Workers’ compensation insurance is a crucial part of any business. It provides benefits to employees who are injured or become sick on the job, while also protecting your company from the financial burden of those events. However, the cost of this insurance policy varies depending on several factors. One factor that often surprises business owners is how payroll changes impact their policy’s premium. But what does payroll have to do with a workers’ comp policy? We’ll dive straight to it.
How Workers’ Compensation Premiums Are Calculated
First, we need to understand what insurance companies use to determine the cost of a workers’ compensation policy and it depends on several factors specific to your business operation such as:
- Employee Job Duties: Different jobs carry different levels of risk. For example, construction workers or landscapers typically have higher premium rates compared to office workers due to the higher likelihood of on-the-job injuries.
- Business Location: State regulations and workers’ compensation laws can differ significantly on where your business operates.
- Claims History: A history of frequent claims can lead to higher premiums. On the other hand, a good safety record with no claims can significantly reduce your costs.
- Experience Modification Factor (E-Mod): In addition to your claims history, this factor rewards companies with good safety records and penalizes those with frequent claims. An E-Mod of 1.00 is considered neutral. A lower E-Mod (less than 1.00) translates to a lower premium, while a higher E-Mod (greater than 1.00) indicates a higher premium.
- Total Payroll: Your payroll is a major factor in determining how much your worker’s compensation policy will be. It’s important to note that your payroll should include all employee compensation, not just base salary. In other words, it should encompass bonuses, commissions, overtime, vacation, sick leave, and holiday pay.
Why Does Payroll Affect Your Workers’ Compensation Premium?
Payroll directly impacts your workers’ compensation premium because it reflects the total amount of insurable wages. The higher the insurable wage, the higher the premium. Here’s a breakdown of how different payroll changes can affect your premium:
- Hiring New Employees: More employees mean a higher total payroll. Therefore, adding new employees likely results in a higher premium.
- Promotions and Raises: When you promote employees or give raises, their compensation increases, which can lead to a higher premium due to the rise of insurable wages.
- Overtime Pay: Employees working overtime and receiving additional wages will also contribute to a higher premium.
- Non-Cash Compensation: Certain non-cash benefits, such as tool allowances or meal stipends, are also factored into payroll for workers’ compensation purposes, potentially increasing your premium.
Calculating Your Premium
When insurance providers estimate your workers’ compensation costs, they generally use this formula:
Class Code Rate x (Payroll / 100) x E-Mod = Premium
- Class Rate: This is a pre-determined rate by the National Council on Compensation Insurance (NCCI) or your state’s rating bureau, and is based on the type of work your employees do.
- Payroll: Your estimated total employee compensation for the year.
- E-Mod: Your experience modification factor based on your claims history.
Typically, you give your insurer an estimate of your payroll for the coming year. Then, they use that number to calculate your estimated premium. At the year-end of your policy, your insurer will perform an audit to determine your actual payroll for the year. If you’ve over-estimated payroll, you receive a credit or a refund. If you’ve underestimated payroll, you owe more.
How to Lower Your Workers’ Compensation Costs
By understanding the factors affecting your workers’ compensation costs and implementing these strategies, you can proactively manage your premiums and create a safer workplace. Here are some proactive steps you can take to potentially reduce your workers’ compensation premiums:
- Invest in Workplace Safety: Implement comprehensive safety programs and training to minimize the risk of accidents and injuries.
- Provide Protection Gear: Regularly assess your workplace for potential hazards and take steps to mitigate them. This might involve implementing machine guards, providing personal protective equipment (PPE), or establishing safe lifting protocols.
- Maintain Accurate Records: Ensure accurate and up-to-date employee classification information and payroll calculations are reported to your insurance provider.
- Return to Work Programs: Develop programs that encourage and facilitate injured employees’ safe and timely return to work. This could involve modified duties or light-duty positions.
- Shop Around: Get quotes from multiple workers’ compensation insurance providers to ensure you’re getting the best rate.
What Does Workers Compensation Cover?
Most workers know workers’ compensation helps with medical expenses for job-related injuries or illnesses. But injured employees can be eligible for multiple types of benefits such as:
Lost Wages: Employees who are unable to return to work due to a work-related injury or illness are eligible for temporary or permanent disability benefits. This helps cover a portion of an employee’s lost wages however, the amount varies from state to state.
Death Benefits: Workers’ compensation may provide death benefits to the employee’s family if an employee dies due to a work-related injury or illness. These benefits can help cover funeral and burial expenses.
Rehabilitation Costs: If an employee requires rehabilitation due to a work-related injury or illness, workers’ compensation can help cover the cost of physical therapy, occupational therapy, speech therapy, and even vocational rehab or retraining.
Disfigurement Benefits: Workers who sustain permanent disfigurement because of their injuries are eligible for additional compensation in certain states. Typically, these benefits are calculated as a lump sum and determined by the severity of the disfigurement.
Protect Your Employees with AIS
If your business is in North Dakota, Ohio, Wyoming, or Washington, you’ll have to get workers’ compensation insurance through your state fund. Looking for a quote elsewhere? Give us a call today at (888) 772-4247 for a quick and easy free workers comp quote. Our team of Commercial Insurance Specialists can help you compare quotes and ensure you have the coverage you need.
The information in this article is obtained from various sources and offered for educational purposes only. Furthermore, it should not replace the advice of a qualified professional. The definitions, terms, and coverage in a given policy may differ from those suggested here. No warranty or appropriateness for a specific purpose is expressed or implied.
