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What is workers' compensation insurance?

Workers' compensation insurance is likely to be an insurance policy obtained by a company to cover the medical costs and lost wages for its employees' work-related injuries and illnesses. In the U.S. each state determines the "worker comp" insurance that companies must provide.

The cost of the workers' compensation insurance is paid by the employer. Many view the cost as another fringe benefit and will include the cost in its fringe benefit rate. Hence, the cost of workers' compensation insurance for production workers will be an additional product cost. The cost of workers' compensation insurance for the office staff will be a period cost and will be expensed immediately as part of SG&A.

The cost of workers' compensation insurance varies by the type of work performed, each employee's annual pay, and the company's experience rating. In other words, the cost of workers' compensation insurance will be highest when the work performed is dangerous, the employees in those jobs have high annual pay, and the company has a history of many injuries. On the other hand, the workers' compensation insurance cost will be very low for an office clerk who never enters the factory area.

It is important not to confuse worker comp with unemployment comp.