Pay-as-you-go workers’ compensation insurance is a policy where the premium adjusts with every processed payroll. This prevents shocking post-audit bills by basing the insurance premium on your actual payroll for accurate billing. Traditional workers’ compensation insurance policies estimate annual payroll costs that require large down payments and policy audits to reconcile premium.
Pay-as-you-go workers’ comp is a revolutionary way to manage expensive workers’ compensation insurance premiums. Business owners with fluctuating employee numbers pay premiums based on their actual payroll, thus making cash flow more efficient and payments more manageable. Getting a quote from The Hartford for pay-as-you-go workers’ comp insurance can be done online in minutes.
How Pay-As-You-Go Workers’ Comp Works
Pay-as-you-go workers’ compensation adjusts premium every month based on actual payroll costs and employees’ job classification. The traditional way of establishing workers’ comp premiums estimated payroll for the upcoming 12-month policy period and then either paying a lump sum payment or a large down payment and financing the remainder. Pay-as-you-go makes monthly payments based on actual costs.
Understanding Workers’ Comp Premiums
To fully understand the benefits of pay-as-you-go workers’ comp, you also need to understand how workers’ compensation premiums are determined. Insurance providers price workers’ comp premiums based on the risk classification of employees multiplied by payroll. Claims history, geographic location, and an insurance provider’s experience with certain industries is also considered in pricing.
Workers’ comp premiums can be paid in one of three ways: a lump sum payment, monthly payments based on the estimated annual premium, or monthly payments based on your business’s processed payroll. The last option is considered pay-as-you-go workers’ compensation insurance. All three methods use the workers’ compensation premium equation to determine the premium rate.
The Workers’ Comp Premium Equation
The workers’ compensation premium equation is the basis for all workers’ compensation premiums. Once an insurance provider determines the premium from this equation, they consider their company appetite for the particular industry and state the company operates in. Workers’ compensation rates vary widely among insurance companies and states.
The workers’ compensation premium equation is:
Premium = (Payroll / $100) x Classification Rate x Experience Modification Rate
The variables in the equation are determined by the following:
- Payroll per $100: Total payroll costs divided by $100
- Classification rate: Job risk classification determined by NAICs code
- Experience modification rate: A number to represent claims history; starts at one and goes up or down depending on claims during the policy term
The more payroll you have, the higher workers’ comp costs are. As job risk increases and the number of claims are factored in, rates can skyrocket for an employer.
Payment Options for Workers’ Comp Insurance
The annual premium for workers’ compensation can be paid as a lump sum of the estimated annual premium or on a monthly basis. Keep in mind that depending on the insurance provider, you can make monthly payments but still not be on the pay-as-you-go program.
How Annual Workers’ Compensation Premium Estimates Work
When it comes to annual premium estimates, workers’ compensation insurance carriers use an equation that factors in location, job risk, claims history, business payroll, and the carrier’s appetite. This estimate is later confirmed when the insurer completes a workers’ compensation audit at the end of the policy period.
Once they estimate the premium for the year, insurance carriers typically offer one of two payment plans: a lump sum paid upfront or monthly payments based on the estimated total. Either of these options gets reconciled during the audit to confirm if the appropriate premium was paid. This often results in either a bill for additional premium or a refund.
Insurers with traditional workers’ compensation programs generally do not let the small business owner add new employees during the policy term because they don’t want to re-underwrite the policy. They wait for the audit to reconcile everything.
Note: Monthly payments may have a finance charge and do not adjust for new hires or a shrinking team.
How Pay-As-You-Go Workers’ Compensation Insurance Works
Pay-as-you-go workers’ compensation uses the same equation to determine the annual premium that the traditional method uses. However, the insurer then integrates the policy with the business owner’s payroll processing. While the premium is based on the annual estimates, the premium goes up and down as the company hires or fires people.
Pay-as-you-go workers’ comp still requires an audit at the end of the policy period to confirm that all employees were classified properly and to review the business’s claims history. The advantage is the employer doesn’t have to come up with a large lump sum or be tied to a non-changing premium during fluid employment periods.
Pay-As-You-Go Workers’ Compensation Insurance Providers
Pay-as-you-go workers’ comp is offered by many providers, but you need to confirm the payroll integration aligns with your existing or desired payroll vendors. As with any insurance policy, shopping for an insurance company that has the right appetite for your industry risk ensures the best pricing.
Pay-As-You-Go Workers’ Comp Providers
Small business owners using QuickBooks for bookkeeping and payroll integration.
Businesses manually calculating payroll and do not use cloud-based programs to upload documents.
Retail stores and companies with a lot of employee turnover or fluctuating hours.
Seasonal businesses such as construction and agriculture where payroll fluctuates widely.
Professional firms where new partners may become exempt changing workers’ compensation exemptions.
Consider these five small business insurance companies for pay-as-you-go workers’ comp insurance:
The Hartford is a national business insurance leader that is constantly seeking ways to build better policies and improve customer relationships. The Hartford has all lines of business insurance, including general liability, commercial property, and professional liability insurance. This company is widely recognized for having one of the most robust business owner’s policies (BOPs) on the market.
The Hartford is a great choice for any small business owner using QuickBooks for bookkeeping solutions. The Hartford pay-as-you-go workers’ compensation policy easily imports payroll data and adjusts premiums on a per-pay-period basis. The workers’ compensation premium is part of the payroll bill, further reducing the paperwork and tasks necessary to complete monthly fiscal responsibilities.
EMPLOYERS is a small business insurance specialist founded on making workers’ compensation insurance policies affordable and easy to obtain. EMPLOYERS writes workers’ compensation insurance in 45 states and offers an extensive support network to aid business owners and injured employees navigate the claims process.
EMPLOYERS is a choice for small business owners running payroll through bank or manual not cloud-based programs. EMPLOYERS has a proprietary online system called PrecisePay that allows business owners to upload payroll information. The system directs business owners through a series of prompts to properly classify new employees, thus reducing any potential issues with annual audits.
Farmers is a national brand for personal and business insurance needs. It offers a wide range of commercial insurance products including general liability, BOPs, commercial property, and surety bonds. Farmers has captive agents in local communities who work directly with small business owners to assess insurance needs and get the right coverage.
Farmers is a great choice for retail businesses where employees may constantly adjust hours or other businesses that have a lot of turnover. Farmers’ proprietary pay-as-you-go solution, known as RealTime Billing, eliminates monthly insurance billing, requires no down payment, and integrates with a variety of payroll processing platforms for workers’ compensation insurance.
CNA is a large national insurance provider that works with independent agents to assist businesses of all sizes, from small independent contractors to large publicly traded corporations. CNA offers standard business lines of insurance along with specialty insurance lines, such as cyber insurance, to protect against new or evolving risks.
CNA is the best choice for businesses in industries where payroll is expected to fluctuate widely based on seasons such as construction, agriculture, and retail businesses. The underwriting process for CNA works well with seasonal businesses where there may be periods with many employees and others with none making it hard to estimate true costs.
Travelers is a leader in international insurance coverage policies for businesses of all sizes. Independent agents help Travelers define the unique needs of each business and customizes its general liability, commercial property, and professional liability insurance policies to meet those needs. Additionally, Travelers has one of the most extensive medical provider networks for workers’ compensation, making it an ideal partner for companies seeking a seamless claims process from start to finish.
Travelers is the right choice for professional firms where employees can be promoted to partners such as accounting, insurance agents, and tax firms. Depending on corporate structure, partners may become exempt employees. Travelers’ pay-as-you-go platform, TravPay, works with these and other preferred industries to properly adjust employee classifications for workers’ compensation.
Example of Pay-As-You-Go Workers’ Comp Premium
Running through sample numbers is the best way to understand how pay-as-you-go workers’ compensation insurance policies affect your monthly cash flow. Consider a new plumbing sole proprietor in California who hires one part-time clerk to aid with phone calls and administrative tasks. As the company grows, the owner hires a second plumber, transitions the clerk full time, and hires a sales representative. The plumber has no claims so his experience modification rate is one for this example.
Example of Pay-As-You-Go Workers’ Comp Cash Flow
Monthly Payroll Amount
Premium Per $100 Of Payroll
Rate calculations based on California baseline rates: Plumber ($5.65 multiplied by payroll – owner excluded); Clerk(28 cents multiplied by payroll); Sales Representative (36 cents multiplied by payroll)
Please note that these premium rates reflect the actual cost for each worker. However, insurance carriers may have minimum policy premiums for workers’ compensation policies, often starting around $250 annually. Professional employer organizations (PEOs) may be able to take on actual costs based on the master policy.
Prevent Premium Audit Bills With Pay-As-You-Go
Type of Workers’ Comp Payment Structure
Payroll Increases from $2,000 to $10,000 month six
Premium Audit Bill
Annual estimate $24,000
$113 ($1,356 annual)
$3,390 - $678 = $2,712 DUE
Adjusted as Increased to $10,000 month six
$113 🠊 $395.50
Note: Based on California baseline plumber’s rate of $5.65 per $100 of payroll.
As this example demonstrates, the monthly bill immediately increased when the payroll was dramatically increased. Adding several new plumbers increased the payroll from $2,000 to $10,000 and the premium reflected the change in more manageable monthly payments with pay-as-you go workers’ compensation.
How Pay-As-You-Go Workers’ Comp Impacts Premium Audits
All insurance companies audit any workers’ compensation insurance policy they sell. They review the business’ payroll, workers’ classifications, and claims for the entire policy term. This information is used to reconcile the actual premium with the original estimate. If these numbers don’t match, the business owner may be billed for the remainder.
In the example above, let’s say the employer started the policy with one part-time employee. He would not have been able to re-underwrite this policy when he added new employees or expanded an employee’s hours and would have been billed at the end of the year for at least $1,000.
Pay-As-You-Go Workers’ Compensation Premium Audit
A small business owner on a pay-as-you-go workers’ comp plan might question the need for the premium audit. After all, the adjustments are made based on real payroll data. However, insurers need to confirm workers’ classifications and reviewing the business’ claims history for the experience modification rate (EMR).
Pros & Cons of Pay-As-You-Go Workers’ Comp Insurance
Pay-as-you-go workers’ compensation is a newer insurance innovation designed to remove a lot of the stress of workers’ compensation audits. However, as much as innovation helps reduce some problems, there are other issues to keep in mind if you choose to go with a pay-as-you-go policy.
Consider these pros and cons of pay-as-you-go workers’ compensation insurance:
Pros of Pay-As-You-Go Workers’ Comp
The pros of pay-as-you-go workers’ comp policies include:
- Eliminating shocking retroactive bills: Small business owners no longer need to try to anticipate any future bills for underpaid workers’ compensation premium.
- Maintaining accurate premiums: Adjustments are made with each processed payroll for existing employees’ hours, new hires, and employees that leave the company.
- Automating workers’ compensation payments: Integration between the insurance company and the payroll administrator reduces the amount of paperwork required during the annual audit.
Cons of Pay-As-You-Go Workers’ Comp
The cons of pay-as-you-go workers’ compensation insurance policies include:
- Creating short-term payroll issues: Small business owners may not remember that hiring means not just adding payroll but adding insurance costs immediately.
- Potentially making errors when classifying employees: Employees onboarded in haste might be misclassified by payroll administrators so business owner may still see an unexpected audit retroactive bill.
- Needing to proactively plan: Human resources departments need to be clear about job descriptions and payroll costs for new or promoted employees to ensure accurate pay-as-you-go premiums.
Frequently Asked Questions (FAQs)
Workers’ compensation insurance is a very complicated type of insurance to begin with. The following are some of the most frequently asked questions regarding pay-as-you-go workers’ comp insurance.
How much does it cost to get workers’ compensation insurance?
The average cost of workers’ compensation premium ranges from $0.75 per $100 of payroll in Texas to $2.74 per $100 of payroll in Alaska. Rates vary widely from state to state and are directly affected by employer payroll, job risk classifications, and claims history.
Is workers’ comp paid monthly?
Workers’ comp premiums are typically based on an annual premium estimate. Depending on the insurer, small business owners may pay premiums in one lump sum, monthly installments, or as part of a pay-as-you-go workers’ compensation policy. However a policy is paid, insurers conduct an annual audit to confirm the premium was correct.
Is workers’ comp based on payroll?
Payroll is a significant factor in calculating workers’ compensation premium. The formula to calculate premium is payroll per $100 multiplied by job classification code multiplied by the Experience Modification Rate factor.
Pay-as-you-go workers’ compensation helps small business owners manage cash flow while making sure all employees are properly covered with workers’ compensation insurance. When premiums are adjusted through payroll integration, small business owners have fewer insurance surprises when their workforce changes over the course of a policy term.
Shopping for a pay-as-you-go workers’ comp insurance policy doesn’t have to be difficult. The Hartford makes buying and paying for workers’ compensation insurance quick and easy with an online platform that allows small business owners to go from quote to established policy within minutes.