How Much Does Workers’ Compensation Insurance Cost?
Nancy Fernandez is a Credit Card and Insurance Expert at Fit Small Business, specializing in business credit cards and business insurance.
This article is part of a larger series on Workers' Compensation Insurance.
Workers’ compensation insurance costs depend on many factors, such as state regulations, payroll, and industry, so it’s difficult to pinpoint an exact premium without considering all of your business’ characteristics. Employer costs for employees’ compensation among civilian workers averaged $39.01 per hour worked as of March 2021, according to a 2021 summary report by the United States Bureau of Labor Statistics (BLS). Those in less-risky industries can pay significantly less.
Since our last update:
- In the latest Employment Cost Index Summary Report released by the BLS, compensation costs increased for both civilian workers (at 2.9%) and private workers (at 3.1%) for the 12-month period that ended in June 2021.
- Among the major industry groups under the private sector, compensation costs for utilities were the highest in December 2020, at $67.62 per hour, according to the latest report released by the BLS.
- The National Council on Compensation Insurance (NCCI) Statistical Plan for Workers Compensation and Employers Liability Insurance (Statistical Plan) has included a provision that covers workers experiencing adverse effects to COVID-19 vaccinations (item U-1402). Since then, the states of Wyoming, Tennessee, Alabama, Illinois, and Ohio have introduced state laws that replicate this provision and are in the process of passing this into law. Meanwhile, Texas has issued an Official Order that accepts this provision into their state.
How Are Workers’ Comp Costs Calculated?
The basic formula for calculating workers’ comp costs considers the business’ industry, claims history, and total payroll. Your industry is represented by a class code that’s assigned a rate based on the type of work performed by your employees. That number is multiplied by your payroll divided by $100 and an experience modification rate (EMR) which represents your claims history. The result is your workers’ compensation premium, typically written as a dollar amount per $100 of your company’s payroll.
What Factors Impact Workers’ Comp Insurance Cost?
Unfortunately, we can’t say with complete certainty what your business’ workers’ comp premium is, but we can look at numerous factors that impact workers’ comp costs for every business. Businesses rarely have the same workers’ compensation premium because if any of these factors are different, the rate is different.
Let’s dive into the top five factors that impact workers’ compensation insurance cost, starting with the three used in the formula.
1. Payroll
Every workers’ compensation insurance rate starts with your payroll divided by $100, so the more people you hire, the more your rate goes up. However, you should also note that workers’ comp requirements vary by state and, while some states require coverage as soon as you hire a single employee, others don’t mandate it until you have three or more.
You may also have some people on your payroll who are exempt from workers’ compensation, depending on your state’s laws. For example, as the business owner, you most likely aren’t required to get workers’ comp for yourself. The same is often true of partners in partnerships, corporate officers, and limited liability company (LLC) members.
2. Industry and Work Classification
Some jobs are riskier than others. A person working on an oil rig has a much higher chance of suffering a serious injury than someone working in an office. The additional risk workers face in certain industries, such as contracting and construction, makes those individuals more expensive to insure.
Sample Workers’ Comp Costs for Small Businesses By Industry
Industry | Annual Premium |
|---|---|
Contracting and Construction | $2,200 to $7,400 |
Retail | $500 to $4,000 |
Restaurants | $1,500 to $3,200 |
Health Care | $550 to $2,000 |
Accountants | $350 to $1,500 |
To quantify the increased risk, states assign every type of job a class code that’s then assigned a base rate according to its risk for injury. There are 38 states that use class codes designed by the NCCI. Others use third-party ratings bureaus, and a few create their own systems.
Most states assign businesses a governing class code that represents the majority of their operations, but some states assign codes to every employee. A few only assign class codes based on type of employees for certain industries. Several states identify some jobs as standard exemptions and rate them separately from the governing class code because they’re either common to most businesses or pose a limited risk. Clerical workers and outside sales personnel are two common standard exemption examples.
3. EMR
The EMR is a multiplier that represents 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. Your state workers’ comp board or its ratings bureau determines your EMR by comparing your past workers’ comp claims to similar businesses. EMRs commonly range between 0.75 and 1.25, and businesses with lower EMRs typically pay less for their workers’ compensation insurance.
4. State Insurance Factors
Because coverage is regulated on the state level, workers’ compensation insurance costs are different in every state. A state that pays more benefits to injured workers for a longer time will most likely have higher workers’ comp costs. Similarly, a state where the top industries are high risk will typically have more injuries and, in turn, higher workers’ compensation rates.
Some states also 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.
Pro tip: States that don’t use the NCCI may have other rules. These include California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Texas, Washington, Wisconsin, Wyoming, and Washington, D.C. Business owners in these states should check with their state boards.
5. Insurance Carrier and Provider
Once all the other factors are defined, every business owner needs to shop workers’ compensation insurance costs among insurance providers. Some workers’ compensation insurance companies have higher rates than others, but this isn’t a standard rule. Every carrier has what’s 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 for the risk.
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 example, failure to carry workers’ comp 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’ comp policy provides protection from those costs.
How to Get the Best Rate on Workers’ Comp 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’ comp 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 make sure 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’re 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’ comp 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 make sure 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. The more accurate billing reduces the chance of a surprisingly large post-audit bill, plus pay-as-you-go plans usually require a lower down payment than traditional plans.
Bottom Line
It’s tough to predict your business’ 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’ comp premium, and no two companies will have the same premium costs.
