How Does the Workers Compensation Work?

Monday, July 9, 2018 - 12:49pm
Injured Kermit the Frog

Workers compensation is required by law and is also one of the most understood coverages for business owners.  This article will outline the most basic and essential parts of workers compensation.


What is Workers Compensation?

Workers Compensation is coverage purchased by the employer (company) but provides benefits to the employee (worker) who suffered a work-related injury or occupational disease.
The injury/illness must be related to or in the course of the job.  In other words, workers compensation would not apply if Joe catches the flu from a co-worker while at work.  Nor, would it cover an injury Sue receives from a car accident while on her way to the office.
It would cover Andy who is diagnosed with Mesothelioma if Andy has constant exposure to asbestos through his job.  And it would cover Patty's injuries if several supply boxes fall on her head when she is in the office supply room.


Who provides Workers Compensation Coverage?

There are two different ways to get workers compensation insurance; private carriers and state funds.  In some states (North Dakota, Ohio, Wyoming, and Washington) the only option is to get workers compensation through the state fund.  These four states are known as "monopolistic states."
All other states have either a mixture of state funds and private companies or are offered solely through private companies.  Oklahoma used to have a state fund that was handled by Compsource.  However, they have, in recent years, migrated to be a private company that is backed by the state.   And so now, private carriers are much more competitive in the state, and there are several options.


Who must be covered?

This is where most business owners run into trouble.  Oklahoma law has provided some loopholes and gaps that have not been filled, and each private company has their own requirements on this matter.
There are very few classifications of employees who can be excluded.  And even so, you may not want to.  Owners and Executives are the most common exclusions.  Most business owners and executives opt out of workers compensation for themselves and purchase their own disability policy.  If you exempt anyone else, give a lot of thought into it.
Domestic Employees (nannies and exclusive maids) are exempted from Workers Compensation Laws.  But that does not mean that the homeowner does not have any risk.  Several years ago, Bob Stoops (former head coach at Oklahoma) ran into legal issues when his maid fell down the stairs while cleaning his house.  He did not have any workers compensation to cover her injuries.


Can I make someone an independent contractor and avoid covering them on Workers Comp?

Oklahoma Only:
Caveat Emptor!  Be very careful when you take this route.  Many employers will 1099 their hires in an attempt to save on taxes and avoid workers compensation.  However, many employers are surprised when they get audited and are charged a substantial increase for 1099 employees.
Let me digress for a moment to explain this.  When you purchase workers compensation insurance in year 1, you are paying an estimated premium upfront.  At the end of every year, workers compensation policies are audited.  The insurance company reviews your tax returns and payroll for the year to get an exact figure of what you paid each employee.  Now when year 2 comes around you are paying an estimated premium for year two along with an adjusted rate from the previous year.
In Oklahoma, the law states that if there is someone who works for you and they do not have workers compensation coverage, you are required to carry it for them!  Here is the problem, you hire a sole proprietor who does not want to have workers compensation, and has decided to opt out (which is his right to do so) you technically are now on the hook for his worker's compensation. The insurance company has the right to include him in your payroll.
Most workers compensation companies (NOT all) are willing to waive this requirement if you provide them with a state waiver signed by the 1099 employee. You can find this waiver here: https://ok.gov/wcc/documents/(1-15-15)%20Affidavit%20of%20Exempt%20Status.pdf
However, this decision is entirely at the discretion of your insurance carrier.


In addition to the Oklahoma caveat, any independent contractor (in any state) is still subject to the worker's compensation laws if the insurance company determines them to be by definition an employee.  Insurance companies will perform a specific test to determine if the individual is an employee or a contractor.  The more control over the individual a company has, the more likely the individual is an employee.  For instance, how much control does the individual have on the way he does his work, how and when is the worker paid, is the relationship ongoing or job specific, what hours is the worker able to work?  All these questions go into determining if a 1099 hire is an employee or an actual contractor.  Unfortunately, it is all at the discretion of the insurance company.


What coverage is provided in a workers comp policy?

Workers compensation will provide four different coverages; medical, disability, death/survivor, and rehabilitation. 
    Medical - typically pay up to an unlimited amount and for an indefinite duration of time.  It will cover the cost of medical necessities to treat the injury or illness.
    Disability - covers lost income as a result of the injury or illness.  It does not pay 100% of the worker's wages but will pay a percentage (usually between 60-70%).  There is often a waiting period before you receive your benefits and the duration of disability depends on the injury/illness and the state you reside in.
    Death/Survivorship - In the event of a death, it will cover burial expenses and can provide benefits to the employee's survivors.  Survivors could receive weekly payments in perpetuity or a large lump sum similar to a small life insurance policy.
    Rehabilitation - Physical rehabilitation is usually covered under medical benefits.  But it will cover the cost to restore physical abilities and will pay to train injured workers so they can accomplish their jobs or train for a new position if they can no longer return to their previous station.


Are there penalties for not carrying Workers Compensation?

YES!  You can be fined for not carrying adequate or any workers compensation.  These penalties are directed by the state, not your insurance provider.  If the state finds out that you do not have the right worker's compensation coverage they can (and usually will) take the following steps:

  •     Step 1 - Notice to acquire insurance
  •     Step 2 - If, after step 1, you still do not purchase insurance they can issue you a fine.  (In the state of Oklahoma that fine is up to $1,000/day for each employee you do not have     covered!)
  •     Step 3 - If you still refuse they will issue a cease work order and shut down your company.
  •     Step 4 - They can also issue a misdemeanor and have the owner imprisoned.  


Where can I get Workers Compensation Quotes?

Talk to me.  I recommend working with an independent agent/broker.  We have connections with all the private companies and can help guide you with state-run companies.  This allows you options and price choices.  That way you are not forced into one company.  Agents are also able to help with audits and can help guide you through an audit dispute.

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