How Does Workers' Compensation Insurance Work? | NJM

Skip to Main Content

How Does Workers' Compensation Insurance Work?

All states have laws requiring employers to provide benefits to employees who are injured on the job. Workers' compensation laws differ in every state, but they all aim to cover the cost of workers' on-the-job injuries and job-related illnesses.

How Workers' Compensation Works

Employers pay a premium to an insurer or a state fund in exchange for workers' compensation benefits.

Premiums are calculated based on:

  • Job Classifications
    The types of jobs performed in a company. A company that employs roofers pays a higher premium than a company that employs accountants, because the risk and frequency of injury is greater for a roofing employee. Job classification rates are mandated by the state.

  • Annual Payroll
    The salaries of all employees performing a given job at the company.

  • Previous Claim Activity and Experience
    The company’s history of injuries or illnesses that required medical coverage. A company can improve this aspect by implementing loss prevention measures.

The best way for employers to save on their workers' compensation premiums is to adopt a safety-first culture and prevent injuries before they happen.

If an employee is injured on the job, the employer's workers' compensation insurance will respond.

Other Options for Employers

In some states, a company can meet their workers' compensation obligation by self-insuring. Self-insurance allows organizations to set aside funds for future losses, instead of paying a premium to an insurer.

Employers that self-insure can choose to use a Third-Party Administrator (TPA) to handle claims, loss prevention, legal representation, and medical management. TPAs allow companies that self-insure to save time and money on administration.

The content on this page is intended for informational purposes only. It is not an insurance policy, and does not, in any way, replace or modify the definitions and information contained in individual insurance policies. Terms and coverage availability may vary by state, and exclusions and deductibles may apply. Discounts also vary by state and may not be applied to all policy coverages. Coverage for an accident or loss is subject to the terms and conditions of the insurance policy applicable to a particular claim.