Policy management includes all the components of the policy – payroll, credits, deductibles, experience modification, rate, etc.
Understand How Your Premium is Calculated
Workers’ compensation premium calculation is pretty straightforward. In short, the insurance company takes your payroll in the various classifications and multiplies it by a rate per $100 of remuneration.
If you have several different employment classifications on your policy, the above calculation will be done for each class.
Insurers may add surcharges or credits to the total before coming up with your final premium. Find out what credits your insurer has available. Ask what needs to be done so that you can qualify for maximum credits.
You may also have an experience modification. See our discussion on the experience mod in the next chapter of this book.
Most insurers have multiple rating plans – substandard, standard, and preferred. Ask your agent to identify your policy plan. Find out what needs to happen so you can qualify for a lower rate.
Check your policy credit structure. Talk with your agent to learn how you can qualify for better rates.
Agent’s Commissions
Most insurance agents receive a commission on the sale of policies. If your agent doesn’t get paid a commission (some are on salary), certainly your agency (the employer of your agent) gets a commission. Workers’ compensation pays among the lowest commission rate of any insurance policy. It isn’t uncommon for agents to get 2%. Average commission on auto, property and liability insurance policies are closer to 15%.
Check Your Policy’s Employment Classifications
Your rates are based on the business and industry in which you work. There are over 600 employment classifications in workers’ compensation for different industries; from “Abrasive Wheel Manufacturing” to “Zoo.”
Important point: your company receives a classification – not your employees. You may run a hotel and employ someone to do nothing but paint. That person will not be classified as a painter. He will be part of the mass of employees included in the hotel classification, along with your other maintenance people, sales staff, and housekeepers.
Each class has a specific definition that prescribes who gets classified in that “code.” The definitions for some classifications are several pages long.
Get a copy of the definition for each of the classifications you have on your policy. Are the descriptions correct for your company? Work with your insurance advisor to find a classification that is a better match (at a lower rate).
Proper classification of employees is key to controlling your premium.
Contractors Can Split Payrolls
The rules for most employers do not allow an individual employee to be divided up into different categories. For example, a restaurant employee who also delivers orders cannot have part of his payroll assigned to the restaurant code and the rest to the drivers code.
Contractors, however can split an employee’s payroll into separate employment codes. So, an employee who works as a carpenter and also does painting can be placed in two different classes, and therefore, you pay two different rates.
Contracting companies must keep detailed records to allocate payrolls.
Check for the Proper Classification of Clerical Employees
Office workers have one of the lowest premium rates of any code. Try to place as many of your employees as possible in the office/clerical class–within the rules of your state. If the clerical rate is $1.00 less than your other codes, you save $100 for every $10,000 of payroll taken from one code and placed into the clerical code. The employee must be doing “office” type work and be physically separate from non-clerical employees. Clerical employees don’t have to spend all their time in the office. Travel is permitted. The duties of the job, however, must be clerical in nature.
See the Appendix for a copy of the National Council on Compensation Insurance’s definition of Clerical.
Check for the Proper Classification of Salespeople
As we have stated before, the objective is to put each employee in the lowest rated code. In many industries, the rate for the sales code is less than the primary classification. Work with your agent to determine the best code for your workers – within the rules, of course.
Recall that inside salespeople are eligible for the clerical code, in most cases. Review your policy and, as was previously mentioned, obtain the classification description.
See the Appendix for a copy of the National Council on Compensation Insurance’s definition of Sales.
Check for the Proper Classification of Drivers
Same issue as above. In many cases the driver’s class rate is lower than your primary rate. Put everyone in the lowest possible classification allowed.
See the Appendix for a copy of the National Council on Compensation Insurance’s definition of Driver.
In most states it is insurance fraud to under report payroll or to misclassify employees to reduce your premium.
Understand What is Included in Payroll and What is Not
It is a bit misleading to say that “payroll” is the basis of workers’ compensation premiums. The actual basis is “remuneration.” The specific definition used by the National Council on Compensation Insurance is included in the Appendix to this book. It’s just too long to put here.
Has Overtime Been Excluded From Payroll?
When a worker receives overtime, the extra amount is not part of workers’ compensation payroll. For example, if a worker makes $8.00 per hour normally and $12 for overtime (time-and-a-half) the only payroll that is counted is the $8.00.
Make sure the extra for overtime has not been included in your payroll audit. Check past audits too. They can be corrected. Contact your agent for help.
Review Officer Payrolls
Workers’ compensation rules limit remuneration charged for executive officers. The actual limitation is determined by each state. It’s usually around $2,000 per week. If any of your executives are paid more than the maximum, be sure the premium is based solely on the maximum. The audit worksheets can tell you what remuneration was used for each employee.
Record keeping for Subcontractors’ Work
If you hire subcontractors or independent contractors make sure you have proper records showing that they have their own insurance. You should have certificates of insurance on file for each sub showing proof of their workers’ compensation insurance. In many states your workers’ compensation insurer can charge you for subcontractors who don’t have coverage. Talk with your agent to be sure your records and procedures are correct.
See the Appendix for a sample certificate policy and notice for subs.
Check Current Policy Payrolls
Seems simple, I know. However, it can make a big difference.
If your policy shows payrolls that are higher than what you will have at the end of the policy period, you’re letting the insurance company use your money at no interest. Remember, what your accountant calls payroll is not what your insurance company calls payroll. Don’t include the extra amount for overtime. Check that the payrolls include the executive officers’ salaries at the minimums and maximums as set forth for by your state workers’ compensation regulations. Make sure employees are properly classified.
It is important not to understate payroll either. Such could result in a large audit premium due next year – in addition to the premiums for the renewal policy. Intentionally understating payroll for purposes of reducing your premium is insurance fraud in many states.
Understand Your Audits
Each year, at the end of the policy period, the insurance company performs an audit. This may be done in several ways. The insurer may send a form letter asking you to send back a list of employees, their classification and payroll. They may call and perform the audit on the phone. The insurer may send an auditor to your office to review your books. Regardless of the method of audit you should review the audit bill. Compare it with your notes of the audit. If there is any question of what employees are placed in which category, get a copy of the worksheet used to determine your final premium.
Managing the audit process will pay off in lower premiums.
Get a Copy of Your Audit Worksheets
Ask your insurer to provide you with a copy of the audit worksheet prepared for your most recently expired policy. This document provides the details of how the insurance company determined your final premium. It lists employees, classifications and payrolls. Look for errors such as the inclusion of overtime and incorrect classification of employees.
In most states, you can go back three years to correct errors made at audit. Use such strategies as limiting payroll for executive offices, checking to be sure the correct payroll is used, and making sure that premium was not paid on any overtime.
Spend Time Preparing for the Audit
In cases where audits are performed by an auditor at your site, you should spend a few minutes preparing for the visit. Review past audits. Review which positions were placed in the various classifications. Have records of overtime and job descriptions available. You’ll also need your payroll tax records to reconcile total payrolls.
Some bookkeepers prepare a spreadsheet that effectively does the audit for the auditor. The auditor then has everything laid out, making the job easy. This tactic also allows the bookkeeper to guide the audit.
Consider Deductibles
A deductible is the part of a claim you pay before the insurance company steps in. Put another way, a deductible is a way for you to retain a portion of the loss. The larger the deductible, the larger the premium savings.
Workers’ compensation deductibles are usually expressed separately for the two parts of a workers’ compensation claim: indemnity (lost wages) and medical.
Get the facts before increasing the deductible on your policy. How much will you save in premium? Are the deductibles on a per claim or per year basis? Run the numbers to see what the deductible would have cost you in the past three years based on your claims experience. Are the savings worth the risk?
Deductibles can also affect the losses that show up on your experience modification sheet. In many states a loss under the deductible is not included as an experience mod loss. This can have a positive impact on your premium down the road.
Consider Excluding Officers From Coverage
Many states allow officers who own more than 20% of the stock of a corporation to opt out of the workers’ compensation system. This is true of both “S” and “C” corporations. Make sure that both your health insurance company and your disability carrier realize that you have opted out of the workers’ compensation system.
“Owners” of limited liability companies might not be required to be covered by workers’ compensation insurance, depending on the state.
Partners and sole proprietors may or may not be considered “employees.” In most states they can, however, opt for coverage. While this increases the premium, it may be a valid tactic for someone whose health does not allow them to buy life and/or disability insurance – some coverage may be better than none.
I normally recommend that owners exclude themselves from coverage when possible. A solid insurance program of health, life, and disability insurance offers better protection for most business owners. Again, check with your health and disability insurers first.
The Difference Between an Employee and a Contractor
In most states employers must buy workers’ compensation insurance to protect their employees. Contractors are not employees. Therefore, you don’t need to buy workers’ compensation coverage for them.
Beware of trying to call an employee a contractor. If they look like employees and act like employees, they are employees.
Here is a common definition:
“Independent contractor means a person who performs services for another under contract, but who is not under the essential control or superintendence of the other person while performing those services.”
Here are some benchmarks:
Does a contract exist for the person to perform a certain piece or kind of work at a fixed price?
Does the person employ assistants with the right to supervise their activities?
Does the person furnish any necessary tools, supplies, or materials?
Does the person have the right to control the progress of the work, except as to final results?
Is the work a part of the regular business of the employer?
Is the person’s business or occupation typically of an independent nature?
The amount of time for which the person is employed.
The method of payment, whether by time or by job.
Does the person receive a paycheck or do they make a profit / loss from the job?
Does the person receive benefits similar to those of employees?
Does the person accumulate vacation time or paid time off?
Does the person purchase his own liability and/or workers’ compensation insurance?
The above are used as a whole to determine an individual’s status. Most state workers’ compensation laws include definitions or tests similar to the above. Talk with your insurance agent.
If you hire independent contractors, get a certificate of insurance showing that they have their own workers’ compensation so you don’t get hit with additional premiums at audit.
Last note on this topic. Falsely classifying an employee as an independent contractor is insurance fraud in many states. It can also land you in claim trouble if there is an injury. I can’t tell you how many times in twenty plus years that small company owners have winked and told me that they have no employees. It’s a dumb tactic that is more likely to land you in hot water.
Be Aware of Out-of-State Exposures
Your employees are eligible for workers’ compensation benefits in the state where they are injured. If your employees travel to other states, be aware that you may need to purchase coverage for those states. Many insurers provide coverage for other states right on your basic policy. Such is designed for incidental exposures. Check with your agent on the correct procedures.
Be Aware That “Other States” Does Not Mean “All States”
Let’s say that you are based in Maine. You have a workers’ compensation policy from a reputable insurer. The policy includes coverage for Maine and in a special box on your policy the entry says something like, “All other states except…” Those exceptions are the states that use monopolistic state funds for their workers’ compensation coverage. This means that the only insurer in those states for workers’ compensation is the state fund. No other insurer can provide benefits in that state.
The monopolistic states are: North Dakota, Ohio, Washington, West Virginia, and Wyoming. If you have workers in a monopolistic state you need to contact the appropriate state fund.
If Your Employees Work Around Water Read This!
Employees who work on docks and wharves may be eligible for benefits under US Longshoreman’s and Harbor Workers’ Compensation Act (also known as USL&H or LHWCA).
Employees on boats may be eligible for benefits as described by the Jones Act.
The Jones Act provides benefits to sea-based maritime workers (i.e., the master and crew of a vessel in navigation). USL&H provides federal workers compensation benefits as the exclusive remedy to land-based maritime employees.
Coverage under the Jones Act requires that the employee have “seaman” status and an “employment-related connection to a vessel in navigation.”
USL&H applies to persons engaged in maritime employment, including those engaged in longshore operations and harbor workers, including ship repairmen and shipbuilders. For the act to apply, the injury must occur upon navigable waters of the United States (including any adjoining pier, wharf, dry dock, terminal, building way, marine railway, or other adjoining area customarily used by an employer in loading, unloading, repairing, dismantling, or building a vessel). The master and crew of a vessel in navigation may not collect USL&H benefits. Their remedy is the Jones Act. Certain other employees are also removed from protection under USL&H – clerical and office workers for example.
Talk to your agent about your exposure and how your workers’ compensation policy or your marine protection and indemnity insurance policy can address your situation.
If Your Employees Work on a Government Defense Base…
The Defense Base Act mandates federal benefits to civilian workers on military bases. Janitorial services, roofers, electricians, etc. You have to add coverage to your state workers’ compensation policy for coverage to apply. Talk with your insurance agent.
If Your Employees Work or Travel Outside the US…
Workers’ compensation provides benefits for injured workers. The benefits paid are determined by the location of the injury and treatment. A person from Maine injured in a work related accident in Massachusetts is eligible for Massachusetts benefits. The Maine workers’ compensation policy will pay Maine benefits unless the policy lists Massachusetts as a covered state.
If a US employee is injured outside of the US most workers’ compensation policies will pay benefits according to their home state benefits. However, some expenses will not be covered for a worker outside the country. The biggest are repatriation expenses and endemic disease – a stomach virus from drinking tainted water, for example.
The solution is an international workers’ compensation policy. The costs are fairly reasonable. The expenses of airplane evacuation flights or other special transportation can be enormous. If your people travel outside the US on business, consider such a policy. Some travel accident insurance policies may help too.
Business Disability Insurance
Another issue for the business owner (though off the subject of workers’ compensation) is disability insurance to protect the business. Most owners are critical to the business they run. An auto accident that lays the owner up for a few months can be devastating. The right disability insurance plan can provide cash to weather that storm. Think about other key people in your operation too. Check with your insurance advisor.
Consider Excluding Family Members
Several states allow family members of owners to be excluded from workers’ compensation coverage. Family includes parents, siblings, children and spouse. Excluded family members must voluntarily waive coverage in advance of any claim. Such a waiver must not be a condition of employment.
Check with your agent to determine the law in your state.
Investigate Dividend Plans
Dividend plans return to the policyholder a portion of premium based on loss experience. The plan can be calculated on the claims experience of the policyholder alone, the experience of a group, or a combination of individual experience and that of the group.
For example:
No losses Return of 20% of Premium
Loss Ratio 10% Return of 10% of Premium
Loss Ratio 20% Return of 5% of Premium
Dividend plans are, many times, a gamble. As there are no guarantees of return premiums, dividend plans should rarely be considered in competitive situations other than to acknowledge that they exist. I generally look at such plans as a bonus rather than as a integral part of the insurance pricing mechanism.
Investigate Retention Plans and Large Deductibles
If your workers’ compensation premiums are over $700,000 look into alternative insurance plans. Retrospective rating plans or large deductible programs may be attractive. Look into so-called “self insurance” too. Review these options at least every few years. Much of your decision is dependent on market conditions. In the early 1990’s self insurance and other alternative workers’ compensation plans made sense.
As I write this, few companies are moving their workers’ compensation away from traditional insurance. In fact, many who were self insured have gone back to fully insured plans.
Investigate Group Self Insurance
Here is where the smaller employer may be able to help himself. A trade association or other group gets together to pool their financial resources to form, effectively, their own insurance company. The total group should have more than $2,500,000 of premium to work with.
One big downside – joint and several liability. If one member of the group is unable to meet his obligations, the remaining members must pay for his liabilities.
Get the facts before you move into self insurance. Other key issues include reinsurance, loss control services, and claims management services.
Take Advantage of Insurance Company Finance Plans
Can you spread your premium payments out any more than you are now? Some companies have monthly payment plans at no interest. However, you may have to ask for them.
Look at the true cash flow of the payment plans. How does the timing of payments line up with your business’s flow of funds? A large payment due in your off-season may cause problems. Can your agent or insurer offer better terms?
Workers’ compensation rates can be negotiated. Push for the best rates and the lowest premium.
Learn the Rating Plan of Your Policy
Most business owners believe that their workers’ compensation premium is payroll times the rate, times the experience modification. This is only partially correct.
Each insurance company has several workers’ compensation plans. Many have three – Preferred, Standard, and Sub-Standard. Some insurers have only Standard and Preferred. The difference is in the rates. Preferred rates are, naturally, lower than standard.
Find out what plan you’re in. Ask your agent what you have to do to get moved into a lower rated plan. Push your insurers to provide you with the best rate.
Learn the Credit Structure of Your Policy
In addition to the rating plans, insurers can include additional credits in the pricing of your policy. Most insurers allow underwriters pricing discretion of up to 25% above published rates and 25% below. Credits are used as competitive tools by insurers. They are often loosely tied to loss control and claims management programs. Find out what your credits are. Ask your agent how to get more.
Build a Work Comp Matrix
Track the elements of your policy in a matrix.
Yr 1 | Yr 2 | Yr 3 | Yr 4 | |
Clerical Payroll | ||||
Mfg Payroll | ||||
Total Payroll | ||||
Clerical Rate | ||||
Mfg Rate | ||||
Experience Mod | ||||
Credits/Debits | ||||
Standard Plan or Preferred? | ||||
Total Premium | ||||
Number Losses | ||||
$ Losses |
Use a spreadsheet like Excel so you can have calculations made automatically. Be creative. Determine average rate and average claim size. List claims from largest to smallest.
A matrix allows you to see patterns and trends. You can see where you can improve and where you are doing well.
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