A common question among business owners, as well as employees is, “What is workers’ compensation?” Although workers’ compensation has been around for more than a century, many individuals are familiar with the term, but aren’t exactly sure what workers’ comp is or why it is required. It’s a good idea for both employers and employees to understand workers’ compensation, including what it is, who needs it, and what it covers.
What Is Workers’ Compensation?
Workers’ compensation is a type of insurance that is available to business owners. This insurance is required by law in most countries throughout the world, with a few exceptions for certain employers. Workers’ compensation insurance provides benefits to employees who suffer injuries or illness as a result of their job. Settlements may range from reimbursement of wages missed due to the injury to payment for medical expenses arising from the incident, depending on the case details and local workers’ compensation laws.
The History of Workers’ Compensation
Before workers’ compensation insurance and laws were established, an employee’s only defense following a work-related injury was to file a lawsuit against their employer. These cases often ended in favor of the business. If the worker did win, the repercussions to the business owner were usually a hefty financial burden that could put the company out of business completely.
Germany was the first country to instate workers’ compensation laws, providing wage reimbursement to all workers with job related injuries for up to 13 weeks. Reduced payments could be continued if the injury resulted in permanent disability. The German compensation law was established in 1884 and was closely followed by similar laws in other European countries.
What Is Workers’ Compensation in the US?
The first American laws regarding workers’ rights following an injury were passed in Georgia and Alabama in 1855. Called the Employer Liability Act, these laws allowed employees to make a case against an employer to be compensated for injuries caused by the company’s negligence. Workers’ compensation laws like those in Germany were not established in the US until 1902 by the state of Maryland. Compensation laws to protect federal employees were enacted in 1906, and by 1949 every state required most employers to carry workers’ comp insurance.
Advantages and Disadvantages of Workers’ Comp
Workers’ compensation laws differ from state to state, but the primary reason this sort of legislation exists is to reduce the need for courtroom litigation. Each state has its own set of compensation requirements for various types of workplace injuries and illnesses, and employers are required to purchase insurance to pay the costs of meeting those requirements. This benefits both workers and businesses, meaning neither has to suffer hardships due to an accident. There are also disadvantages for both parties when answering what is workers’ compensation:
- Worker’s compensation insurance can be a hefty expense for business owners. Coverage rates are based on the company’s average payroll expenses, the industry sector, and their accident history.
- Payments are not awarded on a case-by-case basis so there is no guarantee that the amount will cover the worker’s medical expenses and living requirements.
- Employers are mandated to place workers on light-duty for some work related injuries. These positions aren’t always available and business owners may fire the employee rather than search for alternatives.
- Recently acknowledged injuries and illnesses related to job stress or computer work may not be included in a state’s compensation plan, requiring the parties to take the claim before the board.
What Is Workers’ Compensation Coverage?
Depending on the type of injury, as well as the state the business operates in, workers’ comp insurance will make several different types of payments to the employee on the employer’s behalf. Workers’ compensation does not cover any type of reimbursement for damages like general hardship, emotional distress, or additional compensation for employer negligence. The items below are usually covered.
- If the condition causes the worker to miss time on the job or completely disables the individual, he or she is generally entitled to a portion of their regular wages.
- Medical bills and other health-related charges that are a result of the incident are usually paid by the insurance policy.
- In the case of accidental death, workers’ compensation insurance typically pays a set amount to the employee’s designated beneficiaries.
- Many policies also provide additional compensation and benefits to assist the employee with recovery, as well as economic survival during the process.
What Business Owners Need to Know
Understanding the answer to what is workers’ compensation is extremely important for employers. Most states will impose a fine on companies that operate without the required insurance coverage. Business owners should stay up to date on their state’s workers’ compensation laws and should speak with their business insurance provider to determine the best rates.
Small businesses with very few employees are usually not required to carry workers’ comp, but the maximum number of workers varies depending on the state. Individuals who employee domestic help or farm workers are often exempt as well. Businesses who use independent contractors rather than employees also qualify for exemption in most states, but a copy of the subcontractor’s insurance may need to be included in the company’s records.
What is workers’ compensation? It is a type of insurance that protects employees from loss and hardship from an injury or illness related to their job, and also keeps employers safe from unexpected expenses relating to employee accidents. Workers’ compensation insurance can be costly to business owners, but it is well worth it when the coverage is needed.