As a Professional Employer Organization (“PEO”), our clients routinely call for HR advice on a wide variety of topics – including workers’ compensation. This area of HR can be confusing for companies because it combines elements of insurance, job-protected leaves of absence, and anti-retaliation considerations into one big benefit program. To make matters even more confusing, workers’ compensation requirements are driven by state law. So, some companies may have multiple, different workers’ compensation schemes to administer if they have employees working in more than one state. That said, there is often some commonality among the varying state programs and, therefore, some shared best practices and pitfalls that companies can use as a guide.
A. What is Workers’ Compensation?
Workers Compensation is an insurance policy that provides medical coverage and wage replacement if an employee is injured during while performing his or her job. Workers’ compensation insurance can be expensive – it represents almost 2% of operating expenses for companies nationwide. Workers’ compensation insurance is driven by state law, and thus the premiums and coverage requirements may differ from state-to-state. As premium costs rise, so too does the potential incentive for employers to drop this insurance, regardless of applicable laws requiring it. However, dropping coverage is not a good solution. Workers’ compensation insurance is designed to protect against employee workplace risks by covering costs associated with workplace injuries, including medical expenses, lost wages, and legal fees. Some believe paying these expenses out of pocket may be a more cost-effective solution, especially in industries where the workplace injury risk is low. However, paying regular premiums for workers’ compensation insurance is likely much cheaper than paying all the associated expenses for an unexpected workplace injury – particularly a serious injury.
B. The Risk You Run by Not Carrying Workers’ Compensation Coverage
All employers need to know their state requirements to see if workers’ compensation insurance is required. Not having the insurance could cost your business a substantial amount of money, if an employee is injured and the employer could face fines and/or penalties[1] if the insurance was mandated. Plus, if an employee suffers a workplace injury, the employer is liable to pay out of pocket to reimburse the employee for all costs and monies the employee could have gotten had the company carried the required worker’s compensation coverage. Maintaining workers’ compensation policies, even in low risk industries, can protect your business from financial ruin.
C. State Law or Employee Count Drive the Requirements
As an employer it is very important to know the Workers’ Compensation laws of the state(s) in which your employees work. Requirements for workers compensation insurance coverages and rates vary by state, by the number of employees, and by the industry in which your company operates. Some states go strictly by how many employees you have. Several states require coverage if you have only a single employee, while in a few states workers’ compensation insurance is not required unless you have five (5) or more employees. States can also mandate workers’ compensation insurance for employers in certain higher risk industries, regardless of how many employees you have.
Employers are also responsible for assigning each employee an appropriate workers’ compensation code. The codes are usually a three or four-digit number that represents the level of risk the state has assigned to a particular type of work. Workers’ compensation insurance premium rates are then assigned based on these codes. For example, an employee doing relatively low risk, clerical work in an office will have a cheaper workers compensation rate than maintenance personnel climbing ladders and using potentially toxic compounds. That is why employers should be diligent in assigning correct workers’ compensation codes.
D. Job Descriptions Play a Key Role
Job descriptions that accurately reflect the work an employee performs is crucial in determining workers’ compensation codes. For example, if a worker cleans offices and does basic housekeeping duties inside your office, do not include on his job description that he also performs higher risk duties like washings exterior windows and using a ladder. An incorrect job description could inadvertently cost the company more in workers compensation Insurance. Note, however, employers cannot just change the description of duties performed to get cheaper rates. Falsifying a workers’ compensation code is considered fraud and can result in fines or penalties.
In addition, if an employee performs a high-risk duty occasionally, but mainly only performs low risk duties, employers can track how much that employee was paid for the higher risk duty. This will require strict recordkeeping, but could be a good financial practice to keep your workers’ compensation insurance premiums down.
Another way to save money on workers’ compensation premiums is by limiting the number of employees who perform high-risk duties. For example, if you have five (5) employees who clean the company office and one of their job duties is to change the light bulbs by getting on a ladder, craft their job descriptions so that only one of the employees is responsible for using the ladder and code your workers accordingly.
E. End of Year Payroll Audits for Employees and 1099’s
At the end of each policy year, an audit is performed to evaluate the payroll you paid to each employee. The usual information needed to complete the audit for your employees includes: employee names, job titles, workers compensation codes, state(s) worked in, compensation paid, overtime paid, and any severance paid. The insurance auditor will also ask you about any 1099 payments. States vary by what is needed for 1099 contractors, so know the requirements before you begin to pay any 1099 contractor.
Some states will require you to add a 1099 contractor to the company’s workers’ compensation policy if the 1099 contractor does not have their own workers’ compensation insurance. This could cost a company a considerable amount of money on the back end that it did not budget for. This mistake can easily be avoided by knowing your state requirements when hiring the 1099 contractor and adjusting the amount of payment to the 1099 contractor based on whether they have their own workers’ compensation insurance. Requiring evidence of workers compensation insurance should be standard during the hiring of any 1099 contractor.
F. Employer Takeaways
Although many employers think workers compensation policies are very costly, not carrying workers compensation insurance is not a realistic option. The liability from a single, serious accident could wreak financial havoc on a business. Instilling safe work habits and giving your employees a safe work environment is paramount, and doing so can help reduce accidents and their severity.
Employers can also take a variety of actions to help reduce their insurance costs:
- Be proactive with workplace safety and prevention habits, which can lower reported injuries, and which in turn, will help lower premiums;
- Report work injuries promptly and offering prompt treatment can reduce injury severity and resulting claim costs; and
- Provide transitional duty and return to work opportunities that will allow employees to get back to work sooner and decrease their need for wage replacement benefits.
Lastly, remember that workers’ compensation codes are state specific. Having your insurance broker look over the job descriptions is always a good practice. If the broker does not know, ask them to go to their underwriter and provide you with the proper codes. Costs for workers compensation could be as low as $.08 cents per $100 of payroll but can quickly go up to $8 or $9 per $100 just by including one wrong word or phrase in a job description that incorrectly identifies a high-risk duty.
C2 provides strategic HR outsourcing to clients who want to develop optimal workforce strategies and solutions to allow them to be more competitive and profitable. C2 blog posts are intended for educational and informational purposes only.
