Workers’ Compensation: Claims and Premiums
As a small business owner, it’s imperative that you protect your employees from workplace injuries or illness and minimize your insurance costs.
Workers’ compensation insurance provides medical treatment coverage and protection but the complexity of the regulations and your statutory obligations can be overwhelming.
Here are some important things to consider.
Workers’ Compensation Claims in Small Organizations
Workers’ compensation insurance pays for occupational injury and illness and is often a small organization’s single most expensive line of insurance coverage.
In addition to the direct cost for workers’ compensation insurance, there are significant indirect costs that are not covered and will not be reimbursed:
- Wages paid to the injured employee for absence
- Wage costs related to time lost through work stoppage associated with the worker’s injury
- Overtime costs
- Time spent by administrators who handle the claim
- Hiring and training a replacement employee
- Lost productivity
Direct costs and indirect costs can add up quickly. Here’s key information about workers’ compensation insurance, your obligations, and what you can do to contain the bottom line effect on your business.
Sole Proprietor or Partnership Workers’ Compensation Insurance Requirements
California Law AB 2883, which went into effect on January 1, 2017, changed some of the rules and requirements for sole proprietors and partnerships. For sole proprietorships, only the individual owner and (usually) the spouse can be excluded.
By law, a sole proprietor with no employees is exempt from workers' compensation insurance, not just in California but in all of the United States. However, every California employer (including sole proprietors) using employee labor – even if it is just one employee – must provide workers’ compensation insurance under Labor Code Section 3700.
With regard to partnerships, until California Law AB 2883, any partner could be excluded from workers’ compensation insurance coverage. Now, only partners with at least 15% ownership are eligible to be excluded and must request an exemption. Anyone that’s any other type of partner must be provided coverage.
If the employer fails to provide workers’ compensation insurance to even one employee, there can be significant and expensive ramifications including the California Department of Labor Standards Enforcement issuing a stop order/penalty assessment. That assessment prohibits further use of employee labor until workers’ compensation insurance is purchased – which effectively shuts down operations.
Incentives to Report Claims: Experience Rating
Experience rating is an evaluation method in which your premium is adjusted up or down to reflect your previous loss experience. It is based on the presumption that your historical loss experience predicts your future loss potential. In other words, your future losses are likely to be similar to those you incurred in the past.
Experience rating compares apples to apples, not apples to oranges.
This means that roofers are compared to other roofers, and bakeries are compared to other bakeries. The loss experience of each group is averaged. Each employer's loss experience is then compared to the group's loss experience. Based on this comparison, an experience modifier is calculated for each employer.
Most employers who purchase workers' compensation insurance are subject to experience rating. This process looks at an employer's ‘loss history’ and affects the premium the employer pays for workers' compensation insurance.
The employer's experience rating is compared to the average experience of other employers in the same industry group. If the employer's history is better than average, it will receive a credit on its workers' compensation premium. If its experience is worse than average, it will receive a debit.
An experience modification is a discount or surcharge applied by the state of California to your workers’ compensation insurance premium. It’s calculated with a formula based on your payroll and losses over a three year period of time. ‘Losses’ are the amount paid out for your employees’ injuries, both medical costs and supplemental income for time away from work.
The higher your payroll and the fewer dollars paid out for losses you have, the lower your experience modification will be. The lower payroll you have and the greater your dollars paid out for losses, the higher your experience modification will be.
What is the purpose of an experience of modification? In simple terms: it rewards businesses that have small amounts of losses and offers an incentive to businesses that have high amounts of losses to reduce them.
Some business owners have purchased workers’ compensation insurance for years and have never had an experience modification. In the state of California, if you haven’t had an experience modification, the reason is that your business hasn’t met a certain threshold of workers’ compensation insurance claims activity.
How is My Premium Calculated?
A number of factors go into determining the annual premium your insurance carrier will charge. These include your industry classification, your company's past history of work-related injuries (your experience modification), your payroll, any special underwriting adjustments such as use of a certified health care organization, and any special group or dividend programs you may be eligible for.
Here’s how workers’ compensation premiums are calculated.
Premiums are determined by multiplying a rate times each $100 of employee payroll. For instance, suppose your payroll is $500,000 and the rate is $1. Your premium will be 500,000 divided by 100 multiplied by $1 for a total of $5,000. This premium is called the manual premium. This term indicates that no experience modifier has yet been applied. When an experience modifier is applied to the manual premium, the result is called the standard premium.
Business Risk Classification
The pricing of workers’ compensation insurance is based on a system in which employers are categorized into groups called classifications. Each classification is assigned a rate. The rate for each classification varies from state to state. All employers assigned to a particular classification will pay the same rate.
The purpose of business risk classification is to group employers with similar operations into a single classification. Workers employed by the same types of businesses are prone to the same types of injuries.
For instance, individuals that perform roofing installation work are subject to injuries from falls, burns, sun exposure, and lifting heavy objects. The types of injuries these workers sustain are relatively consistent from one employer to another.
Thus, all employers whose business consists of roofing installation (and no other operations) will be assigned the same workers’ compensation classification.
Annual Payroll Estimate
Estimating next year’s payroll can be an anxiety-inducing for business owners. The future is unknown, but the business owner must pay for workers’ compensation coverage based on that estimate.
If the payroll estimate is overstated, much needed cash will be expended and reimbursement will take months before an audit is completed and a refund from the insurance company is issued for the overpayment.
If the payroll is underestimated, the business owner will enjoy lower monthly premium payments throughout the year, but will have to pay the difference – which can be substantial.
Tips on Lowering Your Premium
The direct and indirect costs you pay underscore why it is so important to be proactive in your efforts to develop effective claims management strategies to deal with inevitable claims.
Here are Some suggestions on managing your Workers’ Compensation premiums
- Develop a compliant and effective Injury and Illness Prevention Program.
- Make certain your supervisors have received the appropriate safety training and that safety is part of their annual review.
- Hold regular safety meetings and make sure they are effective.
- Develop a relationship with the right occupational medical clinic that participates in your insurance company’s Medical Provider Network (MPN) and make sure your entire staff knows where to go in the event of a non-emergency accident.
- Develop a post-accident response protocol and make sure the appropriate people know what to do in response to an employee injury.
- Actively manage any open claims to make certain the treatment is proceeding appropriately.
Be Prudent and Aware of Fraudulent Claims
Workers’ compensation insurance fraud is a crime and it can come in many forms: a worker saying they were injured on the job when their injury really occurred while skiing; an employer saying their employees work at desk jobs when they’re really construction laborers; a medical provider billing for six treatments on an injured worker when they only provided two. These are just a few examples of fraud that can occur.
Fraud is a serious problem and should be reported to the California Department of Insurance (CDI) for investigation. The CDI works closely with other agencies to investigate possible fraud cases and also interacts with local district attorneys’ offices to prosecute those caught violating the law.
Invest in Software to Track Claims or Outsource
There are many software options that can track your organization’s workers’ compensation activity. Many employers recognize that handling the process ‘in-house’ can present difficulties in terms of staff workload and quality control, and opt instead to outsource the responsibility. This option is often more efficient and, ultimately, the most cost-effective.
Finding a Partner You Can Trust
Better than managing your claims through a software that still leaves the burden of knowing the system on your plate, is to outsource to an industry leader that knows the ins and outs of the workers’ compensation world and best practices. Finding an expert in the field of workers’ compensation that knows not only the best policies for your business but can administer your policy and handle any claims that arise will give you peace of mind that you have an expert in the field making sure your costs are managed.
This blog post is intended for informational purposes only and does not constitute legal advice. No attorney-client relationship is created between the author and reader of this blog post, and its content should not be relied upon as legal advice. Readers are urged to consult legal counsel when seeking legal advice.