November 7, 2016

Summary: Option or opt-out plans are an alternative to the workers compensation system. Option or opt-out plans were only available in Texas until January 2014 when the option became open to Oklahoma employers. In September 2016 the option plan was ruled unconstitutional by the Oklahoma Supreme Court because it creates “impermissible, unequal, disparate treatment of a select group of workers.” As we await the decision of action from the United States Supreme Court, an analysis of the benefits and detriments of an opt-out or option system for compensation becomes more relevant.

Topics covered:
Introduction
History of the American workers compensation system

Opt-in/Option plan
Texas
Oklahoma
Employee benefits
Employer benefits
Disadvantages to opt-out plans
Conclusion

Introduction

In the past fifteen years legislatures in thirty-three states have cut state-mandated workers compensation benefits making it more difficult to qualify for benefits. Currently hundreds of thousands of workers in Texas and Oklahoma do not receive state-mandated benefits under workers compensation statutes, and instead are dependent upon benefits plans that are created and controlled by their employers. The system is called either an opt-out or option plan. The opt-out plans are very controversial in today's society, because they put the weight of the plan design on the employer and remove the accountability that comes with workers compensation, a highly regulated state-mandated system.

History of the American Workers Compensation System

Although the workers compensation system is complex, sometimes costly, and at times taken advantage of, such a system is so vital to the working system that similar constructs appear in every industrialized nation in the world. Workers compensation was first seen in the U.S. in the late nineteenth and early twentieth centuries. Congress passed the Employers Liability Acts of 1906 and 1908 in order to soften the then-current law of contributory negligence for workplace injury, under which recovery could be partially or completely barred if the worker was found to have contributed to his own injury. The first comprehensive workers compensation law was passed in Wisconsin in 1911, eventually followed by every other state in the United States with Texas being the only exception. Texas legislation enacted an opt-in or option plan construct.

Opt-in/Option Plans

If an employer decides to opt in to workers compensation insurance, a statutorily dictated limit is placed on the amount and type of compensation that an injured employee may receive.

If an employer chooses not to subscribe to workers compensation coverage, it leaves an employer open to personal injury lawsuits from employees who are injured on the job. In a workplace injury case certain defenses that are generally permitted in personal injury lawsuits—such as assumption of risk, contributory negligence, and co-worker negligence—are not permitted to an employer who does not subscribe to workers compensation.

Opting out of workers compensation coverage does not prevent an employer from offering some sort of coverage for its employees. Employers that opt-out choose to provide their employees with an alternative to workers compensation that includes medical care and wage replacement benefits. Employers exercise some control over approval of medical providers, services that are provided, get second opinions on treatment, and suspend benefits if an injured employee does not complete the requirements of a treatment program.

Because they play a larger role in their employee's compensation in case of workplace injury or illness, employers that do not subscribe to workers compensation tend to be more engaged in the administration of their programs, closer to their employees, and more involved in claims and their outcomes.

Option plans have been used to help impose some restrictions on a system that is sometimes considered to be expensive, slow, and inefficient and often requires injured employees to go to court. The theory behind option plans is that if the employer is saving significant amounts of time and money, it can award the employee with the care and benefits he deserves without being quite as concerned about the bottom line.

Texas

Since 1913 Texas has been successfully running an opt-out plan as a form of workers compensation for injury, illness, or death caused on the company's property or while performing a work-related task. Texas private employers can choose whether or not to provide workers compensation insurance coverage for their employees. Businesses that contract with local, state, and federal governments or are governmental entities themselves must participate in workers compensation insurance and cannot be non-subscribers.

Until 2013 Texas was the only state that had successfully implemented an opt-out plan, and the state shows no sign of stopping. According to a study by a Stanford law professor, Texas opt-out plans have saved over 44 percent over the statutory workers compensation plans, and under the opt-out plan noticed a 47 percent drop in frequencies of severe traumatic accident claims in the workplace. These findings show a possibility that safety improvements occurred following the adaptation of option plans.

In Texas the employee also has the option of opting-out. Employees retain the right to bring a common law claim against their employers if the employees timely waived workers compensation coverage in writing. In this way the Texas system is voluntary for both the employer and the employee.

Oklahoma

In 2013 Oklahoma passed legislation that allowed employment benefit plans as an alternative to workers compensation coverage under the title the Employee Injury Benefit Act (EIBA). In 2014 the option was open for employers to use. That year both South Carolina and Tennessee had proposed opt-out legislation, though both propositions ultimately failed.

After almost three years of successful implementation of the opt-out program, the Oklahoma Supreme Court ruled the EIBA to be unconstitutional. The EIBA was determined to be unconstitutional because even if an employer in Oklahoma decides to opt-out, they are still subject to the mandates of the Oklahoma Employee Injury Benefit Act (OEIBA) and are subject to the jurisdiction of the Workers Compensation Commission and certain regulations of the Oklahoma Insurance Commissioner. This system did not allow employees to waive their workers compensation insurance coverage and retain the right to bring a common law claim in court. Although the EIBA was determined to be unconstitutional by the Workers Compensation Commission, continued litigation will dramatically influence the option plan.

Employee Benefits

Although employer control causes a distinct variability of option plans and makes it difficult to compare opt-out plans with traditional workers compensation programs, employers generally find a balance between employee and employer benefits when creating their plans. Employees can benefit from an option plan as an alternative to workers compensation by experiencing better medical outcomes, shorter periods of disability, and fewer claim disputes. Employees also tend to be more involved in the process, more aware of the policies that are in place, and more invested overall in the compensation system that is in place. Employees have more freedom in choosing the physician they will be visiting, and more freedom in the treatment that is provided. Employers also have a new incentive to maintain a safer work environment for their employees. Another benefit that might vest from option plans is that less of the cost will be shifted to government programs because better treatment and better medical outcomes will likely be a result of having access to better medical care.

Employer Benefits

Employers tend to save significant amounts of money through opt-out plans. An opt-out program can cost up to 70 percent less than the workers compensation system. Employers also experience improved medical outcomes and a quicker return to work than under the workers compensation program. The employer has an incentive to ensure a quick and full recovery. When workers go through a speedy recovery and are able to return to work as soon as possible, the employer does not have to go through the hiring process to hire a new employee that may not fit the company. The cost of hiring and firing replacement workers is often not considered when discussing workers compensation but can be an expensive and risky process. Some argue that due to an increase in competition between the workers compensation system and option plans, the pressure on workers compensation is helping employers to pay less across the board.

Disadvantages to Opt-Out Plans

The workers compensation system in this country has been established for about a century. It is a tried and well-tested system that seems to do well for employees and employers alike. Texas's successfully-implemented opt-out plan system has also been established for a century and seems to have some benefits over the typical workers compensation system.

Where there are benefits, there are also disadvantages. In order to implement new opt-out programs in states that have previously been workers compensation states, much drafting and redrafting of legislation must happen. The landscape of opt-out plans will change over time as more and more cases are brought to court. Establishing a program that is as successful as the one in Texas will take decades and trial and error. Allowing employers to dictate what goes into their plans allows widespread differences in benefits among employers and restrictions and requirements that make it easier to deny coverage.

Some employers have exclusions in their plans preventing coverage for conditions like bacterial infections or any sickness or disease “regardless of how contracted,” and some companies have stipulations that managers can accompany employees to doctor's appointments or that prevent employees from recovering if the injury is not reported by the end of a shift. Allowing the employers to have this much leeway with the benefits given to employees puts the employees at a disadvantage. Another negative about opt-out plans is that benefits are taxable, as opposed to the workers compensation program where benefits are not taxed.

Conclusion

Although highly controversial, and not widely adopted, there seems to be many advantages to the opt-out workers compensation system. Employer-designed plans can help save money, provide better care for injured employees, and keep workers compensation cases out of our court system, in effect saving large amounts of money. Opt-out plans may also prevent the costs that go hand-in-hand with employee injury from being shifted to other taxpayer funded, charitable, or private programs.

On the other hand, an option plan is more difficult to monitor and requires different regulations and standards than a workers compensation system. There is a delicate balance between employer and employee advantages, and it is easy for employers to take advantage of an opt-out system. The landscape of option plans is going through many changes with litigation in Oklahoma and proposed legislation in Tennessee and South Carolina. The industry may be seeing more opt-out programs in the coming years.