What You Need to Know About Workers' Compensation Laws

Every state has laws that require employers of a certain size to provide employees with workers' compensation benefits. Whether you are subject to workers' compensation laws or choose to voluntarily maintain coverage, you should be aware of what benefits are payable for and the proper steps to take when a workplace accident occurs. You should also understand the tax implications of benefits and the interaction of other benefit payments with workers' compensation.

Governed by state law, workers' compensation laws are in place in every state to protect employees against loss of income and for medical payments because of work-related injuries, accidents, illness, or disease. In the vast majority of states, workers' compensation coverage is mandatory, but even if coverage is not mandatory for an employer, voluntarily participating in the state's program is usually the wisest course of action to protect your workers and your business.

Here are some common elements shared by the state workers' compensation laws when it comes to benefits:

Benefits are provided for accidental job-related injury. An employee is entitled to statutory benefits from you when the individual suffers a "personal injury by accident arising out of and in the course of employment."
Benefits include wage-loss, medical, and death benefits. Wage-loss benefits usually cover about one-half to two-thirds of the employee's average weekly wage.
Covered "employees" are defined by law. "Employees" generally does not include independent contractors.
Fault is generally not an issue. Neither the employee's own negligence in causing the accident nor your complete lack of fault are factors in deciding whether the worker gets benefits.
Employees give up the right to sue you. In exchange for the assured benefits, employees give up their right to sue you for any injury covered by workers' compensation laws.
Employees retain the right to sue negligent third parties. If a third party's negligence helped cause the accident, the employee can still sue the third party; any proceeds from the suit should be first applied to reimburse you for benefits paid to the employee.
The system is administered by a state agency. The responsibility for administering the system is placed in the hands of a state agency.

Keep in mind that workers' compensation benefits are payable only for work-related injuries. Benefits are not available for self-inflicted injuries or for those caused by intoxication or substance abuse. Payable benefits include:

income replacement for partial or total disability of a temporary or permanent nature
medical and rehabilitation costs
survivor benefits in the case of a fatal illness or injury

In addition, coverage is provided for certain occupational diseases that are set out in the state laws.

State Workers' Compensation Laws

Do state workers' compensation laws apply to you? In most states, all employers who have at least one employee are covered. While some states exempt very small employers, they don't all have the same definition of what constitutes a small employer. The most common exemption is for employers with fewer than three employees, but some provide the exemption to employers with fewer than four and others to employers with fewer than five. Of course, even if you're exempt, you can generally choose to participate in the state program.

If you don't participate in the workers' compensation program in a state where participation is mandatory, you face fines, possible imprisonment, and denial of the right to conduct business in your state.

Consult our state map to determine whether you are covered by the workers' compensation laws in your state.

Should you voluntarily participate? There are both advantages and disadvantages to having a state-mandated workers' compensation system or to voluntarily participating in the system even if not legally required. The advantages to you are:

that your liability for on-the-job injuries is limited to the remedies available under the workers' compensation system; you can't be sued for everything you own
that the types of benefits you have to pay to employees are limited to those available under the laws
that your disability planning is made easier because the costs are predictable

Conversely, the disadvantages to you are:

that your premiums may be high, depending upon your accident record
that filing requirements increase your administrative burdens
that spurious claims may needlessly take up your time

The states that require workers' compensation participation will require participation in one of the following:

a state insurance pool
individual insurance
self-insurance

Generally, small employers will find that the state insurance pool is the least expensive choice. Self-insurance is almost always too great a risk for small employers to bear and is a route typically taken only by the largest employers.

You can deduct workers' compensation premiums and benefit payments as ordinary and necessary business expenses.

You don't have any obligation for withholding or FICA on any workers' compensation benefits you pay.

Before you set up your workers' compensation program, you should discuss it with your attorney to make sure that you're complying with all of the applicable laws.

Actions to Take When Accidents Happen

There are two important actions that you must take as an employer when a job-related accident happens:

You must file an accident report with the appropriate workers' compensation agency in your state.
You should, at least initially, treat every injury as legitimate, even if the circumstances surrounding the injury make you suspicious.

The requirements for filing an accident report differ in every state. Each state has its own laws that determine the time period within which reports must be filed. Your state agency will decide whether payments should be awarded to your employee. An appeal to a court of law is usually allowed only where the facts are in dispute. Payment of compensation benefits to your employee is usually made after a waiting period, most commonly three to seven days, and is retroactive.

Why is it so important to treat accidents as legitimate? Although workers' compensation laws protect you from lawsuits for workplace injuries, they don't completely insulate you from being sued. You could be sued by your employees, for example, for failing to provide them with the workers' compensation benefits to which they are entitled. Treating every accident as legitimate will help reduce the chances of your being sued.

Treating every accident as legitimate means you should do the following:

Respond to the injured employee. This includes providing assistance, getting the facts from the employee about the accident, and telling the employee that there is a system available that will take care of the injuries.
Give first aid or get medical attention. This includes accompanying the employee to the medical provider.
Document the accident. This includes writing down what happened, which should be done within 24 hours of the accident, designating who should be the contact person who stays in touch with the family, and explaining to the employee which benefits are available.
Ensure prompt medical treatment. This includes following up with the medical care provider (although you should first get permission from the employee to contact the provider).
Follow up with the employee to file an accident report.

When is an Accident Work-Related?

Although the workers' compensation agency or the insurance company is the one that will determine whether an injury is work-related, you should make your own investigation if the question is in doubt. Don't forget that you may be better off if the accident is work-related because the workers' compensation laws generally protect you from liability (while the insurance company that has coverage is better off if the injury is determined to be nonwork-related). The issue is not always clear. Consider the following examples:

an employee is mugged in your parking lot
an employee who is performing work for you after hours is assaulted
an employee under stress commits suicide

How do you determine if injuries are work-related? It depends on the circumstances. The important point to remember is that if you believe an accident is work-related and that there is a chance that the agency or insurer will find that it is not work-related, you should gather any facts that you can that support your belief and be prepared to present your arguments to them.

A checklist for handling workers' compensation claims and collecting information is in the Business Tools.

Employees' Response to Accidents

Your employees should be told that they need to do the following if they receive injuries in a workplace accident:

Give prompt notice of the injury. Each state has its own legal requirement for the time within which employees must notify you of their injury.
Fill out a written report. The written report provided by your employee should contain the employee's name and home address; should contain the time, place, nature, and cause of the injury; and should be signed by the employee or someone on the employee's behalf. Your insurance carrier or state agency should provide you with the necessary forms.

Be aware that once your employee notifies you of the injury, you have the ultimate responsibility for notifying the insurance company that a workers' compensation injury has occurred.

Benefits Offsetting Workers' Compensation Benefits

Workers' compensation benefits interact with a variety of other benefits. In some cases, workers' compensation benefits can be offset against benefits from other sources.

Interaction with retirement plans. Suppose your employee is on workers' compensation leave and retires. Do you have to pay the employee both the workers' compensation benefits and the retirement benefits, or can you offset one against the other? The answer is that there are no hard and fast rules, but you should note that at least one court has held that offsetting workers' compensation benefits against retirement benefits was appropriate. You may be able to offset workers' compensation benefits as long as your retirement plan does not expressly prohibit it.
Interaction with medical plans. Suppose your medical plan also includes coverage for certain workplace-related medical expenses. Does the employee get the benefit of both coverages? The answer is "not usually," although sometimes employees do get the windfall. If you discover overlapping coverage, you should notify both the workers' compensation carrier and the medical plan carrier and let them work out the coordination of benefits.
Interaction with Social Security. Sometimes Social Security will pay for disability benefits that overlap with workers' compensation benefits. Approximately half the states have laws that offset those benefits so that employees are paid only once. If you have an employee who is entitled to workers' compensation benefits, you should instruct him or her to contact the local Social Security office to find out which benefits he or she is entitled to.
Interaction with federal benefits laws. The following are questions and answers that may help you understand how workers' compensation laws interact with other benefit laws. These questions and answers presume that the other benefit laws mentioned here apply to you, which may not be the case if you have only a few employees.
- Is an employee away from work because of a workers' compensation-related injury still entitled to leave under the Family and Medical Leave Act (FMLA)? Yes. The injured employee's rights under the FMLA (which applies to employers with 50 or more employees) are not affected by the fact that he or she is receiving workers' compensation benefits.
- Can a workers' compensation injury be considered a "disability," thus triggering rights under the Americans with Disabilities Act (ADA)? Yes. The ADA applies to employers with 15 or more employees. If your injured employee fits into one of the disability categories, the employee has rights under the ADA. Most importantly, depending on the category, the ADA and the ADA Amendments Act of 2008 (ADAAA) may require that you provide reasonable accommodation in finding other work for the employee to do. Depending upon the circumstances, reasonable accommodation may have to include extending the leave period.
- If an injured employee's right to participate in the group health plan ends while the employee is away from work, do I have to give the employee notice of COBRA rights? Absolutely. You should also be careful about determining when the COBRA rights are triggered. If the employee has unexpired FMLA leave time remaining, the COBRA rights are not triggered until the FMLA leave is used up.