# Understanding Workers' Compensation: Coverage, Costs, and Who Pays

![Workersâ Compensation: A government-mandated program that pays benefits to workers who become injured or ill on the job or as a result of the job.](https://www.investopedia.com/thmb/RUisRGNX411nBc8kxUKTPjQUwBA=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/workers-compensation.asp-final-f97e35419bc74ee4b5d52b66799da153.png)

*— Investopedia / Mira Norian*

## What Is Workers’ Compensation?

Workers' compensation provides critical financial support to employees facing work-related injuries or illnesses. This mandated insurance ensures coverage for medical expenses, lost wages, and job retraining. Varying by state, except in Texas, the program is funded through employer-paid premiums. Accepting these benefits means waiving the right to sue the employer.  

### Key Takeaways

*   Workers' compensation is a state-mandated insurance program that provides benefits to employees who are injured or become ill due to job-related activities.  
    
*   Employers are responsible for paying workers' compensation insurance premiums, with costs varying by state and industry risk level.  
    
*   By accepting workers' compensation benefits, employees relinquish their right to sue their employer for negligence.  
    
*   Independent contractors and freelancers are generally not eligible for workers' compensation, leaving them without similar protection for work-related injuries.  
    
*   Coverage varies significantly between states, with different rules and benefits applicable, and Texas being the only state that doesn't require employers to provide it.

## Delving Into Workers' Compensation: Benefits and Coverage

It covers lost wages, medical costs, disability, rehabilitation, and job retraining. Workers' comp helps employees while out of work by providing several types of benefits that can include:

*   Partial wage replacement
*   Temporary and permanent disability
*   Medical cost coverage and care reimbursement for healthcare services
*   Rehabilitation and occupational therapy  
    
*   Displacement benefit that provides for educational retraining and skill enhancement
*   Compensation to beneficiaries if the worker passes away due to their job

Private insurance companies pay for most workers’ compensation programs from premiums paid by individual employers. Each state has a Workers’ Compensation Board, a state agency that oversees the program and intervenes in disputes.

Federal workers’ compensation programs also exist, covering federal and energy employees, as well as longshore and harbor workers. Another federal program, the Black Lung Program, handles death and disability benefits for coal miners and their dependents.  

> **Fast Fact**
>
> Employers cannot require employees to pay for the cost of workers' compensation.

## Comprehensive Overview of Workers' Compensation Benefits

Requirements for workers’ compensation vary from state to state, and some states do not cover all employees. For example, some states exclude [small businesses](https://www.investopedia.com/terms/s/smallandmidsizeenterprises.asp) from the mandate for coverage, while others have different requirements for various industries. The National Federation of Independent Business (NFIB) maintains [a summary](https://www.nfib.com/content/legal-compliance/legal/workers-compensation-laws-state-by-state-comparison-57181/) of each state’s worker compensation requirements.

### Lost Wages and Disability

Workers’ compensation pays for lost wages to an employee but at a reduced amount, meaning less than your total salary. Typically, programs pay about two-thirds of the worker's gross pay.

In many cases, the worker cannot return to work due to the injury, called temporary total disability, and gets compensated while recovering. The worker returns to the job following a period of rehabilitation or therapy. However, some workers get compensated for longer periods if they suffer some type of [permanent disability](https://www.investopedia.com/terms/t/total-permanent-disability-tpd.asp), whether partial or full disability.

Workers’ compensation benefits are not usually taxable at the state or federal level, compensating for much of the lost income. However, you may pay taxes on your workers' compensation benefits if you also receive income from the [Social Security Disability](https://www.investopedia.com/social-security-disability-insurance-ssdi-definition-5223624) or [Supplemental Security Income](https://www.investopedia.com/terms/s/ssi.asp) programs.

### Healthcare Cost Reimbursement and Survivor Benefits

Most compensation plans offer coverage of medical expenses only related to injuries incurred as a direct result of employment. For example, a construction worker could claim compensation for an injury suffered in a fall from scaffolding but not for an injury incurred while driving to the job site. 

In other situations, workers can receive the equivalent of sick pay while on medical leave. If an employee dies due to a work-related incident, the worker’s dependents receive the workers’ compensation payments.

## Legal Implications: Waiving the Right to Sue with Workers' Compensation

By agreeing to receive workers’ compensation, workers give up their right to sue their employer for negligence. This concession helps protect both the workers and employers. Workers give up further recourse in exchange for guaranteed compensation, while employers consent to a degree of liability while avoiding the potentially greater cost of a negligence lawsuit.

> **Fast Fact**
>
> Workers’ compensation is available only to employees injured on the job. It is not the same as disability insurance or unemployment benefits.

## Important Considerations for Workers' Compensation

Employers may dispute claims if there's a question of liability for the injury. In that case, the Workers’ Compensation Board can help resolve disputes.

### Insurance Fraud

Workers' compensation payments are often targets of [insurance fraud](https://www.investopedia.com/terms/i/insurance-fraud.asp). An employee may falsely report that their injury was sustained on the job, exaggerate the severity of an injury, or invent an injury.  

The National Insurance Crime Board asserts that there are “organized criminal conspiracies of crooked physicians, attorneys, and patients” who submit false claims to medical insurance companies for workers’ compensation and other benefits.

### Independent Contractor Exception

In most states, only regular employees are eligible for workers’ compensation; [independent contractors are not](https://www.investopedia.com/the-best-independent-contractor-insurance-11723342). That was one of the main points of contention in the debate over a California ballot measure that sought to extend employee benefits to drivers for ride-sharing apps like Uber and Lyft.

Issues of workers' comp in the [gig economy](https://www.investopedia.com/terms/g/gig-economy.asp) persist, as gig workers grew by 5 million from 2012 to 2021, now making up 3% of the workforce.  

> **Important**
>
> Access to workers’ compensation benefits is a key issue for participants in the gig economy. Contractors and freelancers are rarely eligible.

## Exploring Different Types of Workers' Compensation Coverage

In the U.S., individual states handle workers’ compensation rules. The U.S. [Department of Labor](https://www.investopedia.com/terms/d/dol.asp)'s Office of Workers' Compensation covers only federal employees, longshoremen, harbor workers, energy employees, and coal miners.

Without federal standards, workers' comp policies vary widely across states for the same injuries. Similar injuries can result in different compensation based on the worker's state.

A paper by the Occupational Safety and Health Administration (OSHA) flatly calls workers’ compensation a “broken system.” It estimates that 50% of the costs of workplace injury and illness are borne by the individuals who suffer them. Low-wage and immigrant workers often don’t even apply for benefits.

## Comparing Coverage A and B in Workers' Compensation

There are two types of workers’ compensation coverage: Coverage A and Coverage B.

### Coverage A

[Coverage A](https://www.investopedia.com/terms/w/workers-compensation-coverage-a.asp#:~:text=What%20Is%20Workers'%20Compensation%20Coverage,killed%20while%20on%20the%20job.) includes all of the state-mandated benefits that an injured or ill employee is entitled to receive from the employer’s insurance. It covers salary replacement payments as well as medical care, rehabilitation, and death benefits as necessary. All states except Texas have such benefits, although they vary widely from state to state, and many states exclude some employees from eligibility.

### Coverage B

[Coverage B](https://www.investopedia.com/terms/w/workers-compensation-coverage-b.asp#:~:text=What%20Is%20Workers'%20Compensation%20Coverage,when%20the%20employer%20is%20liable.) pays benefits that exceed the minimums required by Coverage A. They usually are paid only as the result of a successful lawsuit brought by the employee for negligence or other misconduct by the employer.

Workers who accept workers’ compensation generally waive the right to sue their employers, agreeing to a no-fault contract. However, state legislation and court rulings in a number of states have restored the [employees’ right to sue](https://www.investopedia.com/terms/c/collateral-source-rule.asp) in various strictly defined circumstances. Thus, an employer may opt to purchase a policy that combines Coverage A and Coverage B.  
  

## Who Pays Workers’ Compensation Insurance Premiums?

The employer pays workers’ compensation insurance premiums. In other words, there is no payroll deduction like there is with Social Security benefits. The employer must pay workers’ compensation benefits as established by individual state laws.

## How Much Does Workers’ Compensation Cost?

The cost of workers’ compensation insurance averages $45 per month but varies by state, as do the mandated benefits. There also are different rates depending on whether the employees covered are performing low-risk or high-risk jobs. The insurance fees are based on the company’s payroll numbers. Just as examples:  

*   In California, workers’ comp costs an average of 40 cents for every $100 in payroll for low-risk workers and $33.57 for high-risk jobs.
*   In Florida, the average is 26 cents per $100 for low-risk jobs and $19.40 for high-risk jobs.
*   In New York, the average is 7 cents per $100 for low-risk jobs and $29.93 per $100 for high-risk jobs.

## How Do You Apply for Workers’ Compensation?

The rules for applying for workers’ compensation vary by state. In general, a worker with a job-related injury or illness should:  

*   Write down the details of the injury or illness in detail, with photos and the names of witnesses when possible.
*   Report the injury or illness to your employer. The employer should take it from there, filing your claim with the insurer.

You can follow through with the employer’s insurance company to ensure a claim was filed. If your claim is denied, you can appeal the decision with your state’s Workers’ Compensation Board.  

## Who Is Exempt From Workers’ Compensation?

Generally, only employees are eligible for workers’ compensation; contractors and freelancers are not. Beyond that, every state writes its own rules. For example, Arkansas specifically excludes farm laborers and real estate agents from eligibility. Idaho excludes domestic workers. Louisiana excludes musicians and crop-dusting airplane crew members.

## The Bottom Line

Employers in every state except Texas must provide workers' compensation insurance for their employees, though coverage varies significantly due to state-specific rules and exemptions.

Typically, contractors and freelancers do not qualify for these benefits, and certain professions may also be excluded. To understand your eligibility, check your state's workers' compensation resources online. For instance, Florida offers tools for verifying your employer's coverage and accessing the necessary forms.

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