Workers’ Compensation: What Is It And Who’s Really Paying?

by Corey Philip
September 12, 2022

Workers’ compensation: it’s usually not a pleasant thing to talk about but it’s important to be informed just in case. Whether you’ve recently been injured at work, or a member of your family has, or even if you’re just wanting to educate yourself in case something goes wrong, it’s important to know. Filing a claim after something happens is one part of the equation, but you might be wondering “Who pays for workers’ compensation in the first place?”

While it might seem like companies are just shelling out their own money when someone has an injury or an accident at work, money received from workers’ compensation is often paid out by an insurance agency or government program. The real question to ask is, “Who’s paying the insurance program?” Simply put, your employer pays a premium based on payroll for this coverage.

How Much does Workers Comp Coverage Cost the Employer (roughly)?

Workers compensation coverage rates are expressed as a percentage of payroll.  The rate is based on the risk of the work being performed. The employer then pays the amount of that rate multiplied by an employee's total wages.

For example the rate for an employee doing clerical work from a desk (low risk) might be 0.25%.  For an employee in performing high rick work like roofing that might be 50%.

If the clerical employee is paid $50,000 per year, the employer would pay $125 for the year.  If the roofing employee is paid $50,000 per year the employer would pay $25,000 for the year.

While these two rates reflect common market rates from the task, the exact rate is determined by many complex factors which would require thousands of pages legalese.  

Different Systems for Workers’ Compensation

State Systems

Some states make the whole system for workers’ comp simpler by providing state-sponsored programs to organize and direct funds for employees who are injured or get sick on the job.

These programs are typically run by the state Department of Labor. In a state with state-run workers’ comp, companies who choose to opt-in pay a monthly insurance premium and have a state employee decide how to pay out workers’ comp in the case of an injury.

These insurance payments may be taken directly out of employees’ paychecks or just factored into the expenses of the company. The states that currently have optional government workers’ comp programs are Arizona, California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maine, Maryland, Minnesota, Missouri, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, and Utah.

Monopolistic State Systems

In some states, state-run workers’ compensation insurance is mandatory meaning companies don’t have any other options. These states include North Dakota, Ohio, Washington, and Wyoming. State systems tend to be less efficient than private systems so if you live in one of these states be aware that if you need to file a workers’ comp claim it could be a real hassle.

Private Insurance Companies

While a few states have monopolistic workers’ compensation programs, meaning the state-run program is mandatory for all employers, most states offer a state program but allow businesses to opt-out and choose a private insurance provider instead.

In states where this is an option, it’s typically advantageous for businesses to choose a private insurance provider instead of the state option. This allows companies to explore the market and get competitive pricing on their insurance options instead of just having to settle for the single price offered by the state program.

In addition, private insurance companies tend to have better customer service, lower fees and more options. This option applies to every state except for the 4 with monopolistic state programs.

Directly from the Employer

Some states allow employers to self-insure and cover their own workers’ compensation claims. Obviously most small companies don’t have the funds to do this on their own, so only very large companies utilize this option.

Through careful regulation and planning these companies try to keep workplace injuries to an absolute minimum and avoid paying the hefty monthly payment for workers’ compensation insurance.

In the case of an incident these companies have a third-party organization determine what benefits the injured employee is eligible for. 

What Accidents are Eligible for Workers’ Comp?

For an accident to be eligible for a workers’ compensation claim, it needs to fulfil a few basic requirements.

First, and most importantly, you have to be able to prove that any injuries sustained were from an accident in the workplace. According to OSHA guidelines, any injury or illness that was caused or significantly contributed to by something that took place in the workplace may be eligible for compensation. You will have a higher chance of your workers’ compensation claim being accepted if the illness or injury can be clearly related to the job that you do.

For example, as a lineman or other electrical worker you would have a higher chance of receiving compensation for a severe electrical burn than you would for getting sick or having heart problems.

Secondly, certain things can make your injury or illness ineligible for a workers’ compensation claim. While injuries caused by your own accidents are typically covered, any intentionally self-inflicted injuries or injuries sustained while under the influence of drugs or alcohol will not be covered. 

What to do if you Think you’re Eligible for Workers’ Comp?

If you’re injured or fall sick on the job you will need to file a workers’ compensation claim to receive your benefits. The way you go about doing this varies depending on which system your company uses for their workers’ compensation insurance, which is the reason you should know that information in the first place.

If your company self-insures, they will have specific company policies for workers’ comp claims, and you can learn about these policies by asking your supervisor or a member of human resources. If you are injured or fall ill on the job, you need to report it to your company immediately because many companies have policies requiring that a claim be filed within a certain amount of time from the date of the incident.

If your company insures through a state-run program, you’ll need to file a claim with your state Department of Labor. Any state with a state-run workers’ compensation program will have a Division of Workers’ Compensation in the Department of Labor and you should be able to find information and instructions for submitting a claim on their website. You can also contact this department if your organization self-insures, but you feel you have not been sufficiently compensated.

Obviously, all of this is preparation for a worst-case scenario, remember to follow all company and OSHA guidelines to avoid ever having to worry about workers’ compensation. Stay safe and good luck!

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About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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