Workers’ Compensation Insurance Cost: Formula & Factors Impacting It
This article is part of a larger series on Workers' Compensation Insurance.
It is difficult to provide an exact premium without considering all of the elements of your business. This is because workers’ compensation costs are calculated using a formula that draws on multiple data points—including payroll, state regulations, and industry. Your workers’ compensation premium is written as a dollar amount per $100 of your company’s payroll.
Total cost of workers’ compensation insurance = | Employee’s estimated annual payroll __________________ $100 | × | Premium rate for the class code | × | Experience modification rating (EMR) |
With that in mind, workers’ comp costs vary significantly depending on the industry.
Hospitality | $1,200 to $2,400 |
Retail | $590 to $1500 |
Restaurants | $480 to $1,600 |
Construction | $1,150 to $4,800 |
Disc Jockey | $800 to $1,300 |
One of the best ways to shop for workers’ compensation is by using a broker that will let you compare custom quotes in real time and then purchase the policy online. Simply Business is one of the best providers of workers’ compensation insurance and works with multiple top-rated providers to help you find affordable coverage that fits your business.
Visit Simply Business to compare quotes.
Factors That Impact Workers’ Compensation Insurance Cost
Businesses rarely have the same workers’ compensation premiums because of the underlying factors, like payroll and industry, used to determine it. Let’s dive into the top five factors that impact workers’ comp costs.
1. Payroll
Every workers’ compensation insurance rate starts with your payroll divided by $100, so the more people you hire, the higher your rate goes. While this is true on the surface level, there are situations where the payroll may be higher than what is used in the calculation.
For example, given that workers’ compensation requirements vary by state, some states like California, require coverage as soon as you hire a single employee. Meanwhile, others like Texas or North Dakota, don’t mandate it.
Also, you may have some people on your payroll who are exempt from workers’ compensation, depending on your state’s laws. For instance, if you are the owner of the business, you most likely aren’t required to get workers’ compensation insurance for yourself. The same is often true of partners in partnerships, corporate officers, and limited liability company (LLC) members.
2. Industry & Work Classification
Some jobs are riskier than others, so a person working on an oil rig has a much higher chance of suffering a serious injury than someone doing data entry in an office. The additional risk workers face in certain industries makes those industries more expensive to insure.
To quantify the increased risk, states assign every type of job a class code that is then assigned a base rate according to its risk for injury. There are 35 states that use class codes designed by the National Council on Compensation Insurance (NCCI); and the ones that don’t are California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, and Wisconsin.
Did You Know?
If you are a registered user with NCCI, you can use NCCI’s class look-up tool to find the class code for any of your employees. It also has related information to the specific job classification.
Meanwhile, other states use third-party rating bureaus, and a few create their own systems. Depending on the state, governing class codes are then assigned to either operations or individual employees.
3. EMR
The EMR is a multiplier representing your claims history. When it’s factored into the equation, your rate can go up or down, based on how your claims history compares to similar businesses. The idea behind the EMR is, past performance is an indicator of future claims. If your business is a safe environment with little to no claims history, then the EMR will be lower, helping to lower your premium.
Your state workers’ compensation board or its rating bureau determines your EMR by comparing your past workers’ compensation claims to similar businesses. EMRs commonly range from 0.48 to 1 but can range over 1.25.
4. State Insurance Factors
Even though workers’ compensation is mandated coverage, it is still regulated at the state level. Some states, such as Ohio, North Dakota, Wyoming, and Washington, run their own insurance funds and are called “monopolistic states.” Note, however, workers’ comp costs are different in every state.
States that don’t use the NCCI, which are listed above, may have other rules. As such, business owners in these states should check with their relevant state boards.
Some states offer discounts to employers for doing things to improve safety and reduce claims. For example, many states have discounts for creating a drug-free workplace, establishing safety committees, and implementing fall protection programs.
5. Insurance Carrier & Provider
Once all the other factors are defined, every business owner needs to shop workers’ compensation insurance costs among insurers. While a standard formula is used to calculate the premium, that doesn’t mean the premium is the same for every provider.
Some workers’ compensation insurance companies have higher rates than others—but this isn’t a standard rule. Every carrier has what is called a “risk appetite.” If an industry is in a carrier’s appetite, the rates are usually more favorable than those from a carrier that doesn’t have an appetite.
The Cost of Not Having Workers’ Compensation Insurance
Business owners risk fines and even jail time if they don’t carry workers’ compensation insurance, depending on the laws in their states. For instance, failure to carry workers’ compensation insurance in Pennsylvania is considered a third-degree felony and can result in a fine of $15,000 and up to seven years in jail. In California, penalties can reach up to $100,000 in fines.
Even if you’re not required to carry workers’ comp, you may still want a policy, especially if you’re in a high-risk industry. An injured employee can hold you responsible for their medical costs in some situations, and a workers’ compensation policy provides protection from those costs.
How To Get the Best Rate on Workers’ Compensation Insurance
Your business’s workers’ compensation rate is fixed in some ways, based on your payroll, worker classifications codes, and EMR. However, like many other types of business insurance, there are ways to save on your workers’ compensation policy.
1. Shop Around
If you’re in a state that offers a competitive marketplace for workers’ comp, shop around for rates with different carriers. Review your costs every few years to ensure you’re still getting the best price. When you do this, check the policy terms, too. You don’t want to sacrifice quality coverage for a lower price.
2. Maintain a Work Safety Program
Because your experience modifier impacts your workers’ compensation insurance costs, you want to maintain a clean claims history. One way to do that is by implementing a workplace safety program, both on and off your premises. Well-trained employees following all recommended safety standards can help you reduce worker injuries.
3. Create a Return-to-Work Program
Establishing a return-to-work program can help you retain valuable employees. These programs are designed to help injured workers return to work as soon as they are medically able. While they recover, it can provide an alternative role for them to return to work more quickly.
Many carriers offer premium credits or discounts to business owners who offer return-to-work programs. Even if you don’t earn a discount, a return-to-work program can save you the cost of hiring new employees.
4. Check Your Worker Classifications
Ensure your employees are properly classified on your workers’ compensation policy. A classification error can lead to unnecessarily higher costs. For example, a lawn service company can have more than just laborers working outside; it might also have an office assistant or a sales professional. These workers fall into a different class than the landscapers and likely have lower work classification ratings—meaning lower rates.
5. Consider Getting a Pay-as-You-Go Plan
Workers’ compensation insurance premiums are traditionally based on payroll projections. So, insurers audit policies at the end of the term to ensure you were charged the appropriate amount. However, many insurers now offer pay-as-you-go workers’ comp. These plans make monthly adjustments to your premium based on your actual payroll costs and employees’ job classification.
With the more accurate billing, there is a reduced chance of a surprisingly large post-audit bill, plus pay-as-you-go plans usually require a lower down payment than traditional plans. One such insurer offering pay-as-you-go workers’ compensation insurance is The Hartford. You can learn more about its insurance products in our review of The Hartford.
For additional tips, read our guide on the ways to save money on business insurance.
Frequently Asked Questions (FAQs)
A class code is what insurers use to categorize businesses according to factors like industry and job risk. It is factored into the formula for calculating the premium.
EMR stands for experience modifier rating, which describes your claims history. The EMR is factored into the workers’ compensation premium, which can either help lower or drive up the cost of insurance.
A state monopolistic workers’ compensation fund is when a government handles workers’ compensation insurance for their state. There are four monopolistic states: Ohio, North Dakota, Wyoming, and Washington.
Workers’ compensation is required in every state—except for Texas and North Dakota. But even those states have specific situations where workers’ compensation is required. Each state has its own threshold for when it is required, so check with your state governing board to find out the details.
Bottom Line
It’s tough to predict your exact workers’ compensation insurance cost without considering the unique factors that define your business. Industry, payroll, and state laws all play a role in determining your workers’ compensation premium, and no two companies will have the same premium costs.
To find quality coverage while saving money, shop around for workers’ compensation by using a broker like Simply Business. It can help small businesses find workers’ compensation by providing multiple quotes from top-rated providers. After comparing the coverage and cost, you can purchase a policy online.
