Workers’ compensation: What it is and why it’s important

Though it might not be something you want to think about, accidents at work can happen. But if you become ill or are injured while on the job, you may be covered by workers’ compensation.

Workers’ compensation can help employees handle challenges to their finances, health or career prospects following a workplace injury or illness. Here’s how it works.

Key takeaways

• Workers’ compensation can provide a safety net of benefits for people who become injured or ill while at work.
• Benefits can include coverage of medical expenses, wage replacement, career-related training and dependency benefits.
• Each state has its own rules governing workers’ compensation, and they can be quite different.

Workers’ compensation—sometimes shortened to workers’ comp—is a type of employee fringe benefit. It provides cash benefits or medical care for employees who become injured or ill on the job or because of their job. In return, it grants employers limited liability, no matter who’s at fault for the injury or illness.

For employees of private companies or state and local government agencies, workers’ compensation is regulated at the state level. Federal employees, longshore and harbor workers, coal miners, and energy employees have separate processes through the Federal Employees’ Compensation Program.

Workers’ compensation is really just a shortened way of saying workers’ compensation insurance. 

Employers typically buy workers’ compensation insurance for their employees. Depending on the state, the company may have a choice about whether to buy it from a private insurer or a state-funded program. Some states allow some companies to self-insure.

Each state has its own rules governing workers’ compensation, and they can be very different. Not all employees are covered in some states. And in Texas, employers aren’t required to have workers’ comp insurance at all. Here are some other examples:

• In California, all employers—even those with just one employee—must provide workers’ comp coverage.
• New York includes part-time, temporary, seasonal and day labor workers in its definition of employee.
• Churches, casual employers and agricultural companies with fewer than five employees don’t need to provide workers’ comp coverage in West Virginia.

You can visit the National Federation of Independent Business to see the guidelines for workers’ compensation in your state.

Many states don’t include independent contractors and freelancers under the same protections as contracted employees. If you think your employer is misclassifying you as an independent contractor, you can file a determination of worker status with the IRS.

Workers’ compensation benefits differ by state. Here are some expenses it generally covers:

Benefits could include:

• Medical treatment and supplies
• Prescription medications 
• Transportation to and from appointments

Depending on the type of illness or injury, wage replacement may also be referred to as temporary disability or permanent disability. Permanent disability is also broken down into permanent total disability and permanent partial disability.

The length of time a worker may receive these benefits varies by state. The rate an employee is paid can also vary. As a general idea, in many states, employees get about two-thirds of their usual salary for temporary or permanent total disability. There’s less consistency in the rate paid for permanent partial disability because there are more variables, like the extent of the disability. 

If a worker’s injury or illness prevents them from returning to their previous job, workers’ compensation may help them find a more suitable new job either with the same employer or a new one. 

Vocational rehabilitation can cover the appropriate training or other assistance, including:

• Job testing
• Resume building
• Interview coaching

Workers’ compensation provides funeral benefits and ongoing payments for the surviving families of workers who die on the job. 

Depending on the state, the payments may continue for a set period or until the worker’s spouse remarries or their children reach a certain age. The benefit amount may be based on the worker’s wages and vary according to the number of dependents.

Learn more about how to handle financial matters after a death in the family.

Because the laws around workers’ compensation aren’t federally regulated, the process of filing a workers’ compensation claim may differ slightly, depending on location. It’s a good idea for affected employees to check their state’s rules and deadlines with the state workers’ compensation board, but here’s a general idea of how it could go:

1. The employee reports the injury or illness to the employer after the event or diagnosis.
2. The employer generally files the claim with the insurance carrier, but they may give the employee some paperwork to fill out first. 
3. The employee may also have to report the injury to the state workers’ compensation board.
4. The employee can follow up with the insurance company to ensure that the claim went through.
5. The insurer provides written notice of approval or denial of the claim.

Workers’ comp isn’t usually taxable. But if a recipient also receives payments from Social Security Disability Insurance or a similar program, they may need to pay tax on some of their benefits.

Almost every state requires employers to have workers’ compensation insurance for at least some of its employees. And in general, state regulations encourage the employer’s cooperation with the process. But if you’re unhappy about how your employer is handling things, filing a complaint with the state workers’ compensation board can be a good first step.

Workers’ compensation programs can protect American employees in the event of a work-related injury or illness. They can provide cash benefits, medical care and vocational rehabilitation. But coverage and regulations can vary, so it’s a good idea to familiarize yourself with the requirements in your state. 

An injury or illness at work is just one example of an unexpected life event that can cause financial stress and anxiety. Check out these tips for dealing with a financial emergency.