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Workers' compensation insurance is a financial protection vehicle for workers who are either sick or injured on the job and can't work and earn an income.

Basically, workers' compensation insurance usually covers wages lost by not being able to work and it helps employees pay for medical costs.

If the employee dies, workers' compensation also usually covers the cost of a funeral and burial, saving the worker's family from having to pay those expenses.

Here's a more detailed rundown of what costs and issues are covered by workplace compensation plans:

  • Medical/health care costs. The primary costs covered by workers' compensation insurance are medical expenses. The costs are usually tied directly to injuries or illnesses suffered on the job, and may include emergency room stays, medical care transportation, testing and treatments, and any costs incurred from specific physicians, clinics, hospitals, and other health care centers.
  • Salary lost. Often, injuries and illnesses incurred on the job lead to the inability to work, and consequently, the inability to draw a paycheck. Policies vary on a state-by-state basis, but injured or sick workers can count on earning about two-thirds of their regular income -- tax-free -- under workers' compensation insurance.
  • Funeral costs. Workers' compensation insurance also covers death benefits and funeral costs in the event an employee dies on the job either from illness or injury. In many similar scenarios, the insurance also pays out a death benefit to the worker's family, based on annual income and time served on the job.
  • Cost payouts depend significantly on state compensation laws and policies. Overall, 49 U.S. states require companies to offer workers compensation insurance (Texas is the only state that doesn't require it) and each state has its own unique laws and statutes that govern workers' compensation.

A Brief History of Workers' Compensation

Workers' compensation insurance dates back four centuries, where ancient Sumerians (now present day Iraq) were awarded compensation for being injured on the job. Workers' compensation at the time was primitive, but the "scale" model where some workers were awarded more compensation based on the nature of their injury and the level of risk associated with their job still exists today.

As society progressed, employers grew more aggressive about not paying compensation, even going as far as making employees sign so-called "death contracts" that blocked them from seeking financial recourse in the event of being hurt on the job.

By the late 1800s, Prussian Chancellor Otto von Bismarck created the Employers Liability Law, which more thoroughly laid out the premise of social insurance in the workplace, particularly in high-risk occupations like mining, metal factories, and military service.

That law laid the groundwork for the workers' compensation structure available today. By the early 1900s, the release of Upton Sinclair's "The Jungle" chronicled the horrible conditions workers faced in Chicago slaughterhouses. That led the U.S. Congress to enact laws protecting workers (especially the Employers' Liability Acts of 1906 and 1908,) thus ushering in a new era of workers' "on the job" financial protection.

Over 100 years later, most U.S. states mandate that companies operating in the state adhere to strict rules and governance on workers compensation issues for both full- and part-time employees.

When Does Workers' Compensation Kick In?

Workers' compensation covers employees under the following scenarios:

  • When a worker is hurt on the job and requites medical attention.
  • When a worker is recovering from an illness or an injury and can't earn on an income.
  • When a worker is killed or is disabled on the job, and the worker's family requires financial assistance.
  • When an employee opts to turn down financial benefits offered as the result of an injury or illness on the job, and takes legal action against his or her employer.

The Cost of Workers' Compensation Insurance

The cost associated with workers' compensation varies, depending primarily on the nature of the job.

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By and large, a lumberjack is going to require more coverage than an office accountant, whose job is less dangerous.

Companies build their workers' compensation price model on both occupational risk and what state they operate in, which mandates what a company must pay in workers' compensation.

Most state workers' compensation models base their cost on average cost per worker, per $100 in worker wages. For example, a recent report from the National Academy of Social Insurance states that the average cost for workers' compensation in Texas is 31 cents per $100 in payroll. Compare that to West Virginia, where the average cost is $1.55 per $100 of payroll.

As noted above, the jobs dictate what a company pays in workers' compensation costs.

According to the U.S. Bureau of Labor Statistics, the total average cost of workers' compensation per employee stands at 44 cents per hour. The average cost in a white-collar occupation like sales and office work is 22 cents per hour. Meanwhile, the average cost in the higher risk construction trade stood at $1.07 per hour.

You can look at workers compensation costs in another way -- based on annual pay, cost per employee, and the nature of the employee's job.

According to the National Council on Compensation Insurance, based on a rate of $100 per employee salary, a clerical or office worker who earned $28,000 annually would cost $33.60 to cover each year (plus a one-time administration fee of $250).

But a landscaping worker, who is more likely to get injured on the job, and who earns $36,000 a year, would cost $2,498 to cover for workers compensation.

It's also worth noting that the above figures are based on employers who haven't made previous claims to an insurance company for workers' compensation costs. Companies that do have previous claims can face workers' compensation costs up to five times higher than the figures cited above.

How You Can Get Workers' Compensation

In most instances, you gain access to workers' compensation insurance when you take a new job. That's because in every U.S. state but Texas, workers' compensation is mandated and companies are obligated to having workers automatically signed up for a compensation plan as a condition of employment.

The lone exception is for freelance workers, also known as sole proprietors. These workers aren't actual employees of a company and must take out their own workplace compensation insurance policies from private insurers. That gives them the same financial protection as salaried workers if they get injured or ill on the job.

To trigger workplace compensation payouts if you get hurt or ill at work, you'll need to take the following steps.

  • If you suffer an occupational illness or injury, seek medical help directly. Job one is to take care of yourself health-wise first. If you wait a few days or longer, you're taking a big risk, as it gets more difficult to make a workplace compensation claim the longer you wait.
  • Then, once you're able, notify your employer directly. They'll start the paperwork process after you complete the necessary forms and documents, and will walk you through the claims application process. Your employer will also put you in touch with the insurance company.
  • Once your paperwork is in order, it's time to file a claim. That claim will go straight to your employer's insurance company and needs to be completed before any compensation filing deadlines run out (your company's insurance provider can give you the appropriate deadline dates.) Your filed paperwork will include any medical reports, any forms needed by the state you reside in, and forms filed with your employer. Make sure your claims ask for payments related to any medical expenses already paid out in addition to wage-based payments (again, about two-thirds of your salary.)
  • You'll start receiving payments. Once your workers' compensation insurance paperwork is filed and approved (expect that process to take several days to a week or so) you'll begin receiving payments in the form of checks or electronic bank deposit every payday.

You'll receive payments until you return to work, in which case your regular salary will resume. Based on your injury or illness, that process could be a gradual one and you'll need to discuss that scenario with your employer.