With the economy still uncertain, many employers are continuing to look for ways to cut costs, and workers’ compensation is one area that can provide savings.
While the payoff is not immediate, knowing the right information and asking the right questions can significantly benefit your business. By taking the time to audit your workers’ compensation claims and coverage, you can save money and avoid liability in areas beyond workers’ compensation, according to Adrienne Asimou and James Boutrous of McDonald Hopkins LLC. Asimou is an associate in the Labor and Employment Counseling and Litigation Group, and Boutrous is co-chair of the Labor and Employment Counseling and Litigation Practice and a member.
Smart Business spoke with Asimou and Boutrous about workers’ compensation and how performing an audit can help save your company money.
How does the workers’ compensation system work?
Generally, workers’ compensation is a no-fault insurance system designed to cover and compensate employees injured in the course of and arising out of their employment. In the United States, each state is unique with respect to how it provides and administers workers’ compensation coverage. However, the three general categories that states fall into for workers’ compensation coverage are monopolistic states, where employers purchase coverage through the state; pure insurance states, where employers purchase workers’ compensation coverage from private insurance carriers; and hybrid states, where employers can obtain workers’ compensation coverage through the state or private insurance carriers.
There is also the category of self-insurance, which is available in most states, where employers cover their own workers’ compensation risks out-of-pocket, as well as four federal workers’ compensation programs, which apply to federal employees.
How is the cost of workers’ compensation insurance determined?
From a 30,000-foot perspective, workers’ compensation insurance rates are initially determined by looking at the type of work the employer’s workers perform (i.e. manual classifications) and the payroll for each category of employee. Employers with workers who perform more injury-prone work and/or that have a large payroll will have higher insurance rates than employers with workers performing less injury-prone work and/or with a small payroll.
To arrive at the base rate of insurance coverage, the payroll for each manual classification is multiplied by the insurance entity’s assigned rate of risk, which is determined by the frequency and severity of claims for all employees within that specific manual classification. The base rate of insurance generally applies to new or small employers.
An employer that has a history of workers’ compensation coverage or that buys a business with a history of workers’ compensation coverage will have its base rate impacted by that experience. Employers that manage their claims and have safe working environments are more likely to be discount rated, resulting in a lower premium, while an employer that fails to manage its claims and/or that has unsafe working conditions is more likely to be penalty rated, resulting in higher premiums.
