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.