Opting Out: Are Alternative Workers' Comp Programs Viable?



Introduction

Of all the words HR professionals might use to describe workers’ compensation, “optional” probably isn’t one of them. Because laws in every state except Texas mandate that employers provide certain benefits to workers injured on the job, company leaders who are frustrated with the cost or complexity of the system have resigned themselves to working within its constraints. 

“Workers’ compensation is commonly known as the ‘exclusive remedy’ for workplace-related injuries,” says Walt Capell, president of The Insurance Shop LLC, a national insurance agency and retailer based in Columbia, Mo. “Workers give up the ability to sue for the safety of medical costs and some lost wages. Employers gain the confidence they will not be sued for injuries that occur as part of normal business operations.”    

Now, however, legislators in a handful of states are exploring the possibility of changing their laws to permit so-called opt-out workers’ compensation plans, which would allow employers more flexibility in crafting their own terms of coverage. Oklahoma led the way in 2013 when it passed a law permitting employers to forgo the existing system in favor of developing and administering plans that would offer different levels of benefits and alternate rules for settling disputes.

Although the law was invalidated in April by a ruling of the Oklahoma Supreme Court, it sparked new interest in the idea of tailoring workers’ comp plans to better suit employers’ needs. In the three years since the so-called Opt-Out Act was passed, lawmakers in Tennessee and South Carolina have taken steps toward drafting similar legislation, and some in Alabama, Georgia, Louisiana and Mississippi have shown interest in allowing these plans as well. 

Employers that offer opt-out workers’ comp
plans waive a government safeguard against
employee lawsuits.

What would be the benefit of assuming this additional administrative burden? From an employer’s standpoint, opt-out plans could reduce their expenses substantially. According to PartnerSource, a Dallas-based risk management consulting firm that has designed many workers’ comp opt-outs, switching to such a plan could cut costs by 58 percent to 90 percent, depending on the plan, compared with traditional workers’ comp coverage. 

On the other hand, employers that offer opt-out programs—referred to as “nonsubscription plans” in Texas, the only state where they are currently legal—waive a major protection offered under traditional workers’ comp plans: a government safeguard against employee lawsuits. Should opt-out workers’ comp become more widely available, business leaders would need to think long and hard about whether the increased flexibility and lower costs these plans could provide would be worth the risk of litigation they present, since lawsuits can be both financially devastating and damaging to a company’s brand. 

The State of Opt-Outs

Texas is unique among the states in that it maintains a traditional workers’ compensation system but does not require employers to participate. About one-third of Texas employers use opt-out plans, according to the Association for Responsible Alternatives to Workers’ Compensation in Washington, D.C. And in the short time that opt-outs were allowed in Oklahoma, about 60 companies adopted them. 

In both states, most of the employers that selected opt-out plans have been small businesses, although a few larger companies in the retail industry, such as Dillard’s and Costco, did so as well. Opt-outs are common in retail food service, manufacturing, health care and transportation, according to Bill Minick, president of PartnerSource. They have not “been widely used in industries that rely upon subcontractors covered by master service agreements, such as the oil and gas industry and the construction trades,” he says.

Whatever momentum these plans may have gathered following passage of Oklahoma’s opt-out law came to an abrupt halt in March, when the Oklahoma Workers’ Compensation Commission ruled the law unconstitutional. The commission concluded that the law violated the state constitution’s equal protection clause by creating two groups of workers with different levels of coverage and protections: individuals covered by traditional workers’ compensation plans and those who had to use an alternate plan under their employer. 

​A month later, the Oklahoma Supreme Court upheld the commission’s authority to make its ruling, thereby halting opt-out plans in Oklahoma. Other court cases addressing the constitutionality of the law and additional issues are still pending before the state Supreme Court. 

Although the rulings were a blow to those who advocated for opt-out plans, they were not unexpected. “Even the legislature anticipated that there would be constitutional challenges to the law,” says Bob Burke, an attorney involved in those challenges. “The law says if it is ruled unconstitutional, then claims [made under opt-out plans] can be filed with the Workers’ Compensation Commission and then those workers will get the same benefits as any other worker in Oklahoma.” The legislation also stated that employers would have 90 days to purchase traditional workers’ compensation coverage if the law was overturned.

The legal reversal in Oklahoma did not kill employers’ interest in opt-outs, but it did make it clear that there is more work to be done before the plans can become a broader reality. “The outcome of these and other pending cases is that opt-out in Oklahoma may need to be substantially modified,” said Jennifer Wolf Horejsh, executive director of the International Association of Industrial Accident Boards and Commissions in Madison, Wis., in a recent report. However, few details are available about what those adjustments might be.

Meanwhile, U.S. Department of Labor Secretary Thomas Perez confirmed in March that the agency has begun investigating the practices of employers with opt-out plans in both Oklahoma and Texas. At this point, the investigation is a moot point for Oklahoma employers given the court rulings, but some Texas employers may find their plans subject to fresh scrutiny.

The Texas Approach

Texas remains the sole state from which employers can learn for the time being—and its experience with these plans extends over the past 25-plus years. Moreover, because Texas never required employers to provide workers’ comp coverage in the first place, it is immune to the constitutional arguments over equal protection that resulted in the overturning of the Oklahoma law. 

For that reason, Texas employers have considerable flexibility when designing alternative plans—but they don’t have carte blanche. Organizations with opt-out plans must follow certain guidelines and give up some of the protections they would have under traditional workers’ comp, including immunity from lawsuits. 

Opt-out workers’ compensation plans in Texas are considered welfare benefit plans, similar to employee health insurance coverage, and are therefore governed by the federal Employee Retirement Income Security Act. 

“These plans provide wage replacement and medical benefits that are tailored by the company to meet what it perceives as the needs of the workforce,” says Joseph Gagnon, a partner with law firm Fisher Phillips in Houston. “The plan could be tailored based on the most likely injuries, what the company can absorb financially and a number of other different factors.”

Many Texas employers with opt-out plans self-insure them, Gagnon notes. In addition, they often use third-party claims administrators to manage the program on a day-to-day basis, a job that includes deciding whether an injury is reimbursable by the plan based on its terms and covered injury definitions, determining when an injured worker has reached maximum medical recovery, and figuring out when to terminate plan benefits for each injured worker.

Questions to Consider

Texas employers that choose to adopt an opt-out plan must make sure the plan fits their needs and circumstances by considering the following questions, which will be relevant to those in other states that might offer these plans in the future:

Is it feasible? Employers should consider conducting a feasibility study to determine whether an opt-out plan is the right choice from a financial perspective. Basically, this analysis will focus on whether the company can afford the new plan given the benefits it will offer and the company’s loss history, including common types of injuries, the amount of time that is typically required for injured employees to return to work and the potential overall costs of the plan. 

In some cases, remaining in the traditional workers’ compensation system will make more sense than developing an opt-out plan. For example, if the nature of the company’s work makes the risk and severity of potential injuries higher or if the employer could not absorb significant losses given the state of its financials and cash flow, an opt-out plan likely isn’t the best idea. A hospital that generally deals with soft-tissue-based worker injuries related to lifting would have very different feasibility considerations than a petrochemical plant, where the likelihood of a catastrophic injury is much higher, Gagnon notes.

Is it worth the legal risk? Opt-out plans in Texas come with unique legal exposures for employers. “If a Texas company does not carry [traditional] workers’ compensation, then an employee who has been injured on the job could sue the employer for negligence,” with the potential for large jury awards and possible punitive damages, says Phil Griffis, a personal injury attorney based in Houston. “Texas law strips [employers with opt-out plans] of many courtroom defenses, including the contention that the employee was actually injured due to his or her own negligence,” rather than an employer’s negligence. 

For that reason, “if [the employee] opts in to the plan, the company may require her to agree not to sue the company in the event she is hurt on the job and instead submit her claim to arbitration,” he says.

Something else to consider: Opt-out plans often make employee participation optional, but the worker retains the right to sue if she is injured—even if she declined to take part in the plan and thus is not eligible for its benefits, Griffis says. 

Opt-out plans often make employee participation optional, but the worker retains the right to sue if she is injured—even if she declined to take part in the plan and thus is not eligible for its benefits.

Is faster injury reporting acceptable? A key provision of many opt-out workers’ compensation plans is that injuries must be reported immediately, by the end of the shift during which the injury occurs or within 24 hours, depending on the specifics of the plan. “If the injury is not reported in a timely fashion, then the employee may not be eligible for medical benefits or wage replacement unless the administrator decides there was good cause to not report a daily injury,” says Trey Gillespie, assistant vice president with the Property Casualty Insurers Association of America (PCIAA) in Chicago.

Advocates for opt-out plans argue that this provision ensures that the injured employee gets immediate medical attention. “The sooner the injury is reported, the sooner the employee will receive an accurate diagnosis and treatment can begin,” Minick says. “One of the keys to achieving better medical outcomes is earlier diagnosis and treatment.”

Others contend that the short time frame may prevent a significant number of injured employees from receiving necessary care. “According to the National Council on Compensation Insurance, 80 percent of lost-time workers’ compensation claims are not reported on the day of the injury,” Gillespie says. “Employees may not be totally aware that they are injured or [know] the seriousness of that injury,” and therefore they may not report by the required deadline. Is the employer prepared to deny benefits in those cases?

Which medical providers can be used? Another controversial aspect of opt-out workers’ comp plans is the requirement that injured workers use medical providers chosen by the employer. Opponents of the plans believe that leaving this decision up to companies creates an incentive for them to select health care professionals who will downplay the severity of on-the-job injuries or make the case that the injury is not work-related at all. 

On the other hand, “many of the best medical providers do not accept [traditional] workers’ compensation claims because of the paperwork, the administrative headaches and the low reimbursement rates,” Minick says. “In an option program, we’re able to get the injured worker to the best medical provider faster and then pay that provider fast, fairly and with a minimum of paperwork.”

What are the coverage terms? In opt-out plans, employers have a great deal of freedom—some say too much—to decide what the plan will cover, for how much and for how long. Gillespie points out that if the employees of the Pulse nightclub in Orlando, the scene of the country’s worst mass shooting in recent history, were covered by an opt-out plan, “the employees who were killed or injured would not be compensated under these plans unless they were killed or injured in the course of trying to protect the employer’s physical property. If they were trying to protect themselves or customers of the club, the loss would not have been paid.”

Who pays for what? Under these plans, employers can avoid paying certain benefits by shifting them onto health plans and publicly funded programs, including Social Security, Medicare and Medicaid. For example, many such plans reduce workers’ compensation benefits for injured workers who collect Social Security. “If you are found to be eligible for Social Security disability, you can collect both those benefits and workers’ compensation benefits under traditional plans,” Burke says. “Under an opt-out plan, the employer can deduct the amount of Social Security disability and even retirement benefits from the benefits the plan will pay out.” 

When a worker who is eligible for Medicare or Medicaid is injured and denied benefits under an opt-out plan, those plans become the primary payer for that worker’s medical costs, he says. But if the injured individual must rely on private health insurance to pay for care not covered by an opt-out plan, he or she will be responsible for any deductibles and other out-of-pocket costs. A study conducted by the PCIAA estimates that this cost-shifting of medical and other expenses from the Texas opt-out workers’ compensation system ranges from about $400 million to $600 million annually. 

Comparing Mandatory vs. Opt-Out Workers’ Comp 

Where to From Here?

Opt-out workers’ compensation is at a crossroads. Given the constitutional concerns that were the undoing of opt-outs in Oklahoma, legislators’ interest in permitting these plans—as well as employers’ interest—will either fade away or return with fresh vigor to revamp state laws so they pass muster with the courts. 

“Despite the mixed bag of opting out, some of the employer-friendly states are likely to follow in Texas’ and Oklahoma’s footsteps by enabling employers to choose between a rigid, state-run program and a private, more flexible but riskier locally administrated program,” says Michael Jacobson, a legal editor with Brightmine™ HR & Compliance Centre, an online resource devoted to helping HR professionals comply with the law. He predicts that Tennessee will be the next state to bring legislation to a vote.

In the meantime, employers around the country will have to wait and see whether “optional” could be a word they use to describe state coverage for job-related injuries in the future—and if they would even want to.  

Joanne Sammer is a freelance writer based in New Jersey.