, PEOs perform safety audits and programs to help you avoid future claims. They can also assist with inspections. PEOs can help you negotiate insurance rates, manage relations between injured employees, resolve claims, etc. In short, joining a PEO can help make your business a safer place to work.

Final Thoughts

Most people know what workers’ compensation insurance is. If an employee is injured at work, they’re entitled to compensation, right? Yes, but there’s more to it. Workers’ compensation insurance covers missed wages, hospital visits, disability benefits, continued care, and more. In short, workers’ compensation insurance ensures those impacted by work-related injuries or illnesses aren’t left to fend for themselves.

As a business, offering workers’ compensation insurance is a good idea. Not only is it beneficial to your employees, but it helps you avoid potentially costly lawsuits and helps continue your business. Not to mention, many states require it, and failure to obtain workers’ comp has profound implications. Protect your business and employees- ensure you have workers’ compensation insurance.