Workers' Compensation (West's Encyclopedia of American Law)
A system whereby an employer must pay, or provide insurance to pay, the lost wages and medical expenses of an employee who is injured on the job.
Workers' compensation law is governed by statutes in every state. Specific laws vary with each jurisdiction, but key features are consistent. An employee is automatically entitled to receive certain benefits when she suffers an occupational disease or accidental personal injury arising out of and in the course of employment. Such benefits may include cash or wage-loss benefits, medical and career rehabilitation benefits, and in the case of accidental death of an employee, benefits to dependents. The NEGLIGENCE and fault of either the employer or the employee usually are immaterial. Independent contractors are not entitled to workers' compensation benefits, and in some states domestic workers and agricultural workers are excluded or only partially covered.
It is the goal of workers' compensation to return the injured employee quickly and economically to the status of productive worker without unduly harming the employer's business. A worker whose injury is covered by the workers' compensation statute loses the common-law right to sue the employer for that injury, but injured workers may still sue third parties whose negligence contributed to the work injury. For example, a truck driver injured in a rear-end collision by an...
(The entire section is 3315 words.)
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Workers' Compensation (Encyclopedia of Small Business)
Workers' compensation is a mandatory type of business insurance that provides employees who become injured or ill while on the job with medical coverage and income replacement. It also protects companies from being sued by employees for the workplace conditions that caused such an injury or illness.
Businesses are required by law in all fifty states to pay for the medical treatment and lost wages of employees who suffer job-related injuries or illnesses. In order to avoid crippling expenses in this regard, companies purchase workers' compensation insurance policies of one kind or another. Most states give businesses the choice of buying workers compensation policies either directly from the state or from a private insurer. Each state determines its own system's payment schedules, employee eligibility requirements, and rehabilitation procedures. Although provisions of each state's laws differ greatly, the underlying principle is the samehat employers should assume the costs of injuries, illnesses, and deaths that occur on the job, without regard to fault, and partially replace wage income lost. While income replacement under workers' compensation is usually a percentage of the actual wage, it is counted as a transfer payment and thus is not subject to federal income tax. Some state laws exempt certain categories of employees from coverage. Those most likely to be excluded are domestics, agricultural workers, and manual laborers.
Given the mandatory nature of workers' compensation coverage and the potential expense involved, the cost of workers' compensation insurance policies is a huge concern for small business owners. In fact, workers' compensation premiums stand as most companies' second largest operating expense, after payroll. These rates are based on the employer's total payroll, the classification of the employees (the relative riskiness of their work activities), and the employer's accident record.
Small business owners have less control over the cost of workers' compensation coverage than they do over health insurance costs. State legislatures set the level of benefits and employers pay the full cost, so medical cost-containment strategies like co-payments do not apply. Some insurers avoid handling workers' compensation policies for small businesses because they feel that smaller companies lack the funds to provide a safe working environment. In general, the rates depend upon the type of business, number of employees, and company safety record.
Penalties for failing to carry workers comp insurance policies can be severe. In general, business owners who are neglectful in this manner can be held liable for the medical expenses incurred by the worker in their employ. Nonetheless, many businesses engage in what is known as "premium fraud," in which they either do not carry policies or lower the costs of their policy premiums through fraudulent recordkeeping (underreporting their employee count or the wages they pay them, paying workers under the table in order to falsify the number of employees they have, misclassifying the kind of work engaged in by employees in order to reduce premiums, etc.). However, momentum is building to beef up penalties for these kinds of fraudulent actions, which injure insurers and honest employers alike. "Honest employers pick upadditional costs [of fraud committed by other companies] in the form of higher premiums," noted Rebekah Young in Washington Monthly. "But even if honest employers are able to pass along the costs of their higher premiums, that doesn't mean they aren't adversely affected by premium fraud. For example, honest construction companies lose out on projects to premium fraud-committing companies because they are underbid by these crooked companies, which have lower overhead costs thanks to their lower premium costs."
TYPES OF COVERAGE AVAILABLE
There are three basic methods available for employers to obtain the required workers' compensation protection: state insurance funds, private insurance, and self-insurance through insurance pools. The latter optionhich involves setting aside funds in anticipation of workers' compensation claims, rather than purchasing insurances seen as a cost-saving method for safety-oriented firms. In the states that permit it, many large employers now self-insure, and many small businesses form groups to insure themselves and decrease the risks.
In Employee Benefits for Small Business, Jane White and Bruce Pyenson tout group self-insurance plans as a good option for small businesses with better-than-average workplace safety records. Such plans work best when the companies involved are in the same or similar industries, so that their level of risk is roughly equivalent. The companies can then join together to purchase stop-loss coverage to protect themselves against claims over a certain amount. Though self-insurance can be less expensive than private workers' compensation policies, small businesses should make sure that they have the financial resources to withstand potential losses.
Small businesses can explore a variety of other measures to reduce their workers' compensation premiums as well. These include:
Select the right insurer. Business owners seeking workers' comp insurance policies should seek out insurers with proactive claims adjusting policies. In addition, Occupational Hazards contributor Shawn Adams counsels companies to give preference to insurers who assign specific adjusters for accounts. "[When] claims are handled on a file basis your account is handled by whatever adjuster happens to be assigned the file for your claim. An assigned adjuster is one who can take responsibility for your account, as opposed to having different adjusters handle different claims against your policy but not coordinating the claims in a comprehensive manner."
Pay attention to your own claims trends. Businesses should take steps to monitor all aspects of their work safety record and insurance coverage, and ensure that all subcontractors carry workers' comp coverage.
Adopt policies and programs to reduce exposure to workers' comp claims. Companies can reduce premiums by minimizing the number of claims made by their workforce. This requires the implementation of safety programs in such areas as materials handling and ergonomics. "Few companies know how to prevent workers' compensation claims, or how affordable and effective ergonomic training can be in preventing such claims," wrote Mary Murray in Occupational Hazards. "Businesses don't know that ergonomic training and redesign can almost entirely be paid for with 'found' dollars that otherwise would be wasted in overfeeding their workers' compensation policy."
Adams, Shawn. "Risk Management Methods to Reduce Your Workers' Compensation Rates." Occupational Hazards. March 2001.
Blakely, Stephen. "Costly Numbers in Workers' Comp." Nation's Business. September 1997.
Blakely, Stephen. "Finding Coverage for Small Offices." Nation's Business. June 1997.
Lynn, Jacquelyn. "A Quick Guide to Insurance." Entrepreneur. June 1997.
Murray, Mary. "Dispelling the Myths of Workers' Compensation." Occupational Hazards. August 1998.
White, Jane, and Bruce Pyenson. Employee Benefits for Small Business. Prentice-Hall, 1991.
Young, Rebekah. "Cheap Tricks." Washington Monthly. September 1998.
Workers' Compensation (Encyclopedia of Business)
Approximately every 19 seconds someone is injured in an on-the-job accident. But whether or not the injured individual has health insurance, if the injury occurred on the job it is very likely that the injury will be cared for and the worker's lost income replaced under the workers' compensation insurance system.
The workers' compensation system developed to provide medical coverage and/or income replacement for workers (or the families of workers) who were injured or became ill or died as a result of workplace conditions or accidents. These laws, which require an employer to purchase insurance that provides care and income replacement, were developed in the early industrial age. During that period machine industry workers were being injured at a high rate. Their only remedy for medical care and to replace income lost due to days off of work was to sue the employer in court for negligence. For many this was financially impossible and when it could happen, the cost to employers was very high. Both employers and employees found that a legal system of compensation whereby the employee gave up the right to sue, but was guaranteed legal protection and coverage for the injuries, was preferable.
The first workers' compensation law was passed in Germany in 1883. The rest of industrialized Europe quickly followed suit. The first U.S. state law that passed and remained in force was in Wisconsin in 1911. By 1949 every state had a workers' compensation law on the books.
In 1916, the U.S. Congress passed the Federal Employees Compensation Act providing protection to federal workers. The passage of this law, while it had no legal impact on any private, state, or local workers, aided the cause of state workers' compensation laws by providing a national example of caring for employees. Today the federal government also administers the provisions of the Longshoremen's and Harbor Workers' Compensation Act, which provides benefits for longshoremen, and the Black Lung Act, which provides benefits for coal mine workers who suffer from Black Lung disease. Aside from these three exceptions, the rest of the more than 93.7 million wage and salary workers (as of 1989) are covered under the varying provisions of the 50 state laws and those of the District of Columbia.
Each State has its own workers' compensation law and administration. Although the provisions of each State law differ greatly, the underlying principle is the samehat employers should assume the costs of injuries, illnesses, and deaths that occur on the job, without regard to fault, and partially replace wage income lost. While income replacement under workers' compensation is usually a percentage of the actual wage, is it counted as a transfer payment and, as such, is not subject to federal income tax.
Except for a few states, coverage is compulsory for all private employers. Employers who reject coverage also lose the common law defense for suits filed by employees for negligence. Some state laws exempt certain categories of employees from coverage. Those most likely to be excluded from coverage are domestics, agricultural workers, and manual laborers.
In 1995 employers paid $26.1 billion in premiums, 9.4 percent less than was paid in 1994. The general downward trend (the figure in 1990 was $30.9 billion) is further registered in the primary measure of compensation costs: the cost as a percentage of business payrolls. The Bureau of Labor Statistics estimated that in 1998 this figure measured 36 cents per hour worked, down from 38 cents in 1997. In manufacturing industries, the Bureau found that compensation insurance costs decreased an average of nine percent per year between 1994 and 1998. While workers' compensation represents the only aspect of employee compensation and benefit costs that has continually decreased through the 1990s as states have slashed benefits, many analysts expect the typically cyclical pricing for workers' compensation to be on the verge of another increase.
Increasing costs have led employers to a deeper interest in on-the job safety since insurance premiums for workers' compensation are often based on loss ratio. A loss ratio is defined by the Social Security Administration as the proportion of the premium dollar that is returned to the worker as cash or medical benefits.
Generally, there are three different methods available for employers to insure workers for the required workers' compensation protection. These are state insurance funds, private insurance, and self-insurance. The latter is seen as a cost-saving method for many safety-oriented firms. Where states permit it, many large employers now self-insure and many small employers form groups to insure themselves and decrease the risks. Premiums paid out reflect the payment of benefits and the cost of administering the program, policy writing, claims investigations and adjustments, allocation of reserves for long-term accrued disabilities, and other administrative costs.
Managed care, in which health maintenance organizations or other licensed entities pre-pay for health services and administer the financial and medical details for a defined insured population, is the most common avenue by which workers' compensation-related medical insurance is provided. There exists a good deal of controversy relating to these organizations, however; these administrations, often with enormous bureaucracies, generate disfavor among much of the public (and many doctors) because, in order to safeguard their financial bottom line, HMOs often discourage and deny extensive or aggressive treatments that doctors and patients often feel is necessary, but that is considered inconsistent with the HMO's financial concerns.
First popular in the 1980s, "employee leasing" represents an alternative to managed care. It refers to an arrangement in which employees of a business known as a leasing firm are sent to a client firm for a fee, usually based on the workers' wages. This arrangement eliminates a degree of the client firm's payroll, thereby mitigating insurance premiums.
Another emerging issue is how workers' compensation regulations will meet the increasing trend toward telecommuting, whereby many workers are choosing to take advantage of improved office and telecommunications technology by working at home. Just how hours spent working at home will be determined in terms of employer liability for workers' safety and compensation is yet to be settled.
Changes to state workers' compensation laws are made by state legislatures. In 1993, changes mandated by states included measures to implement managed health care as a way to save money for employers, reduce fraud, and improve safety in the workplace.
Fraud is always a concern. But under the workers' compensation program there is also the question not only of legitimacy of the injury but of legitimacy of the place of injury. The system only covers injuries at the workplace or injuries related to workplace activity. If a worker injures his or her back over the weekend while doing yard work he or she is not covered, even though the injury may cost time from the job. The extension of workers' compensation into the full life of the worker and into caring for the family as a whole has been under study by many. In 1992 four stateslabama, Georgia, California, and Maineegan to examine ways in which workers' compensation might be added to a health insurance plan for the general population.
In 1999 insurance companies lauded the U.S. Supreme Court's decision in the case of American Manufacturers Mutual v. Sullivan. The 3rd Circuit Court of Appeals in Pennsylvania had determined an aspect of that state's workers' compensation reform legislation, which stated that insurers could suspend payments to medical providers pending review, illegitimate on the grounds that, as "state actors," insurers were bound to afford beneficiaries full constitutional protections, including a notice and a hearing before the suspension of payments. The Supreme Court, however, overturned that ruling, upholding the provisions of Pennsylvania's reforms. Similar laws around the country, both current and prospective, now seem more secure, much to the delight of insurers, who will be afforded greater leverage in assessing the appropriateness of beneficiaries' medical treatments.
Hansen, Fay. "Workers' Compensation: Hard Times Ahead." Compensation and Benefits Review. May/June 1999, 15-20.
Hood, Jack B. Workers' Compensation and Employee Protection Laws. St. Paul, MN: West Group, 1999.
Jasper, Margaret. Workers' Compensation Law. Dobbs Ferry, NY: Oceana Publications, 1997.
Lenscis, Peter M. Workers' Compensation: A Reference and Guide. London: Quorum Books, 1998.