What’s the Difference Between Workers Compensation and Employee Disability Insurance?

It’s a good questions and a lot of people, including many small employers, don’t know the answer. In this case, not only is ignorance not bliss, it could cost you a bundle if an employee is injured on the job and you don’t have workers compensation coverage.

Workers Compensation Insurance

In general, Workers Compensation is insurance you the employer purchase from a private insurance company to cover the cost of medical care and lost income to any employee who is injured while performing work-related duties.  (Note that loss income in most circumstances is capped at 2/3rds of gross earnings. If total expenses are under $1,000, in most instances, you may elect to pay them out of pocket to avoid filing a claim and risk increasing your premiums. Don’t assume this applies to you. Check with your agent to be sure.)

Under U.S. Department of Labor regulations, Workers Compensation Insurance is mandatory in all 50 states if you employ at least one person full or part-time. However, specific conditions and exemptions will vary from state to state.  In Texas, for example, you can elect to purchase a non-subscription product that’s similar to workers comp. And most states will let you self-insure if you have sufficient cash set aside to cover work-related injuries, but that’s a risky proposition in today’s litigious society.

Different rules regarding the number of employees may vary depending on the type of business you operate, or the relationship of the employee to you. A spouse or child, for instance, may not count as an employee. No state currently requires that a sole proprietor/non-employer carry workers compensation on him or herself. You can check with your state’s insurance department or your business insurance agent to learn about the specific laws regarding employee status and workers comp insurance in your state.

In any event, it isn’t something you should ever consider doing without, as heavy fines may be involved. It is, however, a tax-deductible business expense.

Employee Disability Insurance

Only California, Hawaii, New Jersey, New York and the Commonwealth of Puerto Rico currently mandate that employers provide employee disability insurance. For the most part, disability insurance is something an individual employee may elect to purchase, or it may also be part of a group insurance policy. It comes in two flavors, which can be purchased individually or together.

• Short-term disability policies usually cover 13 to 26 weeks (some go as high as a year). Benefits typically range from 50 to 67% of an employee’s gross pay, up to a weekly maximum. Unless an employee is in an accident or immediate hospitalization is required, there is usually a waiting period of one to 10 days before benefits are paid.
• Long-term disability policies kick-in when short-term benefits run out. That’s typically three to six months after the beginning of a disabling event, ending at age 65 or within 5 years, whichever comes soonest.  Benefit amounts and terms are generally the same as noted for short-term coverage. If an employee is receiving Social Security or other benefits, the long-term disability benefits may be reduced proportionately.

You can shop for competitive quotes for workers compensation insurance and employee disability insurance on this site.