Since our last update:
- The National Council on Compensation Insurance (NCCI), the rating bureau that governs workers’ compensation rates in most states, has decided that workers’ comp claims stemming from COVID-19 will not impact a business’ experience modification rate (EMR). These changes will remain in effect and won’t expire until regulatory authorities deem there is no longer a need. States that don’t use the NCCI may have other rules—business owners in these states should check with their state boards.
- Since the NCCI is treating the COVID-19 pandemic as a catastrophic event, all COVID-19 related claims are excluded from the determination of loss costs and rates as they are not expected to be predictive of its loss experience that are likely to arise during the upcoming loss cost and rate filings’ prospective periods.
Determining workers’ compensation costs requires complicated algorithms. However, the basic workers’ comp calculations are fairly straightforward if you have the right information to plug into the formula. Doing this can give you a decent idea of what your premium should be so that you can include it when budgeting for new hires.
How Workers’ Comp Costs Are Calculated
Workers’ compensation insurance is governed at the state level, and each state has its own method for calculating rates. However, most formulas share a few characteristics. For example, all workers’ comp calculations use your business’ risk, total payroll, and claims history to determine your premium.
Of these three pieces of information, payroll is the only number that isn’t a rating. The other two—your class code rate and experience modifier—are created by ratings bureaus, which are the organizations that advise states on rating policies, and represent your business risk and claims history respectively. They can use them in the formula listed below:
If you have all three numbers, you can use this calculator to get an estimate of your workers’ compensation costs. However, the result is only an estimate because it doesn’t consider several factors that your state may use to calculate your total premium.
Workers’ Compensation Insurance Cost Calculator
To calculate your workers’ compensation costs, you must first determine the class code your profession falls under, as well as your payroll, EMR, and other factors that can affect your rates.
How Your Class Code Impacts Your Workers’ Comp Rate
Class codes are three- or four-digit numbers that rating bureaus use to represent the risk your employees face for suffering workplace injuries. Every occupation is given a code based on the types of tasks employees are required to perform, then each code is assigned a base rate. Jobs with more risk, such as a tree surgeon, have a higher base rate than those with a lower chance of injury, like an accountant.
Making a mistake on your class code can have a major impact on how much your workers’ compensation insurance costs. Let’s say, for example, you run a group home (class code 8842) in Wisconsin that accidentally gets coded as a retirement home (class code 8824). As a group home, your base rate should be $4.60, but you’re charged $5.06. That’s only a 46-cent difference, but remember your base rate is then multiplied by your payroll divided by 100 and, potentially, an experience modifier. As a result, you could end up overpaying by hundreds—even thousands—of dollars.
How Your Payroll Impacts Your Workers’ Compensation Rate
It’s important to understand how payroll impacts your workers’ comp calculations. The more employees you have, the more your workers’ comp insurance is going to cost. The tricky part is figuring out which employees you’re responsible for insuring and what counts as payroll.
For example, let’s say you run a business in Colorado, and you want to hire an independent contractor. Assuming the worker meets the state’s definition of an independent contractor, you’re not responsible for his workers’ compensation insurance because he is not an employee. You may, however, be responsible for the contractor’s employees’ coverage and their work-related injuries if the contractor does not carry his own workers’ compensation insurance.
Once you determine which employees must be covered, you need to identify their remuneration.
Gross pay is the starting point, but you must also factor in other compensation, such as:
- Paid sick days, holidays, and vacation days
- Lodging or meals included in pay
- Employee contributions to 401(k)s and retirement plans
Each state determines who is exempt from workers’ comp requirements and what counts as remuneration. Working with an experienced agent can make navigating these rules easier.
In the News
For states with an approved Contracting Classification Premium Adjustment Program (CCPAP), to determine CCPAP credit, if the employer did not engage in contracting operations during the whole third calendar quarter, then the last complete calendar quarter prior to the policy effective date may be used.
How Your EMR Impacts Your Workers’ Comp Costs
The final number used in most workers’ comp premium calculations is your EMR. This measures the difference between the business’ past workers’ comp claims and what other similar businesses have experienced. A business on par with others in its industry typically gets an EMR of one, so the modifier does not affect its premiums. Businesses with fewer claims receive an EMR below one while those with more claims have EMRs above one.
As with everything else about workers’ compensation, how EMRs are applied depends on your state. Most states have some sort of eligibility threshold like Oregon, which only factors in an EMR if a business has paid $2,500 in premium for one year or $5,000 for two consecutive years.
Workers’ Comp Calculation Example
Here’s how the basic workers’ compensation calculations work. Imagine you own a bakery in Florida with two employees who earn a total of $80,000 per year. Your class code is 2003, which has a rate of $3.50. With this information, your workers’ compensation calculation looks like this:
($3.50 x $80,000 / $100)
However, let’s also assume your employees take safety very seriously, so you’ve filed fewer workers’ comp claims than other three-person bakeshops in your area. As a result, you’re also given an EMR of just .75, which means your premium is calculated like this:
($3.50 x $80,000 / $100 x .75)
Business is going well, so you decide to hire part-time office help. This raises your total payroll to $100,000. However, clerical workers (class code 8810) don’t face as much risk as employees who take care of clients’ lawns, so most states rate them separately. Consequently, your workers’ comp calculations now look like this:
($0.07 x $20,000 / $100 x .75)
($3.50 x $80,000 / $100 x .75)
Base workers’ comp premium
Other Factors That Impact Your Workers’ Compensation Costs
As we stated at the beginning of this article, the actual workers’ compensation algorithms are complicated, so using the basic formula only gives you a cost estimate. Moreover, every state factors in additional elements to determine premiums. We can’t list all the possible factors applicable for all states, but we can give you a few examples, including:
- Disease load: An additional factor applied to some industries where exposures to specific occupational illnesses increase the risk for claims
- Employers’ liability limits factor: An additional charge for increasing employer’s liability coverage, or part two of workers’ compensation
- Nonrated catastrophe load: An additional factor applied to some industries where there is a risk for catastrophic losses
- State surcharges: Additional fees individual states may charge to fund various workers’ comp programs like second injury funds or return-to-work initiatives
- Expense constant: The additional fee charged by insurers to cover the administrative costs associated with any workers’ comp policy
The more factors included in your workers’ compensation premium, the harder it will be to estimate costs. However, you can use the basic formula to get a general ballpark figure for your business. This can help you budget for new hires as your business grows.
Another way to get an estimate for your workers’ comp is to get a quote from an online broker like CoverWallet. Once you fill out a simple online application, CoverWallet submits your information to multiple carriers so that you can compare premiums and policy terms.