Workers’ compensation is an expensive requirement that most business owners are desperate to control. Some industries’ average cost is more than 5% of every payroll dollar spent. While nothing keeps premiums down more than safety practices that reduce claims, there are other things you can do. Here are 14 tips for lowering workers’ comp premiums.
Every small business owner needs to actively participate in the workers’ compensation insurance process and overall safety programs for his company. Excellent insurance companies like The Hartford don’t just write the policy, they help train business leaders on safety protocols and help implement programs to save on premiums. Minimizing claims is always the best way to lower rates.
Tips for Lowering Workers’ Comp Premiums
Insurance providers consistently tell small business owners that the way to lower workers’ compensation insurance rates is to keep claims down. Risk management is a key component in that effort that businesses can control. However, your insurance broker can also help by comparing providers, looking at job duties, and confirming the right payroll amount is used.
Here are 14 tips for lowering workers’ comp premiums:
1. Write Job Descriptions
Writing clear job description can help you lower your premiums because insurers look at the work your employees do to determine how much your workers’ compensation insurance costs. You and your insurer can use job descriptions to make sure every employee is properly classified for the work they perform so you don’t end up paying too much for workers whose jobs are comparatively safer than others.
Additionally, the more clearly you can define job duties, the more likely employees are to follow safety protocols. For example, noting that warehouse product stockers “use automated risers to load all product boxes over 50 pounds” demonstrates the employer’s safety expectations.
2. Dig Into Your Policy Details
Most business owners stop at the insurance type and premium when it comes to looking at their policies. Insurance policies are filled with weird jargon and can be confusing to even licensed insurance agents when they have to compare terms among carriers. Don’t let that intimidate you. Jump in and start going through your workers’ comp policy line by line.
Most workers’ compensation state requirements mandate policies meet legal limits, with $100,000 per accident or illness with a $100,000 per employee limit. There is often a third limit that is the policy limit, usually starting at $250,000 and going up from there. A deductible may or may not be applicable to your policy depending on the state your business operates in.
If you have a workers’ compensation policy with $1 million in coverage limits, you may want to have an assessment done with your insurance carrier. While you may not want to reduce coverage, you might be able to offset some of the premium costs by electing a higher deductible.
3. Properly Exclude Exempt Employees
The federal government defines what exempt employees are, but every state is different when it comes to who must be covered by workers’ compensation among exempt employees. Exempt employees are normally owners, partners, and independent contractors. Check the IRS guidelines to be sure you are appropriately defining exempt employees.
4. Exclude Independent Contractors
One of the advantages of hiring independent contractors is it reduces payroll fringe costs such as unemployment, taxes, and workers’ compensation insurance. Make sure your independent contractors meet IRS guidelines so you don’t have to cover them with your workers’ compensation insurance.
“Independent 1099 contractors can be covered by workers’ compensation. Courts are not bound by the parties’ designation of their relationship, meaning that whether the company and employee label their relationship as employer-employee or client-contractor, a court will do its own analysis to determine if the relationship is covered by workers’ compensation. Most states have several factors to consider, but, generally, the most important is the amount of control the company has and exercises over the employee’s performance of his or her duties. For example, a UPS driver has complete control over how they deliver your package, so they are a contractor and not an employee of yours. However, if you have an employee make a delivery—and control which vehicle they use, when they go, the route they take, and so forth—that is more likely to be found to be an employee covered by workers’ compensation.”
– Thomas J. Simeone, Attorney, Simeone & Miller, LLP
5. Talk to Your Insurance Agent
Your insurance agent or broker can help you determine if there are any ways to reduce your premium based on inaccurate work classifications or implemented safety programs. Your insurance agent can also talk to your insurer’s underwriting team to see if you can implement new programs to reduce your rates. These programs might include adding safety training, installing specific work aids, or adjusting duties for employees who take on additional tasks that overlap with higher risk jobs.
For instance, if an office clerk is sometimes sent to the warehouse, he might be classified as a warehouse employee, so his entire salary is charged at a higher rate. By keeping his job duties strictly assigned to clerical tasks, his employer can save on premium.
6. Set Safety Standards for Operations
Safety standards are more than training employees about safe practices; they are rules a small business owner establishes to keep employees safe and the business in compliance with OSHA regulations. Common safety standards include requiring that signs are posted near hazards or having two people lift a heavy item. Written safety standards and consistent training can reduce workers’ comp rates with some carriers.
7. Train Employees on Safety Management & Protocols
Regularly training employees on safety management and protocols helps reduce workers’ compensation premiums over time because it helps prevent accidents from happening in the first place. Spills get cleaned before someone slips and gets hurt, store rooms are organized so items are easily accessible, and the appropriate protocols are followed during incidents.
Employees who know how to prevent accidents are less likely to get hurt, and those who know what to do when something goes wrong are able to reduce the chances of injury. When injuries go down, the company’s experience modification rate drops, reducing the premium.
8. Shop Among Carriers
Every insurance company has an “appetite,” meaning a preference for insuring business in certain industries. While insurance companies may write insurance policies across the board for most industries, when something falls into its appetite, the premiums are often much lower. This is why shopping your workers’ compensation premiums among insurance carriers is important.
Using an insurance broker when shopping is often the easiest way to make sure the quotes are apples-to-apples comparisons. Companies like AP Intego work with top carriers and are able to manage the entire quoting process for small business owners after a quick, five-minute online application.
9. Actively Participate in Your Annual Audit
Every workers’ compensation insurance policy has an annual audit conducted by the insurance carrier. This workers’ comp premium audit reconciles the payroll estimates used to establish the premium with the actual premium. The more actively you participate in the audit, the better the auditor understands the scope of your current business situation and the more accurately they can classify your employees.
For example, say you had higher than normal payroll. You don’t want the next year’s workers’ compensation premium to be based on those estimates. However, if you show the current payroll status, your actual premium remains closer to real estimates. Also, you don’t want to assume the auditor understands the exact job classification of all workers. Ask a lot of questions to get that right and to help in lowering workers’ comp premiums.
10. Consider a State Fund
There are four monopolistic states where the only choice for workers’ compensation is the state fund. However, most other states that have state funds do so in a competitive structure. The state fund often is the place where new businesses are guaranteed insurance and high-risk industries are often able to get the best pricing. If your small business had premiums rise due to claims or your industry is considered high risk, consider the state fund for lowering workers’ compensation premiums.
11. Consider Pay-as-You-Go Insurance Policies
Pay-as-you-go workers’ compensation insurance doesn’t necessarily change the overall premium pricing, but it does make paying your premium much more palatable. By integrating the insurance with payroll processing, adjustments for any staff changes are made monthly. This goes a long way to reducing huge workers’ compensation audit bills at the end of the policy term.
“If you are only paying for workers’ comp when employees are working, you can avoid overpaying during the rest of the year. Let’s say you are a seasonal business, nine months a year. But most workers’ comp insurance is going to keep billing you the same amount month after month because it’s based on annual payroll. Improve your cash flow and only pay for the months when employees are working and you’re making money.”
– John Espenschied, Owner, Insurance Brokers Group
12. Look at Professional Employer Organizations (PEO)
A professional employer organization (PEO) is a small business human resources partner that handles all employee management human resources (HR) tasks. One thing PEOs do is serve as the employer of record, thus creating a larger pool of employees getting workers’ compensation and often lowering workers’ compensation premiums for each individual employer.
If you are looking for ways to take HR tasks off your plate and in lowering workers’ comp premiums, consult with a PEO provider for your options.
13. Investigate Workplace Accidents
Workers’ compensation insurance fraud accounts for nearly 2% of all claims and costs insurance companies nearly $30 billion annually. Investigating claims and notifying insurance carriers of potential fraud is critical to keeping workers’ compensation premiums down for you and all businesses.
Some red flags include unsubstantiated stories, claims reported shortly after vacations, or claims for accidents that didn’t appear serious. Work with insurance claim adjusters to make sure legitimate claims are quickly and appropriately processed, and turn over anything that may be fraud to the proper authorities.
14. Create a Return-to-Work Program
A return-to-work program helps get injured employees back into the company operations sooner rather than later. The goal is to provide the employee with a platform to feel good about progress and rehabilitation and ultimately return to his original job duties, if possible. By getting employees back to work, your insurer sees a reduction in claim payouts for disability and that can result in lower premiums.
“If an injury happens, you can then refer to work assignments and identify the one that best fits the circumstances based on the work restrictions provided by the doctors treating the injured employee. It is important to explain to the injured employee that this new transitional position is temporary and once they are cleared to return to full duty, they are expected to return to the position for which they were hired.”
– Justin Rowley, VP of Risk Management, Helpside
What Workers’ Compensation Is
Workers’ compensation insurance pays for medical expenses, rehabilitation services, lost wages, and legal defense of claims if an employee is injured on the job. Workers’ comp insurance is required in most states for any business with employees. Rules and regulations vary from state to state and should be reviewed by every small business owner.
Workers’ Compensation Costs
Workers’ compensation costs vary widely for businesses depending on the job duties, the industry, the location, and their payroll costs. Premiums are as low as 12 cents per $100 of payroll for clerks and more than $30 per $100 of payroll for construction workers. Consider costs before implementing any tips for lowering workers’ comp premiums.
The Workers’ Compensation Equation
The workers’ compensation equation is the starting point all insurance providers use to determine rates. The equation considers the business’ payroll per $100 with each worker’s classification and a number that represents the business’ claims history, called an experience modification rate (EMR).
The workers’ compensation equation is:
Premium = Payroll per $100 x Work Classification x EMR
The definitions for these variables are:
- Payroll: Total payroll amount divided by $100. For example, $100,000 of payroll costs is divided by $100, so $1,000 is the amount used in the equation.
- Work classification: Defined by NAICs codes and state requirements. For example, a clerk might be 12 cents while a plumber is $12.
- EMR: A factor based on the small businesses history that starts at 1 and goes up if there are claims and down if there are none over time.
Typical Cost of Workers’ Compensation Insurance by Industry
Health & Fitness
Construction & Labor
Medical & Rehabilitation
Note: Table reflects average premium estimates.
Rates will change per insurance company preferences to insure specific industries. Consider pay-as-you-go workers’ compensation policies that help keep costs true to actual costs rather than estimates with large audit bills. The Hartford is our choice to get a workers’ comp policy that added features at no extra costs and allows a pay-as-you-go option.
Factors Affecting Workers’ Compensation Premiums
The workers’ compensation equation is the first component used to determine a small business’ premium. The state you live in also has baseline premiums for worker classifications based on state claims statistics. On top of this, business insurance companies have different level of interest for insuring different industries, called an appetite.
All of these factors are part of the complex pricing of workers’ compensation insurance. Keep these in mind as you consider the various ways for lowering workers’ comp premiums.
Frequently Asked Questions (FAQs) About Saving on Workers’ Comp Insurance
Workers’ compensation insurance is expensive and requires an attention to detail from small business owners.
How much is workers’ compensation insurance?
Workers’ compensation insurance costs are different among states and industries. Rates are determined per $100 of payroll, with an office clerk typically costing 12 cents per $100 and a physical trainer potentially costing $5.63 per $100. Higher-risk jobs automatically have higher rating factors. Claims increase premiums while remaining claim-free can reduce it.
How do I lower workers’ comp premiums?
One way to lower workers’ compensation premiums is to maintain safe business operations, where employees are trained to avoid injuries and reduce claims. Companies with fewer claims reduce the experience rate modifier that’s used in the workers’ comp premium equation to represent their claims history.
What is pay-as-you-go workers’ compensation?
Pay-as-you-go workers’ compensation is a workers’ comp policy that is integrated with payroll so premiums are based on actual staff numbers. This way, a small business isn’t estimating payroll costs to later have a shocking premium audit, and is instead getting billed with each payroll and current adjustments to employee hours, new hires, and layoffs.
If you own a small business with even one employee, you are likely required by state law to maintain workers’ compensation insurance. While this requirement is something that protects both the employee and the employer, it is costly and, at times, a financial burden. Using tips for lowering workers’ comp premiums is something every business owner can benefit from.
The good news is that small business owners doesn’t need to figure everything out about workers’ compensation insurance on their own. The Hartford wants to help you improve safety and reduce claims. By doing that, you will have the best chances of reducing workers’ comp premiums.