Workers’ compensation insurance guarantees certain employee benefits and financial protection for businesses in case of a workplace injury. In nearly every instance, workers’ compensation can be broken down into three parts: unemployment/disability insurance, medical insurance and life insurance.
If an employee misses work or is unable to resume employment as the result of a workplace injury, workers’ compensation will cover lost wages. If an employee needs health care as the result of a workplace injury, workers’ compensation will cover medical costs. If a workplace injury results in an employee’s death or dismemberment, workers’ compensation will cover payments or a lump settlement to the employee (in the case of dismemberment), or the employee’s spouse or dependent children (in the case of death).
Although federal laws govern workers’ compensation for federal employees and workers in select industries, workers’ compensation is typically administered by states. With few exceptions, all employers are required to carry workers’ compensation insurance for their employees. However, simply obtaining workers’ compensation insurance is insufficient for complying with ever regulation. Most states, for example, have laws requiring employers to clearly post information relevant to workers’ compensation. Employees and employers also are required to report workplace injuries within a prescribed number of days.
According to the U.S. Bureau of Labor Statistics, workers’ compensation insurance accounted for 1.5 percent of the total spent on each employee’s wages and benefits in 2010. For small businesses (one to 49 employees), workers’ compensation insurance takes a bigger bite out of the budget — nearly 2 percent of the total compensation for each employee. For a business with 20 full-time workers, workers’ compensation would cost roughly $19,000 a year, according to the bureau.
Workers’ compensation and independent contractors
Aside from regulations, the status of independent contractors generates the most confusion about workers’ compensation. Most questions fit into one of two major categories: classification of independent contractors and how hiring these contractors relates to workers’ compensation and employer liability. The following general guidelines can help employers take the best course of action regarding independent contractors and workers’ compensation. Answers to more complicated questions often hinge on state laws.
- What is an independent contractor? Many employers are uncertain about whether a worker should be classified as an employee or an independent contractor. According to the IRS, a worker’s status is determined by the type of work and the compensation method. Who has control of the work performed and whether a written contract was involved are also primary factors. Yet there is no single standard or determining factor. In some cases, employers may need to ask the IRS for an official determination using Form SS-8.
- Do I need workers’ compensation insurance for independent contractors? Most states don’t require self-employed individuals (those who work for themselves) or single independent contractors (those who are hired temporarily to perform specific tasks — and who receive 1099s for the job) to carry workers’ compensation. But you may need to ask independent contractors if they carry workers’ compensation before hiring them. If the independent contractor fails to carry workers’ compensation and uses subcontractors who subsequently are injured on the job, the originating employer may be liable for damages. In most cases, it’s wise to clearly spell out who is liable for injury-related costs and claims in a written contract before the work begins.
Future of workers’ compensation
Questions about what exactly constitutes an independent contractor are becoming more common as the number of temporary workers and independent contractors grows. According to the Government Accountability Office, the number of independent contractors in the U.S. workforce rose from 6.7 percent in 1995 to 7.4 percent in 2005, a trend that is expected to continue. With growth in the segment of U.S. workers who are independent contractors comes a decline in net insurance premiums for workers’ compensation — from $41.7 billion in 2006 to $32 billion in 2009.
Meanwhile, as employers seek ways to reduce workers’ compensation costs, reform movements are afoot. On WorkersCompensation.com, columnist Peter Rousmaniere tells of a “nascent movement among some members of Congress” to keep closer tabs on state workers’ compensation systems.