How does a workers’ comp settlement work?

Workplace injuries are a reality for your business because workers can be injured while performing numerous tasks. The United States Bureau of Labor Statistics reported 2.6 million nonfatal workplace injuries in 2023. This figure includes traumatic injuries from workplace machinery and repetitive-use injuries, such as carpal tunnel syndrome.

Most states require that businesses carry workers’ compensation insurance, a type of business insurance. Workers’ comp covers the financial losses you would incur following an injury on the job. When there’s more severe or permanent harm, a settlement often will result in a lump sum or structured payment plan to the employee. Here’s a look at how workers’ comp settlements work and what you need to know. [Find the best business insurance for your organization]

What’s a workers’ comp settlement?

A workers’ compensation settlement is an agreement between an injured worker and the employer or employer’s insurance carrier to close an active claim in exchange for a sum of money, explained Hannah Tansel, office administrator at Schaffer & Associates LPA. “Usually, settlement agreements resolve past, present, or future medical and compensation liabilities within the claim,” she said.

When an employer has workers’ compensation insurance, it notifies its insurer when an employee suffers an injury. Typically, the insurer coordinates payments for medical expenses, lost wages and rehabilitation costs.

In the workers’ compensation claims process, the insurer may pay workers’ comp benefits directly or via a settlement. When an insurer pays benefits directly — without a settlement — the injured worker often receives money to cover the injury’s hard costs. For example, the insurance will pay existing medical bills but won’t necessarily cover future medical bills.

Editor’s note: Looking for the right workers’ comp insurance for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

However, the injured employee may choose not to accept the workers’ compensation benefits they’re offered. They may instead opt to hire an attorney to get a more significant workers’ comp settlement — one that considers their immediate and future financial and medical needs.

A workers’ comp settlement considers the following:

• The injured employee’s future healthcare costs
• The money the employee needs to sustain household costs
• Attorney costs

Attorney costs drive up the settlement value and provide the worker with proper representation. It’s standard for an attorney to work on a contingency basis and be paid after a successful settlement.

Most settlements allow injured workers to choose a lump sum or a structured payment. Employees with substantial medical bills will likely opt for a lump sum. Those who must pay for medical care over a longer term may prefer a structured payment.

What expenses do workers’ comp settlements cover?

Workers’ comp will pay for the following types of expenses in a settlement:

• Attorney fees
• Disability payments
• Medical bills
• Ambulance rides
• Surgery
• Future medical treatments
• Lost wages and future lost wage costs

What is the workers’ compensation settlement process?

Workers’ compensation is legislated and governed at the state level. Some states have stringent workers’ compensation rules, while others — like Texas — don’t require you to maintain a workers’ compensation policy. Consequently, your workers’ compensation settlement process and deadlines will likely differ depending on your state.

In general, most settlement process steps will be similar for employees and employers and include the following.

Employees’ workers’ compensation settlement process

These are the essential steps an employee will follow to receive a workers’ compensation settlement:

1. Notify your company of an injury.
2. Receive medical attention.
3. File a workers’ compensation claim.
4. Receive an approved or denied claim.
5. Hire an attorney if your insurance company is unwilling to offer a settlement.
6. Calculate the payout.
7. Negotiate with your insurance carrier.
8. Take the case to court if the parties cannot reach an agreement.
9. Receive a judgment.
10. Accept payout as a lump sum or structured settlement.

Employers’ workers’ compensation settlement process

Employers should take the following steps during the workers’ compensation settlement process:

1. Respond to the injury report sent by your employee or their representative.
2. File the worker’s compensation claim with your insurer.
3. Respond to the insurer’s decision and participate in any necessary investigations.
4. Offer a return-to-work program.
5. Collaborate with your insurer on a settlement.
6. Determine whether the payout will be a lump sum or a structured payment plan.
7. If you can’t reach an agreement, hire a business attorney and prepare for a court case.

“Many people assume that a settlement is the end of a case,” explained Tansel. “There are certain types of settlements, called indemnity-only settlements, that allow an injured worker to settle the compensation portion of their claim but keep the medical treatment open.” That’s why it’s important to fully understand the settlement and next steps involved in each case.

How is a workers’ comp payout calculated?

Calculating the payout is a significant part of the settlement process. An attorney and HR personnel will consider several factors when calculating a workers’ comp payout:

• Existing medical expenses and lost wages: Calculating a payout starts with determining the injured employee’s existing medical expenses and lost wages. These factors are easy to determine because your employee’s bills and income are readily available.
• Future medical expenses and lost wages: Calculations get more complicated when factoring in impending medical expenses and lost wages. Attorneys will often speak with doctors to understand necessary future procedures and treatments. For example, your employee might need surgery for a worsening condition or, if ill, may require additional treatment options.
• Defined rates for specific losses: On top of wages and medical costs — existing and future — the attorney will use a defined rate for a specific loss. A specific loss includes the loss of a limb, loss of hearing or sight, or paralysis. Every state has a schedule of loss of use to help determine the rate for a specific loss. For example, under the Illinois Workers’ Compensation Act, the spine is the most valuable body part with a total of 500 weeks, explained Christopher G. Bassmaji, partner at Schlack & Bassmaji. “In Illinois, a settlement is calculated by taking 60 percent of the employee’s average weekly wage (their average weekly earnings for the 52 weeks prior to the date of the accident) multiplied by a percentage of the body part,” he said.

How do workers’ comp claim hearings work?

Say your company is deemed to be at fault in a worker’s injury, and the proposed workers’ comp settlement is considered insufficient. In this case, the injured party may hire a personal injury attorney and take their case before a judge in a workers’ comp hearing.

In a workers’ comp hearing, the judge will review case details, such as the circumstances behind the injury or illness. The judge will examine the injured party’s job history and listen to expert testimony about their injuries. The injured employee will likely include pain and suffering calculations in their payout proposal.

After reviewing all the evidence, the judge will make a determination for all, some or none of what the plaintiff solicited. In most cases, the judgment is for a portion of the plaintiff’s request. The insurance carrier will pay the award as a lump sum or structured settlement, making regular payments to the winning party over time.

Casey Conway and Mark Fairlie contributed to this article.