DEFINITION of 'Workers' Compensation'

Workers' compensation is a publicly-sponsored system that pays monetary benefits to workers who become injured or disabled in the course of their employment. 

BREAKING DOWN 'Workers' Compensation'

Workers' compensation is a type of insurance that offers employees compensation for injuries or disabilities sustained as a result of their employment. By agreeing to receive workers' compensation, workers are also agreeing to give up their right to sue their employer for negligence. This "compensation bargain" is intended to protect both workers and employers. Workers give up further recourse in exchange for guaranteed compensation, while employers consent to a certain amount of liability while avoiding the potentially greater damage of a large-scale negligence lawsuit. All parties (including taxpayers) benefit from avoiding the legal fees needed to process a trial.

Workers' Comp Coverage

Most compensation plans offer coverage of medical fees related to injuries acquired as a direct result of employment. For example, a construction worker could claim compensation if scaffolding fell on their head, but not if they were in a traffic accident while driving to the job site.  In other situations, workers can receive the equivalent of sick pay while they are on medical leave. If a worker dies as a result of their employment, workers' compensation also gives payments to their family members or other dependents.  

While the "compensation bargain" excludes the possibility of a tort of negligence being issued by employees, this is not to say that compensation is a foregone conclusion. For one thing, it is not always clear whether or not an employer is actually liable for an injury to their worker. Furthermore, working injuries are chronically underreported in some industries.

Legally, there is no penalty for reporting a workplace injury to an employer, but this stipulation is impossible to regulate on an individual level, especially in industries like construction where a worker's livelihood depends to a degree on their physical abilities. Workers' compensation payments are also susceptible to insurance fraud: in some cases, workers will sustain an unrelated injury but report that it was sustained on the job.

Workers' compensation should not be confused with disability insurance or unemployment income; it only pays workers who are injured on the job, while disability insurance pays out regardless of when or where the insured is injured or disabled. Workers' compensation also does not cover unemployment.  Unlike unemployment income or disability benefits, workers' compensation is always tax-free.

Workers' Comp at the State and Federal Level

In the United States, workers' compensation policy is usually handled by individual states. The Department of Labor houses an Office of Worker's Compensation Programs, but it is only responsible for compensation policies for federal employees, longshoremen and coal miners. The lack of federal standards for workers' compensation has resulted in deeply variant policies for the same kinds of injuries in different parts of the country. Therefore, it is essential for a worker acknowledging and preparing for the possibility of a work-related injury to carefully examine both state and company compensation literature.  

Recent studies have shown that workers' compensation benefits have dropped substantially in a majority of states. Identical injuries can receive radically different kinds of compensation depending on where a worker resides, which makes it all the more important to examine local compensation statutes. Meanwhile, studies have shown that incommensurate workers' compensation is closely correlated with persistent income inequality.

 

RELATED TERMS
  1. Workers' Compensation Coverage ...

    Insurance that protects employees under state laws, and provides ...
  2. Employer's Liability Insurance

    A product for employers that protects them from major financial ...
  3. Workers' Compensation Coverage ...

    An insurance policy that covers medical care, lost income and ...
  4. United States Longshore And Harbor ...

    A program administered by a division of the United States Department ...
  5. Unemployment Compensation

    Funds paid by the state to unemployed workers who have lost their ...
  6. Workers' Compensation Catastrophe ...

    A type of loss reinsurance that is purchased by insurers of workers' ...
Related Articles
  1. Financial Advisor

    What Kind of Insurance Do RIAs Need?

    Advisors spend a lot of time discussing insurance with clients but they also need to consider their own coverage needs as small-business owners
  2. Insights

    How Education And Training Affect The Economy

    Education and training benefit not only the worker, but also the employer and the country as a whole.
  3. Trading

    Evaluating Executive Compensation

    Find out how to determine whether a CEO is being overpaid.
  4. Retirement

    6 Benefits You're Required by Law to Offer Your Employees

    Learn about the benefits that a business must offer to employees, such as family and medical leave, as well as various forms of insurance coverage.
  5. Personal Finance

    The Top 5 Most Unionized Industries

    Unions don't have the membership numbers that they once did, but they are still a vital part of several different important industries.
  6. Retirement

    When Do Social Security Benefits Start and End?

    Everything you need to know about the three primary Social Security programs, how they work and who qualifies for them.
  7. Retirement

    How Non-Qualified Deferred Compensation Plans Work

    These tax-advantaged retirement savings plans have their pros and cons, and employers and employees must follow strict guidelines.
  8. Small Business

    Hiring? Regulations Small Businesses Need to Know

    When a small business becomes an employer, it has new responsibilities. Make sure you familiarize yourself with regulatory requirements.
  9. Managing Wealth

    Benefits of Deferred Compensation Plans

    Understand the difference between a qualifying or nonqualifying deferred compensation plan. Learn about the benefits of a deferred compensation plan.
  10. Retirement

    Deferred Compensation Plans Vs. 401(k)s

    Discover the major advantages and disadvantages offered by deferred compensation plans for retirement as compared to a 401(k) plan.
RELATED FAQS
  1. How does the Bureau of Labor Statistics define contingent workers?

    Discover how contingent workers are a significant part of the labor force and are defined as persons who do not expect their ... Read Answer >>
  2. Is there a natural rate of cyclical unemployment?

    Learn more about cyclical unemployment and find out about the relationship of cyclical unemployment to the natural unemployment ... Read Answer >>
  3. What is the best way for my startup to have sustainable growth?

    Discover how many years structural unemployment can last. Deciding whether the economy is encumbered by structural or cyclical ... Read Answer >>
  4. What is an evergreen provision and how does it affect shareholders?

    It is common for publicly-traded corporations to provide more than just regular salary compensation to their management and ... Read Answer >>
  5. How does automated work affect structural unemployment rates?

    Learn about structural unemployment, one of the main causes of structural unemployment, and how automated work increases ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center