What Is Workers' Compensation Insurance & How Does It Work?

What Is Workers' Compensation Insurance? 

Workers' compensation insurance is a financial protection vehicle for workers who are either sick or injured on the job and can't work and earn an income in the immediate or ongoing aftermath. In most cases, employers are legally required to pay for this insurance for all employees. 

"Workers' comp," as it is commonly abbreviated, usually covers wages lost by not being able to work, and it also helps employees pay for medical costs. If an employee dies due a covered incident, workers' compensation usually covers funeral and burial costs, saving the worker's family from having to pay those expenses. Payouts from workers' compensation insurance are not taxable at the state or federal level. 

Cost payouts depend significantly on state compensation laws and policies. Overall, 49 U.S. states require companies to offer workers compensation insurance (Texas is the only state that doesn't require it), and each state has its own unique laws and statutes that govern workers' compensation.

What Does Workers' Comp Pay For? 

Here's a more detailed rundown of what costs and issues are covered by workplace compensation plans:

• Medical/health care costs: The primary costs covered by workers' compensation insurance are medical expenses. These costs are usually tied directly to injuries or illnesses suffered on the job and may include emergency room stays, medical care transportation, testing and treatments, and any costs incurred from specific physicians, clinics, hospitals, and other health care centers.
• Salary lost: Often, injuries and illnesses incurred on the job lead to the inability to work, and consequently, the inability to draw a paycheck. Policies vary on a state-by-state basis, but injured or sick workers can count on earning about two-thirds of their regular income tax-free under workers' compensation insurance.
• Funeral costs: Workers' compensation insurance also covers death benefits and funeral costs in the event an employee dies from illness or injury resulting from their work. In many similar scenarios, the insurance also pays out a death benefit to the worker's family based on annual income and time served on the job.

How Can You Get Workers' Compensation?

In most instances, you gain access to workers' compensation insurance when you take a new job. That's because in every U.S. state but Texas, workers' compensation is mandated, and companies are obligated to having workers automatically signed up for a compensation plan as a condition of employment.

The lone exception is for freelance workers, also known as sole proprietors. These workers aren't actual employees of a company and must take out their own workplace compensation insurance policies from private insurers. That gives them the same financial protection as salaried workers if they get injured or ill on the job.

To trigger workplace compensation payouts if you get hurt or ill at work, you'll need to take the following steps:

1. If you suffer an occupational illness or injury, seek medical help directly. Job one is to take care of yourself first. If you wait a few days or longer, you're taking a big risk, as it gets more difficult to make a workplace compensation claim the longer you wait.
2. Then, once you're able, notify your employer directly. They'll start the paperwork process after you complete the necessary forms and documents and will walk you through the claims-application process. Your employer will also put you in touch with the insurance company.
3. Once your paperwork is in order, it's time to file a claim. That claim will go straight to your employer's insurance company and needs to be completed before any compensation-filing deadlines pass (your company's insurance provider can give you the appropriate deadline dates.) Your filed paperwork will include any medical reports, any forms needed by the state you reside in, and forms filed with your employer. Make sure your claims ask for payments related to any medical expenses already paid out in addition to wage-based payments (again, about two-thirds of your salary.)
4. You'll start receiving payments. Once your workers' compensation insurance paperwork is filed and approved (expect that process to take several days to a week or so), you'll begin receiving payments in the form of checks or electronic bank deposit every payday.
5. You'll receive payments until you return to work, in which case your regular salary will resume. Based on your injury or illness, that process could be a gradual one, and you'll need to discuss that scenario with your employer.

How Much Does Workers' Compensation Cost? 

The cost associated with workers' compensation varies depending primarily on the nature of the job. For instance, a lumberjack would likely require more coverage than an office accountant, so workers' comp for that position would carry a higher premium.

Companies build their workers' compensation price model on both occupational risk and what state they operate in, which mandates what a company must pay in workers' compensation.

Most state workers' compensation models base their cost on average cost per worker, per $100 in worker wages. According to a 2022 report from simplyinsurance.com, "the average cost of workers' compensation insurance in the United States is $936 per employee, per year, or $78 per month." As noted above, however, actual costs vary quite a bit by state and occupation. Visit the company's website for a list of average workers' comp monthly premiums per employee by state. 

It's also worth noting that the above figures are based on employers who haven't made previous claims to an insurance company for workers' compensation costs. Just like with car insurance, premiums can go up significantly in response to incidents. Companies that do have previous claims can face workers' compensation costs up to five times higher than the figures cited above.

A Brief History of Workers' Compensation

Workers' compensation insurance dates back four centuries, where ancient Sumerians (now present day Iraq) were awarded compensation for being injured on the job. Workers' compensation at the time was primitive, but the "scale" model where some workers were awarded more compensation based on the nature of their injury and the level of risk associated with their job still exists today.

As society progressed, employers grew more aggressive about not paying compensation, even going as far as making employees sign so-called "death contracts" that blocked them from seeking financial recourse in the event of being hurt on the job.

By the late 1800s, Prussian Chancellor Otto von Bismarck created the Employers Liability Law, which more thoroughly laid out the premise of social insurance in the workplace, particularly in high-risk occupations like mining, metal factories, and military service.

That law laid the groundwork for the workers' compensation structure that exists today. By the early 1900s, the release of Upton Sinclair's The Jungle chronicled the horrible conditions workers faced in Chicago slaughterhouses. That led the U.S. Congress to enact laws protecting workers (especially the Employers' Liability Acts of 1906 and 1908,) thus ushering in a new era of "on the job" financial protection.

Over 100 years later, most U.S. states mandate that companies operating in the state adhere to strict rules and governance on workers compensation issues for both full- and part-time employees.