Workers’ Compensation

Workers’ compensation is a state-regulated insurance system that provides benefits to employees who sustain a work-related injury or illness. If a claim is approved, benefits often include medical treatment and partial wage replacement. Some programs provide disability, rehabilitation and/or death benefits. In most states, employers are required to carry workers’ comp even if they have only a few employees. Regulations, costs and benefits vary by state.

Accidents and injuries can happen even in the best of workplace environments. Workers’ compensation insurance provides defined benefits to an injured worker while offering certain protections to employers from liability claims.

What Is Workers’ Compensation and How Does It Work?

Workers’ compensation is a no-fault insurance system. An employee who is injured or who falls ill as a consequence of their job reports what happened and an investigation ensues. If the employee’s claim is approved, they accept workers’ comp benefits in exchange for not suing their employer.

Employees are covered by workers comp in most states, but the rules, regulations and requirements vary. This can pose a challenge to a business that operates in more than one state.

Is Workers’ Compensation Required?

Employers in most states are required to carry workers’ comp insurance. In most states, the threshold for coverage is one employee. In other states it’s two or more, three or more, or even higher. Texas and South Dakota make workers’ comp optional for private employers.

Businesses that operate in more than one state must follow the rules of each state, complicating compliance with workers’ comp laws.

What Are the Origins of Workers’ Compensation?

Workers’ compensation systems emerged to protect workers who suffer job-related injuries and illnesses by shifting from employer liability to standardized benefits with predictable coverage.

Germany is credited with the roots of workers’ compensation when it instituted compulsory accident insurance in 1884. Massachusetts, Pennsylvania and New York enacted insurance programs in the early 20^th century. Acceptance became widespread in the post-World War II era.

Today, nearly every state operates a workers’ compensation system. Some states maintain exclusive state-run funds, while others rely on private insurers or a mix of both

What Are Workers’ Compensation Benefits?

Workers’ compensation benefits generally fall into these four categories:

Medical treatment. In addition to treatment for an injury such as a broken bone from a fall, treatment may be provided for such conditions as repetitive motion injury and aggravation of a pre-existing condition.
Partial wage replacement / income. While an employee is unable to work, workers’ compensation typically provides a portion of the employee’s average wage, with state-specific caps and rules.
Rehabilitation / return-to-work support. While an employee is in rehab, a workers’ compensation settlement may offer return-to-work transitions such as light or part-time duty.
Disability and death benefits for survivors. A permanently disabled worker—either partially or totally disabled—may be eligible for support. Survivor benefits in the event of a fatality vary widely based on factors like number of dependents and the employee’s wage.

What Does Workers’ Compensation Typically Not Cover?

Workers’ compensation insurance isn’t applicable to all employee health issues. Claims may be denied if an incident is not work-related, if the required reporting steps are missed or if an exclusion under a state’s rules applies.

Here are some examples of things that may not be covered:

Injuries during activities not related to work duties.
Injuries outside the course and scope of employment. In some states, for example, commuting-related injuries may be excluded.
Fraudulent injuries or injuries that aren’t reported within the time frame specified by the state.
Injuries resulting from illegal activities or intoxication.

Who Is Covered by Workers’ Compensation and Who Is Not? 

Everyone at a workplace might not be covered by workers’ compensation. Examples of employees who may be covered by workers’ compensation, depending on state rules and work arrangements, include:

New hires, who are typically covered from their first day
Part-time employees
Seasonal employees, such as holiday hires
Remote or work-from-home employees, as long as the illness or injury is incurred while they are working

Some people who work for a company are usually exempt from coverage. Owners and partners are not typically covered because they are responsible for the work environment. However, some states allow owners and partners to opt in to workers’ compensation.

Independent contractors and volunteers also are generally exempt from workers’ comp, but it’s important for employers to understand the distinctions between them and employees. Misclassification is a common workers’ compensation error, so verify status with a state agency or advisor.

How Can HR Outsourcing Support Workers’ Compensation Administration?

Depending on the arrangement, HR outsourcing for small and medium-sized businesses may provide support with:

Claims coordination
Documentation workflows
Manager training and policy development
Multi-state compliance

Two typical outsourcing models, professional employer organization (PEO) and administrative services organization (ASO), may perform these types of administrative functions, but they differ in employer-of-record involvement and responsibilities.

Frequently Asked Questions about Workers’ Compensation

Is workers’ compensation required for small businesses?

In most states, businesses with one or more employees are required to carry workers’ compensation. However, the threshold varies by state and it’s optional in Texas and South Dakota.

Do independent contractors get workers’ compensation?

Typically no, but misclassification (contractor vs. employee) is a common error. An employer may want to confirm worker classifications with their state or business advisor.

How does a workers’ compensation claim work?

A workers’ compensation claim follows a fairly well-defined process. When an injury occurs, it must be promptly reported and documented. The claim is reviewed by the state or insurance carrier, which determines benefits eligibility based on the rules in that particular state.

Does workers’ compensation cover remote employees?

It can, but eligibility often depends on whether the injury occurred in the course of work duties and on the rules in that particular state.