Worker’s Compensation

What It Means

Worker’s compensation is a type of insurance that employers must have to protect employees who experience work-related illnesses or injuries. The insurance typically covers a fixed amount of the costs of medical coverage and the replacement of a portion of lost income owed to the employee if he or she does not work during the injury or illness. For example, if an employee of a house-painting company falls off a ladder while at work and injures his back, the company’s worker’s compensation insurance pays for a percentage of the employee’s medical bills and replaces some of his lost income while he takes a month off work to recover from the injury.

Worker’s compensation also provides benefits for dependents of workers who die in work-related accidents or because of work-related illness. In some cases worker’s compensation covers what is known as “occupational diseases,” or chronic illnesses that occur as a result from work. For example, many workers whose jobs necessitate working on a computer or operating machinery for long periods of time find that the strength and function of their arms or hands deteriorates (a condition known as carpal tunnel syndrome). Some worker’s compensation plans may cover carpel tunnel disease.

Employers are required by law to carry worker’s compensation insurance. The insurance protects employers as well as employees, since it shields the employer from the risk of having to pay hefty medical fees out of the company’s own resources. Worker’s compensation is designed to protect companies from being sued by employees for workplace conditions that caused the injury or illness, and in many states, but not all, the insurance does provide that coverage. The benefits from worker’s compensation programs are managed at the state level, usually by the state department of labor. Each state has the power to define the benefit level for the employers in that state; that is, the extent of compensation available to injured or ill workers varies by state.

When Did It Begin?

In the eighteenth and nineteenth centuries increased industrialization meant that greater numbers of workers suffered injuries on the job. Workers began to blame employers for injuries that were the direct result of dangerous work environments. Without the protection of worker’s compensation laws, injured workers had to individually file lawsuits for damages against their employers and carried the burden of proving that their injury was the fault of the employer. Workers who did file suits risked losing their jobs as well as wages. Successful lawsuits sometimes resulted in unpredictable and devastating financial losses to employers.

In 1884 Germany became the first country to legislate a compensation program for workers and employers mandating that employers share in the cost of paying benefits to injured workers. In 1897 Britain also passed a similar law protecting workers and employers. Maryland became the first state to pass a worker’s compensation law in 1902. All 50 states had passed a worker’s compensation law by 1949. The first programs reimbursed workers for medical, rehabilitation, and lost-time costs. They also limited the costs of the insurance to employers.

More Detailed Information

Worker’s compensation benefits are generally provided to workers who experience an isolated injury while working. For example, a delivery-truck driver is hit by another vehicle and is injured, or a malfunctioning machine in a textile factory damages a worker’s thumb. Worker’s compensation may also cover occupational diseases in which workers have develop illnesses from exposure to asbestos or other toxic chemicals while on the job. Worker’s compensation can even cover mental illness as a result of work-related incidents. If a worker can demonstrate that a specific incident at work contributed to his or her mental illness, treatment for the illness will typically be compensated.

In general, there are two types of worker’s compensation benefits: indemnity benefits and medical benefits. Indemnity benefits cover the worker’s loss of income or loss of his or her capacity to earn income because of a work-related illness or injury. The worker may claim different levels of benefits depending on his or her medical status and ability to work after the injury. For example, an injury must prevent a worker from carrying out his or her job in order for the worker to collect any indemnity benefits, but a worker who is disabled permanently may be able to claim permanent total disability benefits. Permanent total disability benefits differ from other categories of disability benefits, including temporary total disability, temporary partial disability, and permanent partial disability. The second type of worker’s compensation benefit is medical benefits. These benefits pay for medical treatments (such as medications, surgery, or care services) related to the injury or illness of the worker. Some states also provide vocational rehabilitation to workers with injuries or illnesses. This benefit provides the worker with training for a different type of job if the injury or illness prevents him or her from returning to the original job.

Although some state laws provide exemptions to very small companies and independent contractors, in most states worker’s compensation represents a huge cost to employers. Small businesses are especially burdened by the costs of meeting state requirements for worker’s compensation coverage. For most companies worker’s compensation payments are the largest business expense after payroll. As a result business advocacy groups try to reduce the costs of worker’s compensation coverage to businesses, while labor advocacy groups try to increase the worker’s compensation benefits paid to workers.

Employers may choose from three different methods of obtaining worker’s compensation insurance. State insurance funds are operated by a dozen states; these insure state employees. (Individuals who work for the federal government get compensation from funds that are set aside for the insurance.) In most states private insurance companies provide worker’s compensation benefits to employees in both the public and private sectors. Finally, self-insurance allows employers to tag funds in anticipation of claims filed for worker’s compensation. This is a way of keeping business costs down, particularly if the business has a strong safety record.

Recent Trends

Worker’s compensation must continually evolve as a social program in order to respond to the changing nature of work and its hazards. For instance, newer health risks to workers include exposure to radioactive and toxic materials. Although worker’s compensation was created in part to set a limit on employers’ obligations to their employees who suffer work-related injuries, since the 1970s an increasing number of workers have filed lawsuits against employers for money in excess of what worker’s compensation provides. Many businesses criticize worker’s compensation because it is expensive and covering injured individuals can cause the business’s premiums (fees paid for insurance coverage) to go up. An additional concern is that some employees falsify injuries in order to receive benefits.