If one of your employees asked you to describe your workers’ compensation coverage, what would you say?

Many business owners would vaguely describe it as the money that pays for employee injuries that occur while working.

That answer isn’t wrong, but it’s incomplete. Are you familiar with your business’ legal responsibilities under workers’ compensation laws?

This primer on workers’ compensation:

• Defines workers’ compensation
• Describes the types of businesses required to carry workers’ compensation coverage
• Identifies employees covered by workers’ comp
• Identifies injuries that are, and are not, covered by workers’ comp
• Describes the benefits available for employees under workers’ comp

What is workers’ compensation?

Workers’ compensation is a benefit for your employees that pays for injuries, and certain injury-related expenses, that occur during or arise out of the employee’s course of work.

Workers’ compensation employee benefits and employer responsibilities are determined by state laws. However, common elements of workers’ compensation rules exist across the various state laws.

A follow-up article will detail state-specific workers’ compensation requirements and resources.

Is your business required to maintain workers’ compensation coverage?

Most states require employers with one or more employees to carry workers’ comp coverage. A few states don’t require coverage until the employer hires a certain number of employees.

For example, South Carolina employers don’t need to carry workers’ compensation coverage until they have four employees.

Texas and South Dakota are currently the only states where workers’ compensation coverage is completely optional.

Depending on your state, you obtain coverage from private insurers, self-insurance, or a state insurance fund. Not all state’s maintain a state insurance fund.

Who does your workers’ compensation coverage cover?

All of your employees are most likely covered by your workers’ compensation coverage. Some exceptions for farming, at-home care and a limited number of part-time employees in certain states exist. However, as a rule of thumb, expect that all of your full-time and part-time employees are covered.

Independent contractors and volunteers are not generally covered by workers’ compensation. There are exceptions to this general rule as well. Certain states cover volunteers under their laws.

For example, Alaska covers volunteer school teachers under its workers’ compensation laws.

What injuries are covered by workers’ compensation?

Most workers’ compensation laws use “compensable injuries,” or a similar term, to describe the injuries covered by workers’ compensation.

In most state statutes, an injury becomes a compensable injury when two elements are both met:

1. An injury or illness arises out of or in the course of employment, AND
2. The injury or illness is causally connected to the course of employment

The burden of proof and the standard used to evaluate a causal connection varies depending on the state, but expect a two-pronged test of this type to apply across state laws.

To help explain how this two-step test operates, consider a few examples.

A warehouse fall

Your employee visits your warehouse to retrieve some sample products for an upcoming trade show. The employee climbs a ladder to pull the products from a high shelf. When coming down the ladder, the employee falls and breaks her arm. The break requires surgery and a hospital stay to successfully repair the arm.

First, the employee was clearly acting in the course of employment when the injury occurred. She was physically at your business location performing actions for the benefit of your business.

Note: Her job description and typical duties are irrelevant to the analysis. Whether or not she should have been climbing a ladder plays no role in determining whether or not the fall is covered under workers’ compensation.

Because the employee was injured in the course of her performing work for your business, the first prong of the test is satisfied.

Second, a causal connection between the injury and the course of employment exists. The injury was caused by a fall from a ladder. The employee climbed the ladder to get a product off a shelf. The employee needed the product to prepare for a trade show. Trade show preparation is an act within the course of her employment. There is a clear causal link in this chain of events that led to the injury.

Because a causal link between the injury and employment exists, the second prong of the test is satisfied.

The warehouse fall is a compensable injury because the two elements of a compensable injury are met. Accordingly, your business is required to cover expenses caused by the fall under workers’ compensation.

Your employee is driving home from work. She stops at a stop light, and a delivery truck slams into the back of her car. Your employee suffers a neck injury.

The employee was not injured in the course of her employment. Transportation to and from work is not considered working time, or an action taken in the course of employment.

Accordingly, the first element of a compensable injury is not met, and your business is not required to cover the injury under workers’ compensation.

Subsequent injuries and illnesses

In addition to the initial injury or illness, most states require employers to cover injuries and illnesses that naturally arise from the compensable injury. Examples of naturally arising injuries or illnesses include complications from the injury or exacerbations of existing injuries.

For example, if the employee who fell off the ladder contracts an infection during the hospital stay, the infection will likely be considered a compensable injury under workers’ compensation laws.

Offsite location and work events

Location, where an injury occurs, is less important than the nature of the employee’s conduct when the injury occurs.

For example, if an employee injures herself in a hotel room while on work travel, workers’ compensation covers the injury.

Alternatively, if an employee injures herself in your business’ gym, on her personal time, workers’ compensation will not cover the injury.

Travel for work is considered work in the course of employment. Using company gym facilities is not considered the course of employment. In both instances, location plays no role in the analysis. The employee’s purpose is the key element.

Similarly, work-related entertainment and company events are typically considered work in the course of employment. Holiday parties, offsite company celebrations, and customer dinners are all considered course of employment activities.

Keep this in mind as you plan activities for your employees. If you plan activities that expose employees to the risk of injury, you may be required to cover those injuries under workers’ compensation.

Note: Even if you have your employees sign a waiver before participating in a risky company activity, you will not relieve your company from its workers’ compensation obligations.

Benefits included in workers’ compensation

The injured employee receives payment, and ongoing payments needed to cover all expenses related to the compensable injury. Examples of such expenses include:

• Medical expenses (doctor visits, hospital bills, labs, x rays, physical therapy, etc.)
• Wages (if injury prevents work, the employee is entitled to wages during the absence)
• Lump sum payments (if the injury permanently prevents the employee from working, the employee may be entitled to a lump sum payout)
• Rehabilitation (if additional rehab is needed for the employee to perform a specific job function, your business may be required to pay for the rehab)

Compensable injuries can be expensive. However, in most instances, workers’ compensation is the exclusive remedy for on the job injuries.

An employee cannot receive payment under workers’ compensation and sue you for another cause of action (e.g. negligence) for the same injury.

To help protect your business from runaway workers’ compensation costs, you typically have the right to require your injured employee undergo a medical examination and prove necessary costs.

Your business will be responsible to pay for the examination, but the examination helps limit your expenses as much as possible.

If you have any employees, you are most likely required to carry workers’ compensation coverage. Visit the website of your state agency that administers workers’ compensation to better understand your responsibilities.

Editor’s note: Understand more about workers comp by becoming familiar with Intuit’s program. Click here for details.