How Is Workers Comp Calculated and What Factors Impact the Cost?

Mar 17, 2020Blog0 comments

Employers paid nearly $50 million in worker’s compensation premiums in 2018.

Carrying worker’s compensation insurance is mandatory in every state but Texas. In many states, employers must begin carrying insurance as soon as they hire their first employee. 

Workers comp premiums can vary widely between industries, states, and individual companies. Companies often struggle with confusion. Common questions include:

  • How do I know if I’m paying too much for coverage?
  • How is workers comp calculated, anyway?
  • Is there anything I can do to reduce my costs?

Keep reading to get the answers you need to these key questions.

How is Workers Comp Calculated?

At first glance, workers compensation calculations can look complex. When broken down, however, they quickly make much more sense. 

There are four primary factors that determine companies’ total premiums.

  • State laws
  • Type of work (Worker/Job Classification)
  • Company size
  • Company claims history 

Workers compensation providers combine these factors to assess overall risk and assign premiums accordingly. 

State Laws 

Workers compensation regulations and requirements are set at the state level. Some states do not require employers to carry workers comp insurance at all.  

Other states not only require insurance but mandate that employers purchase their coverage through a state-led program. Some states split the difference. They require insurance coverage but allow employers to purchase it through private sellers.   

Obviously, then, workers compensation insurance rates by state vary depending on the rules and regulations each state has in place. Private insurers may also take companies’ locations into account when assessing the risks and costs of covering them. 

Many employers hire a PEO to assist them in achieving and maintaining compliance with state guidelines. 

Worker and Job Classifications 

“Worker and job classifications” is just a fancy way of tracking what kind of work an employer is paying people to do. Industries and specific jobs within them are assigned “class codes” for state and federal tracking purposes. Insurers look at these codes when determining premiums. 

The reason for this is simple. Some jobs are inherently more dangerous than others. 

Jobs that carry innately higher risks are more likely to result in injury and worker’s compensation payouts. Thus, insurers typically charge employers more for coverage of workers in these jobs. Examples include jobs that require:

  • Working with heavy or complicated machinery
  • Exposure to potentially hazardous chemicals
  • Working in extreme conditions

Insurers set workers compensation rates by class code, assigning higher figures to class codes associated with more dangerous professions. These codes are often managed by state authorities and employers must ensure they are using the right ones at the time of hiring and in all legal filings. 

Generally, this aspect of the equation cannot be changed. All employers can do is ensure that all of their job codes accurately reflect the work being done. 

Company Size

For the purposes of evaluating worker’s compensation premiums, company size is determined using payroll figures. Insurers tend to evaluate costs per $100,000 in company payroll. 

Payroll includes more than just wages or salaries. It may also take into account:

  • Tips, commissions, and bonuses
  • Stock sharing and other alternative forms of compensation
  • Vacation or sick days accrued
  • Pension plans
  • Room and board reimbursements

Not all employees may count, however. Workers employed full- or part-time are typically included. Contract workers, subcontractors, and other gig or temporary employees may not be. 

Company Claims History

Safer companies generally have lower premiums than unsafe companies. 

Unsafe companies are more likely to see employee injuries on the job. That makes them more likely to require payouts from their insurers. Insurers balance this risk by charging them higher premiums upfront. 

Insurers may deem a company unsafe if it:

  • Has a history of injured employees or insurance claims
  • Experiences more injuries than average for its industry and location
  • Does not satisfy the insurer’s alternative assessment methods (e.g. have an established safety program)

Companies are required by OSHA to report most types of accidents, making this information readily available to insurers. 

Companies can actively lower their premiums by improving their in-house focus on safety. They can also work with their insurers to meet insurers’ internal standards. This may include starting or improving a safety program or beefing up their training practices.

Insurers often use the term “experience modifier” or “experience modification” to describe the safety score they use when calculating premiums. 

It is important to note that the regularity of injuries and claims generally influences safety scores more than their seriousness. Even severe injuries may be a one-off event.  

Consistent injuries, even if they are small, suggest a lack of safety mentality which counts against companies seeking coverage. Frequent small injuries can also add up to big payouts over time

Other Factors 

In addition to the above premium rate factors, insurers may also take into account: 

  • How much liability coverage is included in the plan
  • Whether or not company owners themselves are included in the coverage
  • What other insurance companies carry that may mitigate worker’s comp claims
  • Whether or not coverage must be purchased through a state-led comp pool

Surcharges, penalty fees, taxes, service fees, and other hidden or tangential costs may also affect the total premium cost a company pays.

Companies that are not careful with their tracking and reporting may be hit with corrective charges at the end of a billing year. This would happen if their accounts are audited and information is found to be incorrect or outdated in ways that alter the amount they owe or should have owed. 

Workers Compensation and Your Business

How is workers comp calculated? Now you know the answer to that question, you are more equipped to make good choices for your business. 

While you can shop for insurance on your own, consider getting professionals involved. Let the experts help you navigate the complex waters of worker’s comp insurance to get the best coverage for your company at the best price, today! 

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