What Is Workers’ Compensation and How Does It Work?

Workers’ compensation benefits are designed to provide people with financial compensation and medical care after a work-related injury. The federal government was the first to establish a workers’ compensation plan, starting in 1908 for employees who perform dangerous work. By 1916, all federal employees were covered. By 1921, nearly every U.S. state also had workers’ compensation programs.¹

Today, businesses that have to offer required benefits to employees might do so through a private insurance company. Most private businesses must carry workers’ compensation insurance as a matter of law. States with a workers’ compensation benefits board might be the sole provider of coverage or be an alternative to private insurance.

Workers’ compensation benefits provide the financial and medical support that people need to recover from work-related injury or illness. Since employers are generally required to carry workers’ compensation insurance, these schemes also encourage employers to maintain safe workplaces. The insurance company that provides workers’ compensation coverage sets rates for premiums paid.

For human resources professionals, workers’ compensation is one of the most common issues in the workplace. Therefore, a thorough, in-depth knowledge of how employers deal with injury or illness, as well as the role of disability insurance, is critical for legal compliance.

Most workers are covered by some kind of workers’ compensation insurance, with the purpose of recovering lost wages, disability benefits and medical expenses. Typically, only employees are automatically eligible for workers’ compensation benefits. For that reason, workers’ compensation is often closely linked to employment law.

However, in some states, businesses must also cover independent contractors because of the risk involved. For example, businesses that take on construction workers as independent contractors might have to provide coverage by law.² Other groups of workers, like gig workers, might not have automatic entitlement to workers’ compensation. These workers might want to investigate their options in advance of an occupational injury, so they can get coverage before a work-related accident or illness.

Even among workers, there can be differences in which legal protection, or specific law, applies. The U.S. Department of Labor administers disability benefits to most federal employees, with some exceptions. Some federal workers fall under other legislation, such as the Federal Black Lung Program.³ Workers employed by private companies or by state or local governments are also typically covered by the business’s insurance company or by state workers’ compensation law.

Workers’ compensation benefits depend on the state agency or the private workers’ compensation plan. In general, a worker’s compensation claim can cover certain things related to the workplace injury or illness, such as the following:

• Medical expenses
• Rehabilitation services
• Wage replacement
• Permanent disability benefits
• Death benefits

Therefore, the precise entitlements depend on the nature of the work-related injury or illness. They might determine how long a person must stay off work and what services they need to help with recovery. In the unfortunate circumstance of a work-related fatality, a worker’s dependents might be entitled to compensation in the form of death benefits. Each state’s employment laws should provide more detail.

The state statute or private employers’ insurance company policy should describe the process for submitting a workers’ compensation claim. In general, workers should immediately report the injury to a supervisor or human resources at the workplace location. They generally must seek immediate care from a medical professional who can make a qualified assessment of the severity of the injury.

At the time of the injury or illness, a worker should fill out the required paperwork to receive workers’ compensation benefits. Typically, workers will also have to receive further assessment from a medical professional who can determine when they can return to work. Under the workers’ compensation system, there are strict deadlines for benefit claims and assessments. The entire workers’ compensation benefits claim can involve the worker, the employer, the state or federal workers’ compensation board and the insurance company.

To demonstrate, consider the following breakdown of a workers’ compensation claim from the state of New York:⁴

• Step 1: The employee should seek medical treatment for the injury. They should notify their health care provider of the incident and identify their employer
• Step 2: They should also notify their supervisor about the workplace injury as soon as possible and within 30 days
• Step 3: The employee should report the injury to the state’s workers’ compensation board by filing a claim within two years
• Step 4: The employer should notify the insurance company within 10 days of learning of the injury if the worker needed medical attention or lost at least one day of work because of the injury
• Step 5: The insurance company sends the worker notice of their rights to workers’ compensation benefits within 14 days of getting the notice from the employer
• Step 6: The insurance company begins paying benefits within 18 days of notice of the injury if lost time is more than seven days
• Step 7: Payments continue every two weeks during the period of disability insurance
• Step 8: The state’s workers’ compensation board sends notice to the employee and other interested parties that a file has been created

In other states and at the federal level, employers and employees can expect the workers’ compensation process to be similar.
As demonstrated, workers’ compensation after an injury or illness involves several parties working on a very specific timeline. State or federal workers’ comp agencies regularly set these dates and deadlines and impose them on the parties.

While workers’ compensation is part of an established legal regime, insurance companies will often challenge claims by way of:

• Denying the claim entirely
• Delaying payment of the claim
• Paying less than the amount of the claim
• Stopping benefits after paying for some time
• Reducing the benefit amount over time

In a dispute over workers’ compensation costs, an injured or sick employee has options. Typically, the worker can file an appeal with the state or federal agency in question. For example, in California, a worker can file for an application for adjudication of claim if they disagree with their employer or the insurance company. If the adjudication request is accepted, the case goes to the Workers’ Compensation Appeals Board in the local jurisdiction.⁵

In addition to budgeting for workers’ compensation costs, employers have direct responsibilities to injured or sick employees. They must uphold workers’ compensation law and provide a safe work environment, adhering to state and federal occupational safety and health standards. Part of that obligation is having systems to properly document workplace injuries and claims.

Also, employers must carry workers’ compensation insurance of some form. In some states, such as California, qualifying employers can self-insure. Under this scheme, employers provide their own coverage for workers’ compensation liabilities.⁶ As the legal requirements vary by state, employers who want to become self-insurers should closely examine their obligations in order to meet these regulations.

Employees should understand their rights under workers’ compensation, so they can claim protection and support for a job-related injury or illness. They must understand what is workers’ compensation and what is the purpose of workers’ compensation. It is critical to know which law applies to each employee’s situation. If they are already under a workers’ comp regime and need to submit a claim for injury or illness, workers can benefit from knowing the rules and communicating effectively with employers and insurers. In the event of a dispute over disability benefits, they might consider seeking legal advice.

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