Demystifying Workers Compensation Insurance and How to Reduce Premiums

Demystifying Workers Compensation Insurance and How to Reduce Premiums

Over 135 million US workers are covered by workers’ compensation insurance through their employers. Most US states require employers to carry the insurance as a way to help provide workers with both wage loss compensation and medical benefits following a work-related injury. Despite how common the insurance is, however, employers’ requirements for workers’ compensation coverage can be confusing.

Small business owners, in particular, may have a difficult time navigating the legal requirements and costs associated with workers’ compensation. Thankfully, even in states as large as California, employers have access to a significant amount of resources that can help demystify this required insurance, and reduce costs to help make the insurance more affordable.

How Many Employees Must I Have for Workers’ Compensation?

States set their own minimum number of employees hired before workers’ compensation insurance is mandatory. Some states have very a very low minimum requirement, while other states make it more or less voluntary to purchase workers’ compensation insurance, regardless of the number of employees you have.

California, for example, has one of the strictest labor codes in place for workers’ compensation. If you employ even one individual in California, you’re required to purchase workers’ compensation insurance.

As a stark contrast, Texas does not require private employers to provide workers’ compensation at all unless that employer has a contract with the state government. In the case of Texas, all employees working on a government contract need to be covered while working on the government contract.

For more information on state-by-state requirements, check here.

Where Can I Purchase Workers’ Compensation?

Each state has different requirements regarding where employers can purchase their workers’ compensation insurance.

Regardless of the state, you may have the option to purchase workers’ compensation in one of three ways:

  • A commercial provider
  • State-administered workers’ compensation fund
  • Self-insurance

Commercial providers are any private insurance companies available on the market that offer different insurance packages. Most but not all states allow employers to purchase workers’ compensation insurance through commercial providers.

State-administered funds offer workers’ compensation insurance to employers directly through the state. In some states, the state-administered fund is monopolistic and compulsory for employers. Most but not all states have a state-administered fund.

Self-insurance exists in some states, which allow employees to set up their own fund to provide workers’ compensation. Which businesses can qualify for self-insurance varies by state, and not all states allow self-insurance.

Each option comes with positives and negatives, depending on your state. However, if you’re in a state where there’s a compulsory state-administered fund, you’ll won’t have any other options.

Wyoming, for example, only allows businesses to purchase workers’ compensation insurance through a state-administered fund. This is rare, however. Most states, including California, allow employers to purchase insurance through any of these three methods, although there are usually strict requirements in place for businesses that wish to self-insure.

How Much Does Workers Compensation Cost?

Each business will pay different rates for workers’ compensation insurance. Workers compensation rates are calculated based on three factors:

The size of your business’ payroll, divided by 100
How employees are classified (e.g., the type of work they perform)
Company’s claims experience compared to industry averages, known as the MOD number (e.g., the frequency and severity of past claims from your business). MOD number can be positive or negative but starts at 1.00

Your rate will take all of these into account with a simple calculation:

(Rate (based on classifications) x payroll) x MOD = premium.

So if your rate is $0.85, your payroll is $200,000, and your MOD number is 1.25, your premium calculation will be:

($.85 X 2,000) x 1.25 = $2,125

Businesses are rated differently by the National Council for Compensation Insurance (NCCI), based on the occupational risk to provide insurance due to the higher or lower likelihood of workplace injuries, and the severity of injuries that may occur. Additionally, different job classifications within an industry carry different risks, which will also impact the premium you’ll pay to provide workers’ compensation insurance.

Amounts per $100 of payroll vary by state. In California, the average amount is $1.85 per $100 of payroll. Alaska has the highest workers’ compensation rates, at $2.79 per $100 of payroll.

How Do I Lower My Workers Compensation Insurance Premiums or Avoid Fines?

If you believe you are paying too much for your workers’ compensation premiums, there may be able to lower your rates. Here are a few avenues to explore.

1. Make sure your employee classifications are correct

Your employee classifications play a large role in how much you pay in workers’ compensation insurance. If your employees are classified incorrectly, you could be paying too much.

Alternatively, if your employees are classified in such a way that you’re paying too little, you may be subject to a fine or worse following an audit. In either case, it’s important to run your own, internal audit on how your employees are classified to ensure you’re not just compliant, but also not overpaying on insurance.

For California businesses, the Department of Insurance provides updated classification rates by year. You can also use various online resources to search for different class codes and phraseologies.

Additionally, if you hire independent contractors, these contractors may need to purchase their own workers’ compensation insurance. You will still need to provide proof of insurance from these contractors.

2. Perform bi-annual or quarterly salary reviews

It’s important to regularly assess how much you’re paying your employees. If an employee’s pay goes down because he or she has chosen to go down to part-time work, your payroll will reflect that change. As such, the amount you pay in workers’ compensation insurance premiums should be adjusted.

The same is true if your employees get raises. You’ll need to adjust your premiums accordingly. Consider doing either bi-annual or quarterly salary reviews to account for any changes.

Positively, you can report changes to your payroll at any time. This way, you can adjust your premiums based on payroll changes (including hiring or firing employees) to help avoid overpaying on premiums, or underpaying and getting fined following a term-end audit.

3. Overhaul worker safety protocols and standards to reduce MOD

 

Your company’s claims experience (MOD number) can play a large role in how much you pay in premiums. The MOD is a multiplier for your premium, meaning once your premium is set, your insurance provider may lower or reduce your rate based on the MOD.

The standard MOD is 1.00, so a business with a MOD of 1.00 will not have a premium increased or decreased. However, a MOD lower than 1.00 will reduce your premium, and a MOD above 1.00 will increase your premium.

You can lower or keep your MOD number low by reducing workplace injuries. This can be accomplished by implementing strict safety standards for your employees, or overhauling old safety standards and running regular safety training sessions to ensure compliance.

You may also consider purchasing additional safety equipment for employees, depending on your industry. Some equipment can help lower risk and reduce claims.

4. Implement a return-to-work program

You can help save money by ensuring your employees return to work once they are healed. The longer an employee is using workers’ compensation insurance, the more it impacts your MOD score. Implementing a program that helps employees transition back to work faster will help reduce an impact to your MOD score and your insurance premiums.

Return-to-work programs have been shown to reduce employee turnover and reduce workers’ compensation costs.

5. Purchase insurance through group rates

Some insurance providers offer group rates for different trades. If you’re a member of a trade association, some providers may consider that a type of risk reduction and offer lower rates. Ask your insurance provider if any such discounts exist, and under what conditions.

6. Change your insurance provider

You may want to consider changing your insurance provider to reduce your rate. If your state offers a state-administered plan, you may be able to get discount rates by using the state plan and joining certain state-sponsored safety and wellness programs.

What are Workers’ Compensation Premium Audits?

Each year, your business may be subject to what’s known as a “premium audit”. This audit will determine whether your business is providing the required amount of workers’ compensation insurance, as determined by the laws in your state.

There are varying consequences for failing to provide an adequate amount of workers’ insurance coverage. Some states may only issue a warning or a fine. However, your state may also consider noncompliance to be a criminal offense, which can carry both fines and potential jail time.

In California, failure to provide workers’ compensation is a misdemeanor criminal offense, which may result in:

  • An order to cease business operations until workers’ compensation insurance is provided
  • Up to 60 days of jail time
  • $10,000 fine
  • An additional $1,000 penalty per employee on payroll, up to $100,000

The maximum penalties are primarily for complete non-compliance and not under-insurance. However, failing to provide an adequate amount of workers’ compensation insurance coverage can still result in fines.

To avoid costly audits, make sure you are paying the proper amount in insurance. Keep all employees properly classified, guarantee that all contractors provide proof of insurance, and regularly review your payroll.

Ready to take the next steps with workers’ compensation? Give us a call at 650-873-1255 to get expert assistance in navigating all of your workers’ compensation insurance needs.

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