Workers Compensation is a source of much confusion and anxiety for many of my clients, especially for those obtaining for the first time.

Here are three of the most common mistakes:

1. Shopping for WC when you have no employees 

Shopping for WC with no employees is a lot like shopping for car insurance when you don't have a car; there's no insurable interest. Simply stated, Workers Compensation is, as the name implies, for workers.  Generally speaking, the owner of a company is almost always excluded under their own WC policy. Why? WC was designed to protect business owners from being sued by employees who became sick or injured on the job. It's in the state's best interest to keep businesses, well, in business.  If an owner gets injured, they're not going to sue themselves. 

If you own a business with no employees and you have a client asking you to show proof of WC for a job you have essentially four options: 

1. Sign a Hold Harmless (if that's acceptable to your client) which basically says you have no employees and if you hurt yourself you're not going to sue them, 

2. Buy a WC "ghost policy" which, as the name implies, covers no one. The only real-world coverage this affords is usually a small Accidental Death and Dismemberment benefit (usually $5,000-$10,000) and, God forbid, you die or lose a finger or toe on the job, your beneficiary would receive a percentage of that benefit amount. Also, if you hire anyone while your "ghost policy" is in effect, it immediately voids your coverage. 

3. Tell the state you are "looking to hire" at minimum annual payroll and usually at the statutory or minimum levels of coverage. This provides the WC proof of coverage for your business along with actual real world coverage, as soon as you hire a W2 employee they will automatically be covered.

4. Lastly, you can do WC "owner covered" which is typically cost prohibitive as many carriers will take your entire gross annual revenue and "tax" that as payroll.  

2. Under projecting payroll to save money on WC

Any savvy business owner is going to be cognizant of all business operating costs and do everything within their power to curtail them. 

That said, WC premium is directly correlated to projected payroll and while it's good business to project at, or even just below, estimated projections...it can be downright fiscally catastrophic (not to mention unethical) to dramatically misrepresent your payroll figures. 

Most WC carriers audit on a quarterly or semi-annual basis (vs. annually for GL).   And at the heart of any WC audit lie the two big drivers of class and volume; what kind of work are your employees doing and how much of it are they doing (as reflected by total payroll)?

Easy example: 

A new roofing business in Texas projects $40,000 in payroll for the year. 

The stand-alone roofing rate in Texas (class code 5551) for new ventures is currently at $20.57 per $100 in payroll for 1M in WC. 

Simply put, for every $100 in payroll, the owner is setting aside $20.57 towards WC premium.  So, to determine average "raw premium" for $40,000 in payroll we simply divide by 100 and multiply times the rate associated with that work class ($40,000 divided by 100 = 400 x $20.57 = $8228 due carrier).

So, if, in the spirit of saving money, the company projects $40,000 in payroll when, in reality, they have $100,000 in payroll, they'd be looking at an additional $12,342 in "raw premium"  ($60,000 divided by 100 x $20.57 = $12,342) which is not how most companies want to close out their final fiscal quarter.

Now carriers are well aware that businesses, especially in the construction industry, expand and contract all the time.  Any projection is just that, a best guess, just be aware of the basic nuts-n-bolts of what drives the premium (so you can reserve and project accordingly) and provide good information to your agent and carrier and the whole WC process will get progressively easier and easier.

3. Ignoring Audits

As mentioned above, most WC carriers will audit on a quarterly of semi-annual basis.  

I encourage my clients to see the carrier as a partner, of sorts, whose job it is to accurately collect the appropriate amount of premium for the WC coffers based on the nature and volume of your work.  Their job is to make sure you and your business are protected should someone become seriously sick or injured on the job. These carriers pay out hundreds of millions of dollars annually on these injuries, especially in classes like roofing which has historically proven to be more dangerous than police and fire work.

It's not always easy and can even feel a little invasive at first, but establishing sound bookkeeping practices and being responsive to carrier requests can really help pave the way to a longlasting partnership based on trust, respect and a professional sense of symbiosis. 

Some businesses, either out of desperation, lack of sound fiscal management or even laziness will simply refuse to comply to audits, pay additional premiums or even return carrier calls and emails.  

Not only is this not good business but carriers do NOT forget.  If even a single carrier in either the voluntary or residual markets has an outstanding issue with a client, be that a function of an incomplete audit or overdue premium, no other carrier will bind new WC coverage until that issue has been satisfactorily resolved.

Providing good info, keeping payroll records up-to-date and maintaining open lines of communication will make this process easier and keep your people safe.

Do you have the right Work Comp insurance for your business? Is your payroll categorized properly to maximize coverage and savings of premium? Don’t overpay when you don’t have to, get a free quote today and have a licensed professional give everything a proper review.