Workers' compensation insurance is mandatory for most employers in most states, but that doesn't mean it's impossible to reduce your compensation premium costs.
In this guide, we start by explaining why workers' compensation insurance is important and how it is calculated. Then, we delve into the top seven ways you can reduce workers' compensation insurance premiums while protecting your company from liability and giving your workers the coverage they need.
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Importance of Worker's Compensation Insurance
Workers' compensation insurance is not only mandatory in most states; It also protects your company from liability. Specifically, most workers' compensation plans protect your company from being sued by employees who are injured on the job.
It also provides protection and care for employees who suffer injuries on the job and replaces lost wages. Having good workers' compensation insurance provides peace of mind for both employers and employees. For more information, check out our guide explaining how workers' compensation insurance works.
How Workers' Compensation Premiums Are Calculated
The cost of workers' compensation premiums is based on the risk of injury in the company's industry. The greater the risk of injury, the higher the workers' compensation premium.
While most employees are assigned the same classification code, there are some exceptions. For example, an office worker at a construction company who only handles administrative work may be assigned a different code than the construction company as a whole. If independent contractors are not self-insured, they must also be accurately classified.
Under a traditional workers' compensation plan, estimated lump sum payments are made at the beginning of each year. To calculate these premiums, estimates are made of the total payroll for each classification of workers. The rate for each classification is then multiplied by the estimated payroll total and then multiplied by 100 to obtain the final figure. The calculation is as follows: Operator Fee x Payroll (per $100) = Premium.
Certain factors can increase or decrease this final premium figure. For example, some workers' compensation plans offer accommodations, such as credits (premium reductions) for job security plans. In contrast, companies with a history of many accidents and workers' compensation claims can expect to pay a higher premium.
Because it is difficult to accurately estimate full-year payroll in advance, states and insurance companies require audits after the policy expires (usually at the end of the calendar year). If they overpaid, companies will be refunded the excess money. If they paid less, the companies must pay the difference.
7 Effective Strategies to Reduce Compensation Premium Costs
1. Review payroll and worker classifications.
Misclassifying workers not only increases your company's liability; It may also increase workers' compensation premiums. Take our example from above: if the white-collar worker is incorrectly classified as a construction worker, his insurance premium will be higher than necessary. Before renewing any workers' compensation policy, check all payroll and worker classifications to ensure they are as up-to-date as possible.
2. Switch to a pay-as-you-go system
Unless your business is located in Washington, Wyoming, North Dakota, or Ohio, you have the option of switching to pay-as-you-go workers' compensation. Instead of paying a lump sum up front and then retroactively adjusting the amount if necessary, pay-as-you-go systems allow your company to make a smaller workers' compensation payment each time you run payroll.
Choosing software that implements workers' compensation and payroll makes it easy to base calculations on real-time headcount, spread payments over time, and avoid overpayments. For more information, check out our article explaining how to integrate your workers' compensation insurance with your payroll program.
3. Implement a workplace safety program
Workplace safety programs reduce workers' compensation premiums by reducing workplace accidents and related medical and insurance costs. Some insurance companies even provide premium credits or reductions in exchange for having workplace safety programs that meet or exceed certain standards. If you haven't already, check with your insurance company about premium credits.
4. Double-check the subcontractor's insurance
One thing that will inflate your premiums is paying for workers' compensation insurance for subcontractors who already have their own policies in place. Each time you bring on a new subcontractor, confirm the status of their workers' compensation policy. You should also periodically check with existing subcontractors to see if the status of their workers' compensation policy has changed.
5. Perform a self-audit with the insurance company
Within 30 to 60 days after your workers' compensation policy ends, the insurance company will conduct an audit of your insurance and payroll documents to verify that your classifications and payments are correct. However, we recommend performing your own audits throughout the life of the policy to look for incorrect payroll updates, unexplained increases in premium bills, and other errors that may increase your premiums. That way, you can address them proactively instead of waiting to retroactively resolve everything after the policy expires.
6. Consider hiring a workers' compensation expert
Workers' compensation insurance can be a complex issue to manage, and not all human resources departments have the in-house expertise to do so. Hiring a workers' compensation consultant or PEO service like Rippling can help your company perform an audit, implement a safety program, and reduce your premiums. While these PEO consultants and services may cost more upfront, they will often save your company money in the long run by reducing your insurance premiums.
Do you need help managing workers' compensation?Rippling's PEO services can ensure your workers' compensation is set up and optimized for your business. You can also get pay-as-you-go options if your state allows, making it easier to spread out your payments and keep track of your monthly finances. |
7. Find a new policy
If you have made all of the changes listed above and are still struggling with high workers' compensation premiums, it might be time to shop for a new policy. We suggest starting this process at least several months before your current policy expires to give you enough time to compare prices. You may find that another insurance company can offer you a better rate for the same coverage.
