Employee Benefits Required By Law Essay, Research Paper
The legally required employee benefits
constitute nearly a quarter of the benefits package that employers provide.
These benefits include employer contributions to Social Security, unemployment
insurance, and workers? compensation insurance. Altogether such benefits
represent about twenty-one and half percent of payroll costs.
Social Security
Social Security is the federally
administered insurance system. Under current federal laws, both employer
and employee must pay into the system, and a certain percentage of the
employee?s salary is paid up to a maximum limit. Social Security is mandatory
for employees and employers. The most noteworthy exceptions are state and
local government employees.
The Social Security Act was passed
in 1935. It provides an insurance plan designed to indemnify covered individuals
against loss of earnings resulting from various causes. This loss of earnings
may result from retirement, unemployment, disability, or the case of dependents,
the death of the person supporting them. Social Security does not pay off
except in the case where a loss of income through loss of employment actually
is incurred. In order to be eligible for old age and survivors insurance
(OASI) as well as disability and unemployment insurance under the Social
Security Act, an individual must have been engaged in employment covered
by the Act. Most employment in private enterprise, most types of self-employment,
active military service after 1956 and employment in certain nonprofit
organizations and governmental agencies are subject to coverage under the
Act. Railroad workers and United States civil service employees who are
covered by their own systems and some occupational groups, under certain
conditions, are exempted form the Act. The Social Security Program
is supported by means of a tax levied against an employee?s earnings which
must be matched buy the employer. Self-employed persons are required to
pay a tax on their earnings at a rate, which is higher than that paid by
employees but less than the combined rates paid by employees and their
employers.
In order to receive old age insurance
benefits, a person must have reached retirement age and be fully insured.
A full-insured person is one who must have earned at least $50 in a quarter
for a period of 40 quarters. It is possible for an individual who dies
or becomes totally disabled at an early age to be classified as fully insured
with less than 40 quarters. To receive old age insurance benefits, covered
individuals must also meet the test of retirement. To meet this test, persons
under 70 cannot be earning more than an established amount through gainful
employment. This limitation of earnings does not include income from sources
other than gainful employment such as investments or pensions. Social security
retirement benefits consist of those benefits which individuals are entitled
to receive in their own behalf, called the primary insurance amount, plus
supplemental benefits for eligible dependents. These benefits can be determined
from a prepared table. There are also both minimum and maximum limits to
the amount that individuals and their dependents can receive.
The Social Security program provides
benefit payments to workers who are too severely disabled to engage in
gainful employment. In order to be eligible for such benefits, an individual?s
disability must have existed for at least 6 month and must be expected
to continue for at least 12 months. Those eligible for disability benefits
must have worked under Social Security for a t least 5 out of the 10 years
before becoming disabled. Disability benefits, which include auxiliary
benefits for dependents, are computed on the same basis as retirement benefits
and are converted to retirement benefits when the individual reaches the
age of 65.
The survivors? insurance benefits represent
the form of life insurance that is paid to members of a deceased person?s
family who meet the requirements for eligibility. As in the case of life
insurance, the benefits that the survivors of a covered individual?s receive
may be far in excess of their cost to this individual. Survivors of individuals,
who were currently insured, as well as those who were fully insured at
the time of death, are eligible to receive certain benefits, provided that
the survivors meet other eligibility requirements. A currently insured
person is one who has been covered during at least six out of the thirteen
quarters prior death.
Many people think of Social Security as
a retirement program. But, retirement benefits are just one part of the
Social Security program. Some of the Social Security taxes person pays
go toward survivors insurance. In fact, the value of the survivors insurance
he/she has under Social Security is probably more than the value of his/her
individual life insurance. When someone who has worked and paid into Social
Security dies, survivor benefits can be paid to certain family members.
These include widows, widowers, children, and dependent parents. Anyone
earns survivors insurance by working and paying Social Security taxes.
When someone dies, certain members of his/her family may be eligible for
survivors? benefits if the person worked, paid Social Security taxes and
earned enough credits. You can earn a maximum of four credits each year.
The number of credits you need depends on your age when you die. The younger
a person is, the fewer credits he or she needs to have family members be
eligible for survivors? benefits. But nobody needs more than forty credits
to be eligible for any Social Security benefits.
Under a special rule, benefits can be paid
to your children and your spouse, who is caring for the children, even
if you do not have the number of credits needed. They can get benefits
if you have credit for one and one-half years of work in the three years
just before your death. When you die, Social Security survivors benefits
can be paid to your:
(a) Widow or widower – full benefits at
age 65 or older (if born before 1938) or reduced benefits as early as age
60. A disabled widow or widower can get benefits at 50 ? 60. The surviving
spouse?s benefits may be reduced if he or she also receives a pension from
a job where Social Security taxes were not withheld. Widow or widower -
at any age if he or she takes care of your child under age 16 or disabled
who get benefits. (b) Unmarried children under age 18 or up to age 19 if
they are attending elementary or secondary school full time. Your child
can get benefits at any age if he or she was disabled before age 22 and
remained disabled. Under certain circumstances, benefits also can be paid
to you stepchildren, grandchildren, or adopted children. (c) Dependent
parents at 62 or older.
Some people find Social Security taxes
an unwelcome deduction from the family?s earnings. They are thinking about
how they could use the money to pay bills or plan for their children’s
college education. But the illness or injury–or even the death–of a parent
in a family with young children can suddenly make Social Security a very
important part of the family’s survival. Those paycheck deductions for
Social Security taxes could make it possible for the family to stay together.
For example, some families can get as much as $2,000 a month when the worker
is disabled. This fact sheet focuses on benefits paid to the children when
one or both parents become disabled, retire or die. When people think of
Social Security benefits, they usually think of older men and women who
are retired or who are widows or widowers. If you find it difficult to
picture a small child as a Social Security beneficiary, you may be surprised
to learn that 3.8 million children receive approximately $1.4 billion each
month because one or both of their parents are disabled, retired or deceased.
Those dollars are helping provide the necessities of life for the family
members and helping make it possible for those children to complete high
school. When a parent becomes disabled or dies, Social Security benefits
help stabilize the young family’s financial future.
The child can be the worker’s biological
child, adopted child or stepchild. The child also could be a dependent
grandchild. To get benefits, a child must have a parent(s) who is disabled
or retired and entitled to Social Security benefits, or have a parent who
died after having worked long enough in a job where he or she paid Social
Security taxes. The child also must be under age 18; be 18-19 years old
and a full-time student (no higher than grade 12); or be 18 or older and
disabled. The disability must have started before age 22. Normally, benefits
stop when the child reaches age 18 unless he or she is disabled. Five months
before the beneficiary’s 18th birthday, we send the child a notice that
benefits will end at age 18, unless he or she is a full-time student at
a secondary (or elementary) school. If the beneficiary is under age19 and
still attending a secondary or elementary school, he or she must notify
us by completing a statement of attendance. The benefits then will continue
until he or she graduates or until two months after becoming age 19, which
ever comes first. If a child who is receiving Social Security benefits
is in the mother’s (or father’s) care, the parent may be able to receive
benefits until the child reaches age 16. The child’s benefits continue,
but the parent’s benefits stop unless he or she is age 60 or over and is
receiving benefits as a widow or widower or is age 62 or older and receiving
retirement benefits.
Within a family, each child may receive
up to one-half of the worker’s full retirement or disability benefit, or
75 percent of the deceased parent’s basic Social Security benefit. However,
there’s a limit to the amount of money that can be paid to a family. The
family maximum payment is determined as part of every Social Security benefit
computation and can be from 150 to 180 percent of the worker’s full benefit
amount. If the total amount payable to all family members exceeds this
limit, each person’s benefit is reduced proportionately (except the worker’s)
until the total equals the maximum allowable amount. As an example of monthly
benefits, let’s say Tom Brown earns $30,000 a year, is age 35, married
and has one child. Tom is severely injured in a car accident and is found
to be eligible for Social Security disability benefits. Tom, his wife and
their child receive $1,640 each month. As another example of how Social
Security benefits can help the young family, Sara was age 45 and earning
$50,000 when she died, leaving her husband and two children. The husband
and children receive $2,370 each month based on Sara’s earnings record.
If you were like most people, you would
rather work than stay home. But working is a big step for a person with
a disability. Social Security and SSI have special rules called “work incentives”
to help you overcome some problems. These work incentives include cash
benefits while you work; Medicare or Medicaid while you work; help with
any extra work expenses you may have as a result of your disability; and
help with education, training and rehabilitation to start a new line of
work. Social Security disability insurance benefits are paid to people
with disabilities or to individuals who are blind who have worked under
Social Security and to their dependents. SSI disability benefits are paid
to people with disabilities or to individuals who are blind who have little
income and few resources. Social Security beneficiaries with low income
and few resources also may qualify for SSI. Although there are differences
between Social Security and SSI, the work incentives under both programs
are designed to accomplish the same objective: to provide support and assistance
while you attempt to return to work or as you enter the workforce for the
first time.
The disabled individual will receive his
or her full monthly Social Security benefit for a year after the individual?s
return to work. If he or she continues to work beyond that while still
disabled, the person?s eligibility for monthly cash benefits will continue
for at least another 36 months. The person usually can have a trial work
period of nine during which his or her benefits will not be affected by
your earnings regardless of how much you earn. A trial work month is any
month in which his or her total earnings are more than $200 or, if he or
she are self-employed, the person will earn more than $200 (after expenses)
or spend more than 40 hours in the person?s own business. Before the person
will start loosing benefits he or she can earn more than $500 a month.
Nearly every American–man, woman and
child–has Social Security protection, either as a worker or as a dependent
of a worker. Most women did not work outside the home. Today, the role
of women is far different. Nearly 60 percent of all women are in the nation’s
workforce. Many women work throughout their adult lives. Although Social
Security always has provided benefits for women, it has taken on added
significance. More women work, pay Social Security taxes and earn credit
toward a monthly income for their retirement. Working women with children
earn Social Security protection for themselves and their families. This
could mean monthly benefits to a woman and her family if she becomes disabled
and can no longer work. If she dies, her survivors may be eligible for
benefits. Although some women choose lifetime careers outside the home,
many women work for a few years, leave the labor force to raise their children,
and then return to work. Some women choose not to work outside their homes.
They usually are covered by Social Security through their husband’s work
and can receive benefits when he retires, becomes disabled or dies. Whether
a woman works, has worked or has never worked, it is important that she
knows exactly what Social Security coverage means to her. She also should
know about Social Security coverage for anyone she may hire as a household
worker or provider of childcare. She needs to know what to do if she changes
her name. And she needs to know that if she receives a pension for work
not covered by Social Security, her Social Security benefits could be affected.
Unemployment Compensation
Unemployment insurance provides workers,
whose jobs have been terminated through no fault of their own. Monetary
payments for a given period of time or until they find a new job. Unemployment
payments are intended to provide an unemployed worker time to find a new
job equivalent to the one lost without major financial distress. Without
employment compensation many workers would be forced to take jobs for which
they were overqualified or end up on welfare. Unemployment compensation
has also been justified in terms of providing the economy with consumer
spending during periods of economic adjustment.
Unemployment compensation is a form of
insurance designed to provide funds to employees who have lost their jobs
and are seeking other jobs. Title IX of the Social Security Act of 1935
requires employers to pay taxes for unemployment compensation. The law
was written in such a manner as to encourage individual states to establish
their own unemployment systems. If a state established its own unemployment
compensation system according to prescribed federal standards, the proceeds
of the unemployment taxes paid an employer go to the state. By 1937, all
states and the District of Columbia had adopted acceptable unemployment
compensation plans.
Employees who have been working in employment
covered by the Social Security Act and who are laid off may be eligible
for unemployment insurance benefits during their unemployment for a period
up to twenty-six weeks. Eligible persons must submit an application for
unemployment compensation with their state employment agency, register
for available work and be willing to accept any suitable employment that
may be offered to them. However, the term suitable permits individuals
to enjoy considerable discretion in accepting or rejecting job offers.
The amount of the compensation that workers are eligible to receive which
varies among states, is determined by their previous wage rates and previous
periods of employment. Funds for unemployment compensation are derived
from a federal payroll tax based upon the wages paid to each employee,
up to an established maximum. The major portion of this tax is refunded
to the individual states, which operate their unemployment compensation
programs is accordance with minimum standards prescribed by the federal
government.
While not required by law, in some industries
unemployment compensation is augmented by supplemental unemployment benefits
(SUBs) financed by the employer. These benefits were introduced in 1955
when the United Auto Workers successfully negotiated a SUB plan with the
auto industry which established a pattern for other industries. This plan
enables an employee who is laid off to draw, in addition to state unemployment
compensation, weekly benefits from the employer that are paid from a fund
created for this purpose. Many SUB plans in recent years have been liberalized
to permit employees to receive weekly benefits when the length of their
workweek is reduced and to receive a lump-sum payment if their employment
is terminated permanently. The amount of these benefits is determined by
length of service and wage rate. Employer liability under the plan is limited
to the amount of money that has been accumulated within the fund from employer
contributions based on the total hours of work performed by union members.
In the United States, the unemployment
insurance program is based on a dual program of federal and state statutes.
The program was established by the federal Social Security Act in 1935.
Much of the federal program is implemented through the Federal Unemployment
Tax Act. Each state administers a separate unemployment insurance program,
which must be approved by the Secretary of Labor, based on federal standards.
The state programs are explicitly made applicable to areas normally regulated
by laws of the United States. There are special federal rules for nonprofit
organizations and governmental entities. Which employees are eligible for
compensation, the amount they receive, and the period of time benefits
are paid are determined by a mix of federal and state law.
To support the unemployment compensation
systems a combination of federal and state taxes are levied upon employers.
State employers are normally based on the amount of wages they have paid,
the amount they have contributed to the unemployment fund, and the amount
that their discharged employees have been compensated from the fund. Any
state tax imposed on employers (and certain credits on that tax) may be
credited against the federal tax. The proceeds from the unemployment taxes
are deposited in an Unemployment Trust Fund. Each state has a separate
account in the Fund to which deposits are made. Within the fund there are
also separate accounts for state administrative costs and extended unemployment
compensation. During economic recessions the federal government has provided
emergency assistance to allow states to extend the time for which individuals
can receive benefits. This has been accomplished by transferring money
to a state from its Extended Unemployment Account by passing a temporary
law authorizing the transfer. The ability of a state to tap into this emergency
system is usually dependent on the employment rate reaching a designated
percentage within the state or the nation.
Some states provide addition unemployment
benefits to workers who are disabled. Financing for the California disability
compensation program comes from a tax on employees. The Railroad Unemployment
Insurance Act provides unemployment compensation for workers in the railroad
industry who lose their jobs. Federal Unemployment Tax. Unemployment insurance
is a Federal-State program jointly financed through Federal and State employer
payroll taxes. Generally, employers must pay both State and Federal Unemployment
taxes if: (1) they pay wages to employees totaling $1,500, or more, in
any quarter of a calendar year; or, (2) they had one employee during any
day of a week during 20 weeks in a calendar year, regardless of whether
or not the weeks were consecutive. However, some State laws differ from
the Federal law and you should check with your State Employment Security
Agency to learn the exact requirements. Federal Unemployment Tax. The Federal
Unemployment Tax (FUTA), paid to the Internal Revenue Service (Form IRS
940), covers the costs of administering the Unemployment Insurance and
Job Service programs in all States. In addition, FUTA pays one-half of
the cost of extended benefits and provides for a fund from which States
may borrow, if necessary, to pay benefits. State Unemployment Tax. The
State Unemployment Tax, paid to State Employment Security Agencies, is
used solely for the payment of benefits to workers who have lost their
through no fault of their own. In addition, these taxes are used to pay <
one-half the cost of extended benefits.
Domestic employees. Employers of domestic
employees must pay State and Federal unemployment taxes if they cash wages
to household workers totaling $1,000, or more, in any calendar quarter
of the current or preceding year. A household worker is an employee who
performs domestic services in a private home, local college club, or local
fraternity or sorority chapter. Employers of agricultural employees must
pay State and Federal unemployment taxes if: (1) they pay cash wages to
employees of $20,000, or more, in any calendar quarter; or (2) in each
of 20 different calendar weeks in the current or preceding calendar year,
there was at least 1 day in which they had 10 or more employees performing
service in agricultural labor. The 20 weeks do not have to be consecutive
weeks, not must they be the same 10 employees, nor must all employees be
working at the same time of the day. Tax rate. The FUTA tax rate is 6.2%
of taxable wages. The taxable wage base is the first $7,000 paid in wages
to each employee during a calendar year. Employers who pay the State unemployment
tax, on a timely basis, will receive an offset credit of 5.4% regardless
of the rate of tax they pay the State. Therefore, the net Federal tax rate
is 0.8%. The issue of the Federal Unemployment Tax Act is that whether
the national employment the security system should be reformed and updated.
The FUTA came into existence in 1939 to guarantee financing for a national
employment security system. The idea was for employers to pay the costs
of administering the unemployment compensation and national job placement
system. In return, employers would receive assistance in recruiting new
workers and the unemployed would be able to find jobs faster.
Unemployment insurance pays benefits to
qualified workers who are unemployed and looking for work. Unemployment
payments (compensation) are intended to provide an unemployed worker time
to find a new job equivalent to the one lost without major financial distress.
Benefits are paid as a matter of right and are not based on need. In the
United States, the unemployment insurance program is based on a dual program
of federal and state statutes. The program was established by the federal
Social Security Act in 1935. Much of the federal program is implemented
through the Federal Unemployment Tax Act. Each state administers a separate
unemployment insurance program within minimum guidelines established by
Federal Statute. Who is eligible, the amount they receive, and the period
of time benefits are paid are determined by each state. To support the
unemployment compensation systems a combination of federal and state taxes
are levied upon employers. The proceeds from the unemployment taxes are
deposited in an Unemployment Trust Fund. Each state had a separate account
in the Fund to which deposits are made. The Federal Government provides
funding for benefits for unemployed federal employees and ex-military personnel.
The Railroad Unemployment Insurance Act provides unemployment compensation
for workers in the railroad industry who lose their jobs.
Unemployment Compensation for Federal Employees
is the benefit program for unemployed federal employees. Funding comes
from the Federal Government and is distributed through State agencies.
Federal wages are not reported to a state unemployment compensation agency
until a claim is filed. The claimant?s federal wages will be assigned to
the state of the last duty or the state of residency if the duty station
was outside the United States, if covered work was dome in the state after
leaving federal service, or if employer was the Federal Emergency Management
Agency (FEMA). This is the only Federal agency that does not report wages
to the last duty station. Benefits amounts and length of weeks benefits
can be paid are determined by the law of the state in which the claim is
made. Federal wages assigned to another state may be transferred to the
resident state under the Combined Wage Claim program. When a claim is filed
following a period of federal employment, the claimant must bring all forms
the federal agency furnished upon departure. These include the SF-8 ?Notice
to Federal Employees About Unemployment Compensation? and the Notification
of Personnel Action. Also bring proof of the federal wages, if available.
Certain services for the federal government are not covered by unemployment
compensation. The agency worked for must certify that the services were
covered under the UCFE program. Information from a federal agency regarding
the location of the duty station, the wages, and whether the employment
was covered, are final and binding. If claimants disagree with any of this
information, they have the right to ask the agency to reconsider its findings
and appeal the denial of benefits.
Unemployment Compensation for Ex-Service
members is the benefit program for ex-military personnel to provide weekly
income to meet basic needs while searching for employment. Those who were
on active duty with a branch of the United States military may be entitled
to unemployment benefits based on that service. The military wages are
assigned to the state where they first file a new claim after the separation
from active duty. They must meet the following requirements: The claimants
must have been separated under honorable conditions. They must have completed
a full term of service, or if released early, it must have been for a qualifying
reason. And they served on active duty in reserve status as a member of
a National Guard or Reserve component continuously for 90 or more days.
Unemployment Compensation for Ex-Service benefits are paid under the same
conditions as benefits based on other employment. However, military wages,
for claims purposes, are determined by pay grade at time of separation.
A wage table furnished by the federal government which shows the equivalent
civilian wage for each military pay grade is used for the determination.
Information the military furnished about length of service and the reason
for separation is considered as final and binding. If any of this information
is incorrect on the Form DD-214, or other military documents, it is the
responsibility of the claimants to contact the service to have the information
reviewed by them or the Department of Veterans Affairs.
Workers? Compensation
Workers? compensation is meant to
protect employees from loss of income and to cover extra expenses associated
with job-related injuries or illness. Accidents in which the employee does
not lose time from work, accidents in which the employee loses time from
work, temporary partial disability, permanent partial or total disability,
death, occupational diseases, noncrippling physical impairments, such as
deafness, impairments suffered at employer-sanctioned events, such as social
events or during travel to organization business, and injuries or disabilities
attributable to an employer?s gross negligence are the types of injuries
and illnesses most frequently covered by workers? compensation laws. Since
1955, several states have allowed workers? compensation payments for job-related
cases of anxiety, depression, and certain mental disorders. Although some
form of workers? compensation is available in all 50 states, specific requirements,
payments, and procedures vary among states.
Certain features are common to virtually
all programs: The laws generally provide for replacement of lost income,
medical expense payments, rehabilitation of some sort, death benefits to
survivors, and lump-sum disability payments. The employee does not have
to sue the employer to get compensation. The compensation is normally paid
through an insurance program financed through premiums paid by employers.
Workers? compensation insurance premiums are based on the accident and
illness record of the organization. Having a large number of paid claims
results in higher premiums. Medical expenses are usually covered in full
under workers? compensation laws. It is a no-fault system; all job-related
injuries and illnesses are covered regardless of where the fault for the
disability is placed.
Workers? compensation coverage is
compulsory in all but a few states. In these states, it is elective for
the employer. When it is elective, any employers who reject the coverage
also give up certain legal protections. Benefits paid are generally provided
for four types of disability: permanent partial disability, permanent total
disability, temporary partial disability, and temporary total disability.
Before any workers? compensation is reorganized, the disability must be
shown to be work-related. This usually involves an evaluation of the claimant
by an occupational physician. One major criticism of workers? compensation
involves the extent of coverage provided by different states. The amounts
paid, ease of collecting, and the likelihood of collecting all vary significantly
from state to state.
After a decade of yearly double-digit
increases in the cost of workers? compensation, in the early 1990s at least
35 states began to make changes in their workers? compensation laws. These
changes included tighter eligibility standards, benefit cuts, improved
workplace safety, and campaigns against fraud. Recent data indicate that
these changes are paying off. The rates of increases in the cost of workers?
compensation have slowed considerably, and in 1993 the cost actually declined.
From 1993 through 1996, the cost of workers? compensation insurance continued
to decrease.
State and federal workers? compensation
insurance is based on the theory that the cost of industrial accidents
should be considered as one of the costs of production and should ultimately
be passed on to the consumer. Individual employees should neither be required
to stand the expense of their treatment or loss of income nor be required
to be subjected to complicated, delaying, and expensive legal procedures.
In most states, workers? compensation insurance is compulsory. Only in
New Jersey and Texas is it elective. When compulsory, every employer subject
to it is required to comply with the law?s provisions for the compensation
of work injuries. The law is compulsory for the employee also. When elective,
the employers have the option of either accepting or rejecting the law.
If they reject it, they lose the customary common law defenses ? assumed
risk of employment, negligence of a fellow servant, and contributory negligence.
Workers? compensation laws typically
provide that injured employees will be paid a disability benefit that is
usually based on a percentage of their wages. Each state also specifies
the length of the period of payment and usually indicates a maximum amount
that may be paid. In addition to the disability benefits, provision is
made for payment of medical and hospitalization expenses to some degree,
and in all states, death benefits are paid to survivors of the employee.
Commissions are established to adjudicate claims at little or no expense
to the claimant. Two methods of providing for workers? compensation risks
are commonly used. One method is for the state to operate an insurance
system that employers may join and are required to join. Another method
is for the states to permit employers to insure with private companies,
and in some states, employers may be certified by the commission handling
workers? compensation to handle their own risks without any type of insurance.
Under most state and private insurance plans, the employer and the employee
gain by maintaining good safety records.
Disability payments from other sources
do not affect your Social Security disability benefits. But, if the disability
payment is workers? compensation or another public disability payment,
your Social Security benefits may be reduced. After the reduction, your
total public disability benefits should not exceed eighty percent of your
average current earnings before you became disabled. These include your
combined family Social Security benefits, your workers? compensation payment
and any other public disability payment you receive. The workers? compensation
payment and another type of public disability payment are kinds of payments
that affect your Social Security disability benefits. Workers? compensation
payment is one that is made to a worker because of a job-related injury
and illness. It may be paid by federal or state workers? compensation agencies,
employers or insurance companies on behalf of employers. Public disability
payments that may affect your Social Security benefits are those paid under
a federal, state or local government law or plan that pays for conditions
that are not job-related. They differ from workers? compensation because
the disability that the worker has may not be job related. Examples are
civil service disability benefits, military disability benefits, state
temporary disability benefits and state or local government retirement
benefits that are based on disability.
The higher costs of providing workers’
compensation benefits in risky occupations may lead employers to improve
safety in order to lower their insurance costs. The 75th anniversary of
the Federal Employees’ Compensation Act (FECA) is an opportune time to
reflect on broad policy issues of no-fault work injury liability statutes.
Policy discussions regarding occupational safety and health usually are
divided into two distinct parts with government standards established under
the Occupational Safety and Health Administration (OSHA) as the regulatory
device for encouraging prevention and workers’ compensation considered
as the program for providing benefits to disabled workers. The much debated
standards approach established under the Occupational Safety and Health
Act draws attention to the role of workers’ compensation as apart of the
policy mix for improving the health and safety of employees. General issues
of safety and health and their effect on employers and employees are first
considered in this article. Then the mechanics of determining workers’
compensation benefits in the private sector and how this process relates
to employer prevention incentives are briefly reviewed. Evidence on the
effect of workers’ compensation on safety and health is also discussed.
Finally, the specific arrangements by which Federal agencies are charged
for the work injury liabilities of their employees are compared with arrangements
used in the private sector to determine whether the Federal arrangements
are consistent with the objective of encouraging prevention of injury and
illness.
All workers’ compensation systems in the
United States require employers to guarantee that compensation to injured
workers will be paid. Some large employers may self-insure but most employers
meet this obligation by purchasing insurance. Several States offer workers’
compensation insurance in competition with commercial carriers, while other
States have a monopoly insurance fund. The largest source of workers’ compensation,
however, is insurance purchased from private companies. Workers’ compensation
insurance rates are based on the riskiness of the firm’s industrial classification
within each State. Approximately 600 groupings are used to determine the
firm’s “manual” rate, which is stated as a percent of payroll. If a firm
is large enough, the manual rate will begin to be adjusted by the experience
of the individual firm. The larger the firm’s payroll, the larger will
be the degree of this experience rating. In a typically risky industry,
firms with approximately 1,800 employees will have premiums based on their
own experience. It is obvious from this cursory review of the rate-setting
procedure, that the system is quite subtle in its attention to the accident
and disease experience of the individual firm. Within the workers’ compensation
community, experience rating is often viewed as a matter of equity–firms
with poor claims experience are charged a premium that reflects poor performance
and firms with good experience are charged less.
However, the potential for using this scheme
to regulate behavior is also apparent. Considering the significance of
occupational safety and health as a regulatory concern, it is somewhat
surprising that so few studies have examined experience rating. It is a
complex area to study, largely because of the complicating factor of the
employee’s response to higher benefits. A straightforward prediction about
the effect of experience rating on employers is that higher statutory benefit
levels should encourage more prevention. Benefit levels vary across States
and are regularly increased within States. However, higher benefit levels
are associated with higher reported levels of accidents. Higher levels
of benefits apparently encourage employees to report accidents. It is very
difficult to remove this employee effect from any effect higher benefits
might have on the employer. More attention should be paid to how liability
arrangements can be improved to create a better workplace environment.
Suggestions have been made to allow, or even require, all employers to
self-insure deductibles for workers’ compensation, and thus sharpen the
immediate reward for reduced injuries and disease. Other possibilities
for refining the incentives of the experience-rating system are to simplify
the relationships between experience and premiums. The current formula
is a complex array of actuarially important factors that are beyond the
comprehension of most safety and health professionals. Perhaps some elements
of the relationship between experience and premiums could be simplified
so as to make the reward for improved safety and health more apparent to
decision makers. The use of claims experience from the first 3 of the last
4 years is another reason that the linkage between experience and premiums
is more obtuse than is desirable.
A final suggestion for improvement in the
experience-rating scheme concerns the workers’ compensation rate regulation
system used in most States. Workers’ compensation rates are still heavily
regulated in most States, and although there are several mechanisms through
which competition can manifest itself, pricing is not explicitly and visibly
competitive in most States. This results in a marketplace that is not as
effective as one would expect under open competition–and this lack of
creative tension is manifested, in part, by producing few new ideas in
experience rating. Regulated rates also often subvert the potential of
experience rating by holding rates below the level established by the benefit
levels and claims. In an effort to please worker groups, State legislators
frequently set higher benefit levels, but then seek to appease employers
by keeping rates below the level implied by those benefits. This eventually
results in rates that make many employers unprofitable customers for insurers,
which leads to employers being unable to obtain voluntary insurance. Because
employers are legally obligated to have insurance, they are forced into
assigned risk pools. Assigned risk pools, with rates that do not fully
reflect benefit levels and claims experience, further diffuse the relationship
between experience and premiums, and thus distort the incentives of workers’
compensation.
Federal employee work injury and disease
benefits are paid by the employing agency through regular payroll funding
during the 45-day period of pay continuation and then through an annual
bill that accounts for benefits paid to the agency’s work- disabled employees.
This is essentially self-insurance, with extended claims administered through
the Office of Workers’ Compensation Programs, the Department of Labor agency
responsible for administering FECA. This arrangement avoids the imperfections
of the experience-rating system, because employers are fully rewarded or
penalized for their claims experience. Although employers pay the full
amount due, there are some problems. For example, it is not clear that
anyone at the “insurer’s” level is inclined to encourage disabled employees
to return to work. Another potential problem is that agencies must deal
only with the one authorized “insurer.” In most private insurance markets,
the amount of prevention services is used as a device to attract and retain
customers. It is not clear whether the Office of Workers ‘Compensation
Programs has any incentive to offer these key services. Occupational health
and safety is as important a regulatory issue today as it was in the early
20th century, when it was at the vanguard of government intervention in
the labor market. We should clearly be using all available devices for
improving the operation of the labor market. Because employees will be
compensated for their occupational injuries, it is necessary to take full
advantage of the financing of that compensation system in order to create
incentives for prevention. The financing arrangements now in use are quite
strong, but reinforcing prevention incentives has never been viewed as
their primary purpose. Recognition of this preventive incentive role and
attention to its improvement will serve to improve the occupational health
and safety of American workers.