HR Tip: Understanding "Employer Paid Salary in Lieu of Compensation"

In workers comp, "Employer Paid Salary in Lieu of Compensation" means that the employer paid an injured employee salary, wages, or other remuneration for a period that the insurer would have otherwise been obligated to pay indemnity benefits. It's commonly referred to as wage continuation. Some employers do so to avoid indemnity payments and keep an injury medical only, expecting to lower the experience mod and premium costs.

However, this is inaccurate - not reporting wage losses will not help employers lower their experience mod to save premium costs. If an employer pays an injured employee directly, in lieu of carrier paid indemnity benefits, the carrier is required by the rating bureau to report the indemnity that should have been paid. This makes it an indemnity claim and negates the 70 percent Experience Rating Adjustment (ERA) discount that applies to medical-only claims in many states.

Since carriers do not uniformly enforce this rule, it's important to let your agent know if you are considering wage continuation. They can help determine whether you would qualify for the discount. Moreover, some states have specific requirements or limitations on when and how an employer can make these payments.

Other factors should be weighed in this decision. If the injury turns out to be more serious and longer term than expected, it may be challenging to cover the costs. When the employer pays wages directly, the insurer may not be fully involved in managing the claim (e.g., medical care coordination, claim investigation, or fraud prevention). If not equitably implemented, this approach can create legal issues. Workers compensation indemnity benefits are generally non-taxable, but regular salary is taxable, which could disadvantage the employee and create payroll tax burdens for the employer. Without adequate explanation, the practice can send mixed messages to employees about injury reporting and work comp benefits.

Offering salary in lieu of workers compensation is essentially an employer-provided benefit that can be an alternative to the standard workers compensation payments, but it does not change the employer's responsibility to report the injury to their insurer and the state workers compensation agency.