Your workers’ compensation premium is calculated with a formula that has 3 primary components. First the type of business you own, second your claims history, and finally, your total payroll. The formula is Payroll (per $100) x Class Code Rate x Experience Modifier (if applicable) + State Taxes & Fees = Premium. The National Council on Compensation Insurance (NCCI), a trade association for the U.S insurance industry, and state agencies such as the Workers’ Compensation Insurance Rating Bureau (WCIRB) collect and analyze data to make sure that insurance companies in every state use the formula consistently and reliably. Below we’ll look at the specifics of each portion of the formula. As well as the full formula to help you understand how your premium will be calculated. We will also look into a few ways to lower your premiums.
1.Business Type
For this portion of the formula your company is put into a hazard group based on the likelihood that an accident will occur in the workplace. A business with a low risk profile, like a professional services firm, will have a different hazard group than a business with a higher risk potential, like a construction company. For each classification, the average cost per injury and death is first calculated. As you can imagine, workplace injuries from a construction site will likely cost more than injuries that could happen in an office setting. It’s very important that your employees are correctly classified, as it has a direct impact on your workers’ compensation premium. Additionally, if you classify your employees incorrectly you can face penalties and your insurer can even refuse to cover claims if they find the employee was put in a lower classification than they should have been.
2.Claims History
The next portion of the workers’ compensation premium formula is based on the amount of workplace accidents your company has had in the past. This is also called your experience modifier. Your company will compare this amount to the average accidents for businesses in your same classification with the same or similar amount of employees. The average modifier rate is set at 1.0 for the scale, the less injuries the lower your modifier rate is, the more injury claims you have the higher the number. During a specified measurement period (typically 1-3 years), if your business experiences less workplace accidents than the average, your premium will most likely be lower than what a similar business with more accidents paid. Having a lower premium is a huge incentive for businesses to do more to prevent workplace injuries.
3. Payroll
The final portion of the formula for workers’ compensation premiums is the total payroll of your business annually. The higher your payroll, the higher your workers’ compensation premium will be. This also means the more workers you have, the more potential for on the job injuries or illness. To make sure your payroll amount is accurate, every business is required to complete a workers’ compensation payroll audit a few months after their policy is renewed. If you don’t complete this audit you will face a penalty for noncompliance, so it is mandatory. If the audit shows that your payroll was actually higher than what you reported, you will have to pay the additional workers’ compensation premium on the correct information.
On the other hand, if you overestimate the amount of your payroll then you will be issued a refund for the overpayment of your premium once the insurance company adjusts the rates. Every state has a different average of how much they can expect per $100 of payroll. To find out more about your state’s rates check out our state by state workers’ compensation guides.
Ways To Lower Your Workers’ Compensation Rates
Now that you know what affects your premium rates, you’re able to calculate and get a rough estimate of what you could be paying. If you know your premium is likely to be more than you’d like, there are ways to start lowering your premiums to make it more affordable, as well as make your company safer not just financially, but physically as well.
Develop A Drug Policy
Certain industries are actually more prone to drug use and alcoholism in the workplace according to the Substance Abuse and Mental Health Services Administration (SAMHSA). For example, the mining industry has the highest rate of alcohol abuse at work sitting at 17.5% and right behind them is the construction industry at 16.5%. Since these industries are already considered high risk based on the type of work they do, it’s very important for these types of businesses to follow drug-free policies because their policies will already be more expensive. For drug use, Food industry workers sit at 19.1% and construction workers are at 14.4 percent.
You have the right as an employer to conduct drug tests on both current and prospective employees. Although, you’ll want to look into your state laws first as some states only allow drug testing once there’s a job offer on the table. However, making sure that your employees are not working under the influence of drugs or alcohol prevents catastrophic accidents. Promoting a drug free workplace can lower your workers’ compensation premiums as well as increase productivity, lower absences, lower employee turnover, and improve morale.
Aside from drug testing there’s a few other things you can do to help promote a drug-free workplace. For one, you can make it a point to educate your employees about the risks of working while impaired. You can also help workers who struggle with substance abuse by offering resources such as helpline numbers and treatment center information to help them seek treatment for their addiction.
Drug Free Policy State Discounts
Not only will a drug free workplace lower your premiums by preventing accidents, but in 13 states there is a discount for workers’ compensation premiums if you implement a drug-free policy within your business. The following 13 states already have discounts for drug-free work policies:
Alabama – 5% discount
Arkansas – 5% discount
Florida – 5% discount
Georgia – 7.5% if the drug-free workplace program is certified by the state Board of Workers’ Compensation.
Hawaii – 5% for safety and health programs
Idaho – Premium reductions for conducting drug and alcohol testing for current and prospective employees.
Kentucky – 5% discount
Mississippi – 5% discount
Ohio – 5 year phased-in premium reduction that can reach up to 20% discount.
New York – Workplace Safety and Loss Prevention Incentive Programs have a 6% discount.
South Carolina – 5% discount
Tennessee – 5% discount
Virginia – 5% discount
Safety Protocols
Creating a safe work environment can boost employee morale and reduce workers’ compensation costs. Establishing a culture of safety is easier than you might think, and you’re probably already doing some of this work.
Ensure that your employees have access to the tools and information necessary for their safety on the job.
If you have not already done so, schedule regular safety inspections.
Utilize daily safety checks to constantly remind employees to exercise caution while at work.
Plan weekly or monthly deep dive inspections.
Putting an emphasis on safety will not only reduce workplace accidents and injuries and lower your workers’ compensation premiums, but it will also demonstrate your concern for their well-being.
Safety Rewards
Check with your insurance provider to see if they will lower your premiums in light of the fact that your company has become safer over the past year. Typically, these types of safety bonuses are distributed after a period of one year in which fewer claims were filed. It is important to check with your insurer to determine whether or not safety rewards are currently being offered, as they are not guaranteed.
Review Employee Classifications
This recommendation may be so simple as to be overlooked. While it is true that each type of business will have a different overall rate, the costs associated with each classification of employee will also vary. For instance, a sheet metal worker will have different standards than a bookkeeper who rarely visits the production floor. Ensure that each employee is correctly classified in their current position according to your policy. This simple tip will save you a substantial amount of money.
Workers’ Compensation Insurance With EZ
The majority of states require businesses to carry workers’ compensation insurance. Which will not only protect your business but also your employees. Keeping your employees safe does not have to be an expensive endeavor for your company. There are numerous ways to promote safety routines and programs. All of which will help you reduce your workers’ compensation expenses. If the best practices for claims management are implemented and followed in a timely manner, your employees will be able to return to work as soon as they receive medical clearance to do so. Not only will production return to normal, but workers’ compensation costs will decrease as well.
Come to EZ for free, instant quotes from one of our licensed agents to help you look for the best workers’ compensation policy. If you already have workers’ compensation benefits but are looking for a better deal, we can assist you. Your EZ agent will be familiar with the local regulations and able to provide guidance as you shop around for the best policy at the most affordable price. Enter your zip code in the box above. Or call us at 877-670-3538 to speak with one of our licensed agents.
