Do I need workers’ compensation?
State laws set workers’ compensation requirements state by state; but I have a much simpler point of view on this. If you have even one employee, you should carry workers’ compensation. The fact is that the cost of a workers’ compensation policy will almost always be less than the cost of your being liable for all costs associated with an injured employee.
Let the experts at the work comp carrier work with you to control the costs associated with a work comp claim. The carrier will guide your employees in setting up their medical visits, rehabilitation, paying their lost wages, and paying their medical bills.
How is work comp priced?
It’s important to know there are three major components to your work comp premium:
1. Class codes:
The work that your employees do determines their class code. A drywaller’s class code will be different than a roofer’s class code. A clerical worker’s class code will be different than a driver’s class code. Each class code will have its own price per $100 in payroll. Knowing the price, you pay per $100 in payroll can help you predict what effect changes in your workforce will have on your workers’ compensation premium. Many times, multiple class codes are used on the same policy, with payroll divided between those class codes. If your payroll or tracking system does not break down payroll for each class code, the price will default to the highest-rated class code. That’s very important to know.
This comes into play if one employee does activities that fall into multiple class codes. For example: you have an employee that does roofing for four hours and then switches to painting for four hours. You must have those hours split out by class code in your payroll software to take advantage of painting being at a lower rate than roofing. Check with your work comp provider on their rules on splitting out payroll between class codes for an individual employee.
2. Payroll:
Payroll is multiplied by the class code price to determine the premium paid. This information allows you to forecast the impact of hiring new employees. By determining the class code for the new employees, then multiplying that class code price per $100 of the new employee’s payroll (Employee Salary/100); this will give you a good idea of how changes in your payroll will affect your policy.
When you start a work comp policy, you are asked to project your payroll for the entire year to determine your annual premium. At the end of the policy period, the work comp company will perform an audit. If your payroll was higher than projected, the audit will result in additional premium. If the payroll was lower than projected, the audit would result in a refund. If you anticipate large fluctuations in your payroll, make sure you contact your insurance broker. Payrolls can be adjusted during the policy year. These adjustments can help reduce the impact of an audit at the end of the year.
Pay-as-you-go
Another option to help avoid large audit swings is to ask your carrier if they offer a pay-as-you-go option. Pay-as-you-go does require more administrative work on your end due to the monthly reporting requirements. However, pay-as-you-go can reduce negative audits since the monthly reporting payroll minimizes those fluctuations that you might see in your payroll. A lot of my employers find benefit in that.
If you have a lull in your workload, you actually pay less using pay-as-you-go for your workers’ compensation because there’s not as much payroll going out. If you have an insanely busy season, your premium for your work comp will increase. However, you don’t have to worry about that increase coming at the tail end of your policy from an audit.
3. Experience Modification Factor:
We call it an E-mod. You earn an E-mod overtime. If you’re a new business, your E-mod factor will be a 1. One is the starting point. An E-mod lower than one, say a 0.89, means that you will pay less for your work comp policy than you would if you had an E-mod of one. If your E-mod is higher than one, 1.25 for instance, means that you’ll pay more for coverage than if your E-mod was at a one or lower.
If you have good work practices that result in little to no claims, your experience modification factor, over time, will go below one, equating to lower premiums. This factor is made to reward employers that promote safe work environments. If you’re competing for a job, the fact that your E-mod is lower than your competition may allow you to price your bid more competitively and win more business. The E-mod is a long-game strategy and crucial to the most successful business owners.
Audits
Audits are a real thing. The most frequent communication that I get from an underwriter, is that “Your client hasn’t completed their audit.” If you don’t complete your audit, the insurance company will increase your rates by approximately 25% because you have not completed the info to verify the premium accuracy. Audits can be painful if you do not update your payroll as fluctuations happen. Keep accurate payroll splits if you have an employee that falls under multiple class codes and keep certificates of insurance for any subcontractors that you use, showing that they carry workers’ compensation. Subcontractors are used frequently, and they can affect your workers’ compensation.
If you carry workers’ comp and use a subcontractor, the subcontractor must carry their own workers’ compensation policy. If your sub does not carry a workers’ comp policy, your work comp company will charge you for workers’ compensation for that sub as if they were your employee. If you subcontracted with a roofer, the work comp company will add to your payroll a roofer’s class code rate for what you paid that subcontractor. When you hire a sub, you want to ask them for a certificate of insurance showing work comp before you pay them! That is the time to get the certificate. I’ve seen it too often where we have the job done, we chase the certificate after the fact, they didn’t have the insurance, and our client is now stuck.
The subs certificate should be provided to your work comp company during the annual audit. This will make sure that the amount you paid the sub will not affect your audit. If you are hiring the sub, it is your responsibility to ensure they carry workers’ compensation and get that certificate. Don’t be the business owner that scrambles calling their subs, begging them to get a certificate of insurance because you have an audit on Tuesday. We see that happen a lot too. But the effect of subcontractors on your workers’ compensation is real. Don’t let it catch you by surprise.
How do I keep my rates low?
Keep a consistent focus on safe work practices every single day. Have a zero-tolerance drug policy. Have a seatbelt policy and cell phone use policy. Use regular safety meetings. Insist on the use of personal protective equipment. Inspect your equipment for proper function and ensure all safety guards are in place.
Not sure where to start?
Most work comp companies will have sample policies for you to use. Work comp companies will have loss control representatives that they will send to your job sites and help you develop safety plans. Many work comp companies will have online resources that will provide pre-made videos or toolbox talks, ready for your use. All the above items are generally free to insureds. You must take the time to ask your carrier for help, and equally important is your willingness to implement those items for safe work practices.
Claims Do Happen
At some point, someone’s going to get injured. Discuss the claim process with your work comp carrier before any claims occur. If a claim happens, take the necessary emergency medical actions needed. Notify your agent and work comp carrier as soon as possible. Your work comp carrier will help you direct the medical care of your employee. Your policies and procedures that you have in place can, and will, influence your claims. If you have a seatbelt policy in place and it’s signed by the employee and that employee was not wearing their seatbelt during an accident, the work comp carrier will reduce the employee’s benefits for not following company policy. Now, that might seem strange, but we want your employees, number one, to follow company policy, and we also want to keep your claims as low as possible to keep your experience modification factor and premium from increasing.
See, It’s As Easy As That
Success with work comp is all in the planning. It does not happen by accident. The work comp company can be one of your most significant sources of information and help. All you must do is reach out to them and use the resources that they make available to you. Have physical safety talks with your employees. Put policies and procedure manuals in place that include employees’ signatures. Make sure your payroll processing system can provide you with the necessary audit documentation. Keep those certificates of insurance for your subs in your highly organized insurance file.
By using the strategies that we’ve discussed, you can continue to drive your prices down. Keep those prices lower than your competitors and use it to your advantage. We’d happily work with you and show you how to do that.
Thank you!
Here is a link to our YouTube page where you can find other videos of interest:
Work Comp Play List
https://www.youtube.com/playlist?list=PLm4BPhSEOJNke_Kt3yRwO0IH159vbvVO1
Also please check out our web site:
I hope everybody’s doing well. Thank you for your time, your business, and your friendship.
Brian Gleize, Account Executive.
Scott Agency
604 E Veterans Mem Pkwy, Warrenton MO 63383
636-456-8633