Workers Comp Explained. What is this insurance, who needs it, and how does it work?
Workers Comp is required for most employers, but what is it, what does it do, and who does it cover? I’m going to explain these issues and more coming right up
Hi, I’m Gordon Coyle. Welcome to my website, where we talk about the risk and insurance issues on business owners’ minds. As an expert business insurance broker, I believe these videos are intended to help guide and educate decision-makers to help you become a more informed insurance buyer.
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Alright, so workers comp or, more formally, workers compensation insurance, what is it?
Workers comp is a form of business insurance that covers employers’ statutory or state-mandated requirements to protect their workers from injuries or illnesses they incur on the job.
The employer is the named insured on the policy, and the employer’s employees are protected from the costs related to on-the-job injuries and illnesses.
What’s included in Workers Comp?
It includes the medical bills, medications, hospitalization, surgical, and rehabilitation costs and a portion of the lost wages the employee may suffer while they are out of work due to the injury or illness.
For the employer, workers comp not only satisfies the requirements imposed by the states in which they operate but also protects the company’s bottom line from paying these costs out of pocket. For the employee, it gives them a level of security knowing that if they’re injured on the job the employer’s workers comp will pay for the costs related to that injury.
If you already have workers comp and are struggling with its cost, I have a white paper you can download on the ten best steps to reign in and control workers comp costs.
Earlier, I mentioned that workers comp will pay an injured worker for a portion of lost wages – the amount reimbursed is typically two-thirds of that worker’s normal wages up to a maximum amount. You may be asking why doesn’t the policy pay for all the wages, and here’s the thinking or reasons behind that:
First, workers comp benefits are generally tax-free to the worker, so partial wage replacement often is similar to take-home pay the worker would have received in a regular paycheck after paying taxes.
Second, partial wage replacement is supposed to incentivize workers to return to work and prevent over-compensation. If the system paid full wages, there would be little motivation for many workers to return to work since they could be pocketing more than their regular wages after taxes.
Third, most states set these wage replacement rules and rates and maximums. When I say maximum, each state will adjust the maximum amount of the wage replacement. In New York, for example, it’s $1,145.43 weekly in 2024.
In addition to covering the medical bills and lost wages, workers comp also provides death benefits to a worker’s family should the work-related injury or illness be fatal. That amount will be different from state to state, but generally, it’s two-thirds of the worker’s average weekly wages for the 52 weeks before the accident.
What Does Workers Comp Cost?
An employer’s premiums are based on two major rating factors – payrolls and worker classifications. In the workers comp rating manual, hundreds of classification codes identify what workers do. Generally, most employees are put into these class codes based on what the employer’s company does, not the job tasks an employee does.
For example, most employees will be classified under a “Bakeries” governing code if the employer is a commercial baker. Certain employees, like clerical office employees, may be accepted out of that governing code, but most will fall into that bakery code. You won’t find class codes for a bakery that break down the operations like dough mixers, bakers, cake decorators, etc.
In construction and contracting businesses, it is more common to see class codes that identify distinct and separate operations.
Now, each class code will have a rate formulated by the state in which the employer is doing business based on the actuarial history of claims and claim costs.
The second rating factor I mentioned is payroll. So you take all the payroll for the class code, and that is multiplied by the rate to develop a raw premium. Several factors then modify the raw premium to arrive at a final premium, which the employer will pay.
One big feature of workers comp is that the policy premium is an estimate based on what the employer thinks payrolls and operations will be for the year. At the end of the policy year, a payroll audit is completed to ascertain the actual payrolls for that policy year, and an adjustment is made. If payrolls are higher the employer gets an audit additional premium bill, if they’re lower, the employer gets a credit.
Another significant point I want to make here is that the actual costs an employer pays for workers comp is highly determined by the claims they have. The better job an employer does to minimize claims from occurring and reduce the ultimate cost of claims that do occur, the lower the premiums they’ll pay for workers comp.
This puts heavy emphasis on workplace safety and having a safety culture. The larger the employer, the more important these factors become, so safety training, safety programs, claims management, and safety committees are all critical factors in reducing costs.
Other Issues to Consider
Now, having over 40 years of experience working with employers and sticky workers comp issues, I want to take a minute and talk about some other workers comp issues that are important.
- There’s no reason to delay reporting workers comp claims, in fact the sooner you report claims the better. In most states, there’s an obligation on the employer to report worker injury claims within 5 days of the accident. Studies have shown that late reporting of claims only drives the ultimate cost of a claim higher.
- The employer must be involved in the claim process, which includes helping the injured worker understand how workers comp works and how they will not be stuck paying medical bills. On top of that, the employer’s active engagement with their broker in a claim often helps resolve issues before they become real problems.
- I mentioned that claims directly impact the cost of workers comp. If you’re not actively engaging in safety protocols, ask your insurance broker for assistance, as they are your best resource for help in this area.
- Not all worker injury claims are fraudulent, but if you suspect fraud is involved in a claim, then speak with your broker about it. Now, I’m not talking about just being suspicious about a claim – I mean, you have a good reason to believe there’s a fraud involved. If that’s the case, speak with your broke,r who can broach the subject with your insurer and have it investigated.
- Posting notices – in most states, the employer must post the fact that they have workers’ compensation and how an injured worker can report a claim. That posting notice should not be a secret. In conjunction with thought #1 above on early reporting – employers should have an easy method for injured workers to speak with HR or another responsible person or department in your company about claims and injuries and make that well known in safety meetings.
There are a ton of other details I could include in this video and article, but I didn’t want to make it too long for you. As I mentioned earlier, if you’d like a free copy of my Ten Simple Steps to Reducing Your Workers Comp Premiums, reach out, and I’ll send it over.
If I can assist with your business insurance, please reach out, and let’s chat!
Gordon Coyle is The Coyle Group’s CEO and a seasoned business insurance expert with over 40 years of experience and four professional designations. He specializes in helping businesses with 25 to 1,000 employees navigate the complexities of risk and insurance, from cyber insurance to D&O protection and everything in between. Gordon is passionate about providing tailored solutions that protect businesses, their owners, and their futures.
Need guidance on your business insurance? Contact Gordon for help!