Workers' compensation insurance is something all business owners are most likely aware of. However, it can be a tricky policy to fully understand. To help grasp the concept, I've gathered some of the most frequently asked questions about workers' comp and provided the answers to them.
How is Workers' Compensation calculated?
A workers’ compensation policy premium calculation looks like:
Classification Code Rate X Experience Modification X Payroll (per $100) = Premium
Workers’ compensation rates are based on the type of business and the jobs employees perform. These are referred to as job classification codes, or class codes. A class code is applied to employers with similar exposures or hazards. Generally, it denotes a specific job duty within your business.
Each class code has a corresponding workers’ comp rate that varies by state. For example, the class code 8810 would apply to clerical office employees. The rate for code 8810 in Florida is under $1.00 and in California it’s over $1.00. This rate is based on every $100 of payroll.
Experience Modification Rate
Every business has an experience modifier – sometimes referred to as a MOD or experience MOD. An experience MOD is a number that represents your claim history. The average experience MOD is set at 1.00. If you have a clean claim history, your experience MOD could go below 1.00 – helping your premium to go down. If your business has had a few claims, your experience MOD will go above 1.00 and raise your insurance premium.
By taking appropriate measures in the workplace, you can reduce the chance your employees get hurt or sick while at work.
Workers’ compensation premiums are based primarily off of the amount of payroll a business runs annually. With a standard workers’ comp policy, a business owner will provide an estimated amount of payroll to the insurance company to calculate their premium.
Is workers' compensation insurance required for all businesses?
For the majority of American businesses, the answer is yes. Most companies are required to have workers’ comp, no matter the number of employees. Workers’ compensation is governed by state. Meaning, many aspects of workers' comp requirements will vary from state to state.
The following states have exceptions to the blanket statement that workers' comp is always required:
- Alabama: Required after the fourth employee.
- Florida: Required after the fourth employee. However, construction businesses are required to always carry the insurance.
- Georgia: Required after the third employee.
- Michigan: Required once one employee is hired and works 35 hours a week for at least 13 weeks during the previous 52 weeks. Or it is required after the third employee.
- Mississippi: Required after the fifth employee.
- Missouri: Required after the fifth employee. However, contractors with just one employee must be covered.
- New Mexico: Required after the third employee. However, construction businesses are required to always carry the insurance.
- North Carolina: Required after the third employee.
- South Carolina: Required after the fourth employee.
- Tennessee: Required after the fifth employee, unless in the construction business or trades. These businesses are always required to carry insurance, in fact owners are also required to carry coverage on themselves or be listed on the exemption registry.
- Virginia: Required after the third employee.
- Wisconsin: Required after the third employee.
- Texas: The insurance is not required.
No matter what state your business operates in, it is highly recommended to acquire the insurance to protect your business.
What happens when a company does not have workers’ comp coverage?
An employee has the right to sue the employer if there is an injury or illness incurred at work. In addition to any legal fees, an employer would be responsible for covering all medical or indemnity costs (including lost wages).
The costs associated with this are high enough to cripple any small business, no matter how successful. Thus, it’s always recommended to obtain the insurance.
If you fall within your state’s requirements for workers’ comp insurance and you don’t obtain coverage, chances are you will fall subject to hefty penalties.
For example, in New York you would be subject to a $2,000 fine for every 10 days you weren’t compliant with workers’ comp laws. If you didn’t have workers’ compensation insurance for a year, you could be facing up to a $73,000 fine. Plus, the Workers' Compensation Board has the right to add any other penalties for noncompliance.
Penalties will vary depending on the state your business operates in. Some states even send employers to jail for not having workers’ comp.
Improving Cash Flow & Workers' Comp Go Hand In Hand
Standard workers' compensation policies require a deposit to be put down at the beginning of a policy period. It's also tough for employers to be sure they estimated their payroll numbers correctly. Overpaying on a policy ties up money you could be using in other aspects of your business. Policy owners have to wait until the year-end audit to see if they will get money back or if they have to pay out of pocket from estimating a low payroll amount.
Standard workers' comp payment plans are a thing of the past. With PrimePay's workers' compensation payment solution, you can pay your premium based on your actual payroll numbers. You run payroll as you normally do, we'll calculate how much you owe for workers' comp that pay period and the money is sent to the insurance company! There's no overpaying or underpaying. There's also no fee or initial deposit (some insurance companies may require paying an expense constant)!
Want a workers' compensation quote from PrimePay? Give us a call at (484) 913-3511. We'd love to help you save time and improve cash flow in your business!