The District's $100 million workers' compensation system - which last year paid benefits to nearly 9,000 men and women injured on the job - is facing the most serious challenge in its 50-year history from employers who say it fosters fraud and malingering and drives businesses out of town.

One of the most basic forms of insurance, workers' comp represents a social contract between employe and employer: it prohibits workers from filing negligence lawsuits following job-related accidents in return for a promise by employers to pay medical and wage-loss benefits under a no-fault system.

But in the last seven years, the cost of workers' comp insurance to employers has ballooned by 500 percent.

The reason: benefits paid to workers have sky-rocketed from a maximum of $70 a week in 1972 to $396.78 today, making the District's payment the second highest in the United States, where maximum payments - on average - are under $200. Only Alaska is higher.

The top D.C. benefit is more than double Virginia's $187 maximum and nearly double Maryland's $220.

The federal law under which D.C. workers are covered is so broadly written and interpreted that higher D.C. benefits are routinely paid to Maryland and Virginia residents - and in one case a California resident - who live, work and were injured miles away from the District.

Washington business leaders are mounting a campaign to change the current system because, they say, it fosters malingering by allowing injuring workers to collect two-thirds of their gross salary tax free. This often exceeds regular take-home pay, and therefore, removes the incentive for returning to work, the businessmen say.

Critics also question a system that awarded $16,498 to a Chesapeake and Potomac Co. operator after she claimed that the first two fingers of her right hand gave out from pushing touch-tone buttons all day.

In another case, a Metro bus driver collected more than $1,500 in medical and wage benefits after she claimed that pushing the brake pedal and accelerator of her bus caused disabling calluses on her feet.

U.S. Labor Department officials, who currently administer the D.C. system under a law that also covers dock workers around the country, contend that the amount of fraud and malingering in workers' comp here is negligible.

The officials say that the only reason comp costs have risen dramatically is that Congress liberalized benefits in 1972 and adjusted the system to keep pace with inflation. Prior to that, benefits were often below the poverty level, officials say.

Nevertheless, D.C. rates for compensation insurance are so much higher than rates charged in neighboring Maryland and Virginia that D.C. businessmen say their profits are being eroded and their competitive edge blunted in the regional marketplace.

For example, George Hyman Construction Co. which builds office buildings throughout the metropolitan area, pays $372,000 in comp premiums on a $1 million payroll in the District, but only $137,700 in Maryland and $94,800 in Virginia.

The differential in comp insurance rates between the jurisdictions means the cost of what would be a $10 million office building in Virginia becomes a $10.4 million office building in the District, according to A. James Clark, Hyman's president.

D.C. employers are mounting an intense lobbying campaign aimed at the D.C. City Council pending legislation which would take control of the system away from the U.S. Labor Department, freeze benefits and cut others dramatically.

Indeed, the official insurance industry rating bureau has said the City Council bill would reduce workers' comp costs - premiums and benefits - by at least a third, and perhaps more.

"Comp is a crisis in this city like (medical) malpractice is nationally," said Vincent H. Cohen, a member of the Hogan and Hartson law firm. Cohen's specialty is defending insurance companies against comp claims.

"There's is so much fraud in this god -- system," Cohen said, the employers seldom contest suspicious, short term injuries because the law is intentionally weighted in favor of the worker. Cohen characterizes these short-term injuries as "three-week vacations . . . for a bang and a bump."

Said James D. Loesch, claims supervisor for Metro transit workers, "In the days when I was doing menial work, when you were hurt, you bled or broke a bone."

"Today," Loesch continued, "we've changed the definitions. When an employe perceives he is injured - he's injured. His psyche may be injured."

Though business groups allege that the system is rife with fraud, federal labor officials and union spokesmen insist that it is not. "Most of the people injured are in fact injured," said Assistant Secretary of Labor Donald Elisburg, a Carter administration appointee whose Employment Standards Administration supervises the D.C. program.

"Any claims system is always going to have the possibility of people abusing it," said Elisburg, who also acknowledged that upon his appointment in the spring of 1977, fraud control procedures were nonexisteint.

"Whatever we had, had lapsed or atrophied over the years and there really was not an active fraud unit, so we created one," Elisburg said. To date he added, there have been no prosecutions.

Fraud allegations aside, the central business attitude toward D.C. workers' comp is: "It's just too damned expensive," according to Jim Kimble, a lobbyist for the American Insurance Association.

Though the jump in the maximum weekly payment from $70 to $396.78 was dramatic, federal labor officials hasten to point out that no worker is entitled to more than two-thirds of his average weekly wage. In order to earn the maximum payment, a worker would need an income of $595 a week, or $30,940 a year.

But many abuses, businessmen say, are found in daily interpretations of the law to extend benefits to workers whose injuries do not merit them and to those who return to work at their previous salaries.

The D.C. comp law dates to 1928, when District workers were lumped together with dock workers, because the Supreme Court had ruled that off-shore maritime industries could not be insured under state programs. D.C. workers were likewise without statehood protections. Today, there are 340,000 D.C. workers insured under the law.

D.C. benefits have risen so rapidly in comparison with Maryland and Virginia that out-of-town workers have increasingly taken advantage of more generous D.C. benefits by filing claims here.

A worker need not live in the District or work in the District to qualify for D.C. benefits. Under the liberal wording of the law, a federal claims judge once wrote that D.C. benefits could be paid "to the Detroit assembly line workers of a major auto manufacturer" simply because the auto company sold cars in Washington.

In recent years, a federal appeals court ruled that a California widow, whose union-official husband lived and worked on the West Coast, was entitled to D.C. benefits because the union headquarters from which he was mailed his paycheck was located in Washington.

Moreover, a legislative oversight in 1972 put widows in a special class, not subject to the $396-a-week benefits ceilings. As a result, they are entitled to benefits equal to half their deceased husband's salary - regardless how high the salary may have been.

"We have cases in D.C. where the total payout (over the estimated life-time of the widow) is in excess of $2 million," said Ed Giglio, a Boston-based claims examiner for Liberty Mutual, the largest private insurer in Washington.

"With the inflation-indexing provisions of the act, that works out to $9,000 plus per week when she is in her 80s," Giglio said.

More and more, insurers say they will not write workers' comp policies in the District. Businesses denied insurance in the regular market are forced into a special risk classification that increases their premiums costs by eight percent. Other officials say there could be as many as 1,000 D.C. businesses who are operating illegally without comp policies.

To be sure, most job-related injuries in the District are minor and involve no time lost from work and minimal medical expenses. Sometimes, however, even higher D.C. benefits fall short, as in the case of the 45-year-old elevator operator and mother of nine who was seriously injured in an elevator accident and who collects only $78.18 a week - two thirds of her salary.

Figures compiled by federal labor officials show that of the 29,148 on-the-job injuries and 3l fatalities reported by D.C. employers during 1978, a full two-thirds of them, 19,526 required simple medical treatment and no time lost from work.

But in more than 8,400 comp cases last year, some form of wage-loss compensation was awarded.

Julius Miller, a Labor Department claims review judge, bristles at suggestions that the system is riddled with fraud. "My philosophy is that a man should be ablt to take care of himself and his family. They never called it an employer's comp law. It's workers' comp."

However, employers - at least those in the District - argue that injured workes have gained too much of an upper hand. Only in D.C., they argue would a Metro bus driver have the courage to suggest that his psoriasis was aggravated by driving over bumpy streets.

Metrohs comp record in perhaps the worst in the city. Operating under a self-insurance system for its 6,000 transit workers, Metro's comp bill has risen from $1.3 million in 1973-74 to more than $6 million this year.

Metro assistant counsel John Swanson, said a recent study of 441 comp claims, more than 300 involved bus drivers and more than half of the injuries resulted from seat collapse or adjustment, turning the steering wheel, running over potholes or adjusting the mirror.

"When he can sit home and collect two-thirds of his average weekly wage - tax free- that's more than his take-home pay anyway," said Swanson. "You remove the economic motivation to go back to work."

The question of whether the seven-year spurt in insurance premium increases is driving businesses out of the city, as business leaders claim, is perhaps the most difficult to answer.

Board of Trade officials acknowledge that they cannot support their contention with concrete figures, but, they add, workers' comp is one of the most often complained about costs of doing business in Washington.

One businessman who says his company is leaving town - mostly because of comp costs - is Ernest F. Slater, secretary-treasurer of Washington Stair and Ornamental Iron Works Inc.

Washington Stair has been in the 2000 block of Fifth Street NE just off Rhode Island Avenue for more than 20 years. When Slater joined the firm in 1958, there were 35 men in the shop, now there are 15.

The reason is simple, says Slater: insurance rates for his employes represent more than 20 percent of his payroll compared with 6.5 percent in Maryland and 5.9 percent in Virginia.

"I'll tell you what we've done," said Slater, a swarthy man with a deep-lined face and metal frame glasses. "Since 1973, we no longer make it a labor-intensive job. If we can buy materials already made or cut by someone outside D.C., we'll do that and we've retrenched by subcontracting everything we can."

The mathematics of comp is plain to Slater. A typical bid his company might submit in competition with Virginia and Maryland firms would be roughly equivalent in materials cost, salaries and on-site construction costs.

But on a $1 million project, Slater calculated that his bid - assuming equal profits and overhead among the bidders - would be $44,000 higher than the Maryland firm's and $49,000 higher than the Virginia firm's - due almost exclusively to the D.C. workers' comp rates.

The comp system had made an acknowledged cynic out of Slater. "Maybe I'm cold about it," he said in describing how he dispatched an insurance man to obtain a favorable death certificate following a heart attack that struck one of Washington Stair's workers.

"Before the body was cool," said Slater, he had documented that the man died of hardening of the arteries, a ruling that would help the company's case that the death was not work-related. If it was not, Slater's insurance carrier would not have to pay and Slater's policy premiums would not increase as they always do when accidents increase.

As it was, the heart attack was ruled work-related and so, Slater said, "We still got stuck with it." CAPTION: Graph 1, Workers' Compensation Maximum Benefits in D.C., Source: U.S. Labor Dept. The Washington Post; Graph 2, The Difference in Insurance Rates (Based on $100 of payroll), The Washington Post; Picture, Ernest F. Slater says his company is leaving town because of workers' comp costs. By Gerald Martineau - The Washington Post