Workers' Compensation: A Tax Masquerading As Insurance?
Workers' compensation is a program providing payments, without regard to a finding of negligence by either party, to workers involved in specific job-related injuries. These laws were enacted so no employee would have to go through a long and arduous lawsuit and possibly not recover due to the employer's advantageous financial strength.
Workers' compensation is independently regulated by each state.
The cost of providing workers' compensation "is one of the top concerns in survey after survey of our members," said a spokesman for the National Foundation of Independent Businesses, a trade group representing over 575,000 small businesses.
Why is workers' compensation such a big cost for so many drillers? For one thing, workers' compensation medical benefits are considered an entitlement, not an option, so insurance must pay the entire cost. Lawmakers in each state set limits of benefits paid to injured workers while state insurance commissioners regulate rates insurors may charge employers to cover those benefits.
Under common law, and workers' compensation laws, every drilling operation and equipment dealer as an employer is liable for injury to employees caused by any failure to provide safe equipment, safe working conditions, hire competent fellow-employees, or warn employees of an existing danger. In every state, an employer must insure against potential workers' compensation claims. Naturally, employee coverage and extent of employer's liability vary from state to state.
The workers' compensation system that has been in place in this country throughout most of this century gives drillers strong incentives to make workplaces safe. Premiums for workers compensation insurance are usually based on the operation's payroll. Furthermore, those rates often depend on hazards present on the job and safety record of the driller/employer.
Payments to employees under workers' compensation are usually set at a fraction of the employee's wages (usually one-half to two-thirds since these sums are tax-free to the recipient).
Workers' compensation also typically reimburses the injured worker for medical and rehabilitative exposure. A waiting period of a few days to two weeks is usually provided to discourage claims for relatively minor injuries.
In most states, workers' compensation coverage is provided through private insurance or self-insurance arrangements. However, 20 states offer coverage through state funds and six of these require employers to use state funds.
Unfortunately, insurors have often avoided insuring contractors, small businesses and businesses in "hazardous" kinds of work. Insurers argue small businesses may not always be able to afford expense of keeping working conditions safe. As a result, many drillers are forced to buy coverage through "assigned risk" pools, otherwise known as residual markets or markets of last resort.
In 1998, the assigned risk market accounted for about 25% of the total workers' compensation insurance market, making it the nation's largest single provider of this type of coverage. In the state of Maine, the assigned risk market accounted for the vast majority of workers' compensation insurance premiums.
Is there a practical solution to these mandatory, high workers' compensation insurance costs? For larger drilling operations, one way to save is to self-insure. A 1999 Tillinghast survey (Tillinghast is the insurance consulting division of New York-based Towers, Perrin) of more than 500 employers revealed 42% self-insure. What's more, 25 states permit small companies to join self-insurance plans.
No driller should make the decision to self-insure lightly.
Although there may be no law in the driller's state requiring purchase of health coverage for employees, the driller has no choice about paying for insurance covering wages lost by employees due to a disabling workplace injury.
Those drillers who self-insure have a keen interest in workplace safety since they pay out of pocket to compensate for injuries that might result from negligence. Although not every workplace injury can be anticipated or prevented, every driller can lower employees' risk of injury by changing the way they perform their jobs.
Today, many safety conscious -- or cost cutting -- drillers automatically label workplace safety improvements as someone else's concern. Workplace safety improvements are not, however, limited to requiring hard hats for construction workers or safety goggles in a manufacturing plant. Our economy's recent trend toward becoming a service economy also opens many new avenues for reducing workers' compensation claims or improving workplace safety records.
Communicating with workers can often help reduce cost of workers' compensation insurance. Listening to employee suggestions about modifying the workplace or work station is always profitable. Working with the employee to make his or her job less stressful, less physically demanding or less repetitive can lead to a modified workplace where job-related injuries are far fewer and insurance premiums considerably less.
Surprisingly, communicating with an employee after a workplace injury has occurred can also substantially reduce workers' compensation costs. Honestly informing any injured employee about his or her rights under workers' compensation laws, reassuring them their job (or a less demanding job if necessary while they are recovering) will be waiting for them goes a long way toward reducing lawsuits.
Even the smallest driller will find rewards greater -- and costs greatly reduced -- once they realize workers' compensation is not one of those topics about which nothing can be done.