How Workers Compensation Works

Carpenter building a home at construction site.  Falling off ladder.
Workers' Compensation is a system that deals with workplace injuries and compensates the workers who suffered from them. -Oxford- / Getty Images

Workers compensation is the oldest insurance program in the United States. With the rapid growth of industrial jobs in the early twentieth century, workplace injuries became more common and the dangers more apparent of working in factories, with heavy machinery or in hazardous conditions. A system was needed to deal with these injuries and to compensate the workers who suffered from them.

Prior to the establishment of workers compensation, an injured or disabled worker had to sue his or her employer to recover wages and future earnings and to pay for medical expenses. Workers usually lost these cases, which damaged the employer/employee relationship and contributed to mistrust between employers and their workers. Employers frequently used three defenses in lawsuits by employees [ref]:


  • Assumption of risk - The injury was from a normal and accepted danger associated with the job.
  • The fellow worker rule - The injury was caused by a fellow worker’s negligence.
  • Contributory negligence - The worker’s negligence contributed to the accident.

Workers had to wait a long time for any possible financial compensation, and if someone were too injured to work, the inability to earn a living, combined with accumulating lawyer fees, could be devastating. When workers did win in court, judgments against employers were frequently substantial, though the amounts didn’t correspond to a defined scale or system.

Europe paved the way for American workers compensation programs. In 1884 Germany passed Sickness and Accident Laws, and England established workers compensation in 1897. The first U.S. workers compensation law was passed in 1908, covering federal workers. Between 1911 and 1920, most states adopted their own workers compensation programs modeled on those in Germany and England.

Now we know the history of workers compensation and why we have it. But how does it work? Read on to learn how this program works and what kinds of injuries it covers.



Workers Compensation Benefits

Workers compensation is designed to cover workers for all on the job injuries.
Photo courtesy ©2007 Microsoft Corporation

Workers compensation provides workers who are hurt on the job (or their families, in case of a death) with a predetermined level of compensation. The benefit of this type of program is that it removes the burdensome and costly process of litigation (dealing with a lawsuit) and provides guaranteed benefits for workers. The basis of workers compensation is an idea called a compensation bargain or exclusive remedy. Injured workers give up most rights to sue employers for injury in exchange for clearly defined benefits in case of injury or disability. As part of the bargain, employers aren’t allowed to give lesser compensation if a worker is found negligent or liable.

Most of the 55 different workers compensation programs that exist in the United States are state-run. These programs vary in terms of compensation and benefits, including which injuries and illnesses are covered. There are also more than 1,200 commercial insurers operating in the U.S. Most employers are required by state law to have workers compensation insurance.


Most workers compensation programs pay for medical expenses, repay most of lost earnings, and pay for the loss of future earnings or provide vocational rehabilitation (training for a new job or occupation, physical therapy, etc.). When a worker is killed, funeral costs are generally paid and survivors may get wage-replacement benefits. In the case of injury, workers receive immediate compensation for their medical expenses and then receive cash benefits for lost work after three to seven days.

Filing a Workers Compensation Claim

Workers compensation covers repetitive stress injuries like carpal tunnel syndrome.
Photo courtesy stock.xchng

Most employees are covered under workers compensation law. In some states, certain people are exempt such as company owners, businesses with five or fewer employees, agricultural workers, domestic workers and independent contractors. These companies may still be required to carry general liability insurance.

For those who are covered, workers compensation covers injuries sustained at work and illnesses or effects suffered from long-term exposure to hazardous or strenuous conditions. These can range from a broken arm resulting from a fall, to hearing loss from drilling in a quarry, to carpal tunnel syndrome from stress caused by typing. Above all, the illness or injury has to be something that was caused by the job or that can be attributed to the conditions of employment.


The Coming and Going rule means that injuries sustained during the commute to or from work aren’t covered, but other transportation-related injuries may be covered such as running errands for an employer and traveling or transporting goods in the course of employment.

If you are injured on the job, it’s good to consult an attorney who specializes in workers compensation cases, especially if you think that your claim might be challenged by the insurance company or your employer. Many attorneys offer free consultations, and some are even required by state law to operate on contingency, meaning that you won’t have to pay any attorney’s fees unless you obtain a favorable settlement.

Though it’s important to consult a lawyer, it’s also essential to file a claim with your employer as soon as the injury occurs. Your employer will offer you an employee claim form to complete. The employer or the insurance company may contest the claim, which would result in a court hearing. Monetary compensation is generally one-half to two-thirds of normal compensation, but this amount is tax free, which means that you will likely end up with a level of income close to your pre-injury level. And as stated before, all of your medical expenses will be covered.

Sometimes workers, especially those on long-term disability, are offered a settlement. Accepting one of these settlements may be advantageous, but it’s important to consider whether there may be unforeseen medical costs in the future. If so, it’s likely better to stick with your current compensation plan.

An essential part of the workers compensation process is the independent medical examination (IME). A doctor chosen by the insurance company performs this exam and reports the results to the insurance company, which uses the report to help form its compensation offer. Be observant when undergoing one of these exams. Come prepared with a list of questions, and write down notes afterward about the doctor’s comments.

An independent medical examination helps the insurance company in determining its compensation offer.
Photo courtesy ©2007 Microsoft Corporation

If for any reason you are unhappy with your workers compensation package, your power to sue is limited -- remember the compensation bargain. However, you can still appeal to the state workers compensation board, and an attorney can help you in this process.


Workers Compensation by the Numbers

American workers find themselves the victims of many different types of calamities, but sprains and strains are most common.

The numbers surrounding workers compensation show how broad and important a program it is. In 2004, $56 billion in workers compensation benefits were paid in the United States. Medical benefits accounted for $26.1 billion of that spending, while cash benefits accounted for the other $29.9 billion. Between benefits and insurance, workers compensation cost employers $87.4 billion in 2004 [ref].

From 1998 to 2001, medical-only cases accounted for 78 percent of all workers compensation cases but only 6 percent of all benefits paid [ref]. This number indicates that workers usually recover fully and return to work, so benefits end.


In some cases, though, workers return to work without fully recovering (perhaps because a full recovery isn’t possible or is a long way off) and have fewer duties and a smaller salary. Because they are still partially disabled, these workers receive temporary partial disability benefits. Between 1998 and 2001, temporary partial disability benefits made up 65 percent of cases involving cash benefits and 21 percent of total benefits paid.

Workers who are permanently disabled receive permanent total disability benefits. These benefits made up 1 percent of all cases involving cash benefits but comprised 12 percent of benefit spending in 2001. These numbers indicate that significant, permanent disability or impairment is rare but that compensating those who suffer catastrophic injuries or illnesses at work is expensive.

A third class of benefits is permanent partial disability. Workers in this category suffer from permanent impairments that don’t completely prevent them from working again. For example, consider an accountant who is blinded in one eye by an exploding light bulb. The injury affects his life but should allow him to continue working in his previous job. Thirty five percent of cases with cash payments fall under permanent partial disability, making up 67 percent of total spending.

Workplace fatalities have declined since their peak in 1994, but they remain a significant concern.

In 2005, 93 percent of workplace fatalities were suffered by men. Farming, fishing and forestry remain the most dangerous fields in terms of fatality rate [ref].

Construction remains one of the most hazardous occupations in the United States.
Photo courtesy stock.xchng

For more information on workers compensation laws and a complete glossary of workers compensation terms, check out the links on the next page.


Lots More Information

Related HowStuffWorks Articles

More Great Links

  • “CFOI - Current and Revised Data.” 8/10/2006. U.S. Department of Labor: Bureau of Labor Statistics.
  • “Workers Compensation.” Encyclopedia.
  • “Federal Employees’ Compensation Act (FECA).” U.S. Department of Agriculture
  • “Injuries, Illnesses, and Fatalities.” U.S. Department of Labor: Bureau of Labor Statistics
  • “Workers Compensation: Benefits, Coverage, and Costs 2004.” National Academy of Social Insurance
  • “Workers Compensation Overview.” Workers Compensation Leader
  • “Workers Compensation - Wex.” 6/6/2006. Cornell University
  • “Workers Compensation Law.” FreeAdvice