Workers' Compensation

Workers' compensation is a mandatory type of business insurance that provides employees who become injured or ill while on the job with medical coverage and income replacement. It also protects companies from being sued by employees for the workplace conditions that caused such an injury or illness.

Businesses are required by law in all fifty states to pay for the medical treatment and lost wages of employees who suffer job-related injuries or illnesses. In order to avoid crippling expenses in this regard, companies purchase workers' compensation insurance policies of one kind or another. Most states give businesses the choice of buying workers' compensation policies either directly from the state or from a private insurer. Each state determines its own system's payment schedules, employee eligibility requirements, and rehabilitation procedures. Although provisions of each state's laws differ greatly, the underlying principle is the same—that employers should assume the costs of injuries, illnesses, and deaths that occur on the job, without regard to fault, and partially replace wage income lost. While income replacement under workers' compensation is usually a percentage of the actual wage, it is counted as a transfer payment and thus is not subject to federal income tax for the employer or employee. Some state laws exempt certain categories of employees from coverage. Those most likely to be excluded are domestics, agricultural workers, and manual laborers.

Given the mandatory nature of workers' compensation coverage and the potential expense involved, the cost of workers' compensation insurance policies is a considerable concern for small business owners. In fact, workers' compensation premiums stand as most companies' second-largest operating expense, after payroll. These rates are based on the employer's total payroll, the classification of the employees, and the employer's accident record. The wages paid each employee are assigned a rate based on the occupational classification in which that employee works. For example, an employee who does office work will be assigned a rate that is lower than one who works re-roofing. The employer's cost of workers' compensation for the office worker will likely be in the range of 0.25 to 1.0 percent of wages earned while the employee who works on roofing projects will cost the company as much as 10 to 15 percent of that employee's gross wages.

Small business owners have less control over the cost of workers' compensation coverage than they do over health insurance costs. State legislatures set the level of benefits and employers pay the full cost, so medical cost-containment strategies like co-payments do not apply. Some insurers avoid handling workers' compensation policies for small businesses because they feel that smaller companies lack the funds to provide a safe working environment. In general, the rates depend upon the type of business, number of employees, and company safety record.

Penalties for failing to carry workers' comp insurance policies can be severe. In general, business owners who are neglectful in this manner can be held liable for the medical expenses incurred by the worker in their employ. Nonetheless, many businesses engage in what is known as "premium fraud," in which they either do not carry insurance as required or lower the costs of their policy premiums through fraudulent record keeping. Methods used to fraudulently reduce insurance premiums include underreporting of employee count or the wages they are paid, paying workers under the table in order to falsify the number of employees, misclassifying the kind of work engaged in by employees in order to reduce premiums through a misclassification of their occupation, etc. However, momentum is building to beef up penalties for these kinds of fraudulent actions, which injure insurers and honest employers alike. Honest employers end up with higher insurance premiums as a result of these sorts of fraud. Law-abiding employers may suffer as a result of fraud in another way as well. Construction companies, for example, may lose out on projects to bidders whose lower bids are made possible because they are absorbing lower overhead costs through intentional workers' compensation fraud.

TYPES OF COVERAGE AVAILABLE

There are three basic methods available for employers to obtain the required workers' compensation protection: state insurance funds, private insurance, and self-insurance through insurance pools. The latter option—which involves setting aside funds in anticipation of workers' compensation claims, rather than purchasing insurance—is seen as a cost-saving method for safety-oriented firms. In the states that permit it, many large employers now self-insure, and many small businesses form groups to insure themselves and decrease the risks.

Group self-insurance plans are worth consideration for small businesses with better-than-average workplace safety records. Such plans work best when the companies involved are in the same or similar industries, so that their level of risk is roughly equivalent. The companies can then join together to purchase stop-loss coverage to protect themselves against claims over a certain amount. Though self-insurance can be less expensive than private workers' compensation policies, small businesses should make sure that they have the financial resources to withstand potential losses.

MANAGING WORKERS' COMP CLAIMS AND COSTS

Small businesses can explore a variety of other measures to reduce their workers' compensation premiums as well. These include:

First and foremost, make the workplace as safe as possible. Companies can reduce premiums by minimizing the number of claims made by their workforce. This requires the implementation of safety programs in such areas as materials handling and ergonomics.

Select the right insurer. Business owners seeking workers' comp insurance policies should seek out insurers with proactive claims adjusting policies. In addition, Occupational Hazards contributor Shawn Adams counsels companies to give preference to insurers who assign specific adjusters for accounts. "[When] claims are … handled on a file basis … your account is handled by whatever adjuster happens to be assigned the file for your claim. An assigned adjuster is one who can take responsibility for your account, as opposed to having different adjusters handle different claims against your policy but not coordinating the claims in a comprehensive manner."

Pay attention to your own claims trends. Businesses should take steps to monitor all aspects of their work safety record and insurance coverage, and ensure that all subcontractors carry workers' comp coverage.