Every business
should be aware of the amount they pay
for workers’ compensation insurance.
When employers hire workers, they take on many responsibilities; among the most expensive are the legal obligations under workers’ compensation laws for work-related disability due to work-related accidents or illnesses.
Workers’ Compensation laws make the employer responsible for compensating the disabled employee regardless of fault or negligence. This means that even if the employee has directly caused his or her work-related disability through negligence on his or her part, the employer must still compensate the person. The amount of compensation to be applied in particular cases is predetermined by law, although it is not equal to the total income received while employed. If the injuries are fatal, death benefits are provided for the employee’s dependents. Medical expenses, income, and rehabilitation benefits are also included.
The workers’ compensation plan pays benefits for covered employees required by state law for work-related illnesses, injuries, and deaths. Benefits include medical expenses, death benefits, lost wages, and vocational rehabilitation. Failure by a business to carry workers’ compensation insurance leaves the employer out of compliance with the law, and vulnerable to paying benefits that have been assessed out of pocket, in addition to fines imposed by the state.
Calculating Workers’ Compensation Premiums
The type of work the employer performs determines workers’ compensation costs. Some types of work are more dangerous than others, so it is reasonable for some types of business entities to pay more than others. When a class of work does not exist for a specific type of employee, they are grouped into a class that most closely matches the type of work they perform. A rate is set for each occupational category by studying the loss history for that specific type of work. These rates are used by insurance companies to calculate the cost of the premium to be paid by employers.
The annual premium is calculated by multiplying the defined rate by the number of hundreds of dollars of compensation – general payroll paid annually to each employee in a given class. Because different occupations involve different levels of risk for injury or illness, class rates can vary greatly. A construction company, for example, would have a different classification for a roofer than they would for their office receptionist.
Calculating Payroll
Classification Correctly
An employer’s classification for workers’ compensation must be set up correctly. An error could cause the company to pay too little or more than necessary. Failure to get employees’ payroll properly classified can even ruin the business in some cases if an audit is conducted. If the insurer ran an audit and discovered errors in the classifications, it would adjust the premium and retroactively collect for the past three years. As long as the overpayment would not have an adverse effect during an audit. Employers must keep an accurate, detailed record of their employees, detailing each person’s job title and job description.
Good bookkeeping is necessary!
All workers’ compensation policies can be audited. While such audits can be voluntary, they are not necessarily so. Typically, the business will receive a notice in the mail requesting a voluntary audit. An auditor may also make a physical visit, called a physical audit.
A voluntary audit asks the business owner to provide actual payroll information for the policy year, broken down by workers’ compensation classifications. In a physical audit, the person performing the audit will inspect the records for the purpose of verifying the payroll and job classifications of the workers are correct. The auditor may inspect the company’s taxes, payroll, financial reports, time cards, and subcontractors’ insurance certificates, if applicable. The records must agree so the auditor can satisfactorily reconcile them with the payroll estimates on which premiums are calculated.
One of the most important pieces of record keeping that applies to a workers’ compensation audit is time cards. Each day of work must be evidenced on the time card. If there are different employee classifications, this must be noted on the time cards. This is especially important if an employee has more than one classification.
Other Considerations
Illegal Immigrants
Workers’ compensation coverage excludes illegal immigrants when the employer is aware of their illegal status. Of course, it is unlikely that a client will tell their agent if they know they are hiring illegal individuals. However, the employer is required by federal law to check the status of all of their employees or potential employees. What does this mean for the business owner? If he or she knowingly hires an illegal immigrant and that person is injured on the job, the business owner is personally liable for any claims.
Owners and Officers
Should the owners of a business be insured under this policy? This can be a difficult decision. This will depend on each business’s individual situation and the owner’s wishes. In some cases, coverage must be provided, especially if the type of business is such that injury or illness is a possibility for anyone associated with the business, including the business owner.
