The Experience Mod's Effect on your Workers Comp Premium

We discussed how to calculate your Experience Mod in an earlier post, now we will discuss how to reduce your premium by focusing on your Experience Mod:

What is an Experience Modification Rate (EMR)?

The experience modification rate (EMR) is a number that represents a company's history of workers' compensation claims and their safety record. This rate is calculated by the National Council on Compensation Insurance (NCCI) based on the company's workers' compensation claims experience over a three-year period.

How Does EMR Affect Workers' Compensation Premiums?

Insurance carriers use a company's EMR to determine their workers' compensation premium. A high EMR indicates that the company has a history of workers' compensation claims, which increases the risk of future claims and raises the cost of insurance premiums. A low EMR indicates that the company has a good safety record and a lower risk of future claims, which can result in lower insurance costs.

How Can Companies Reduce Their EMR?

There are several steps that companies can take to reduce their EMR and lower their workers' compensation premiums. These include:

1. Implementing Safety Programs: Implementing safety programs and training employees on safe work practices can help prevent workplace injuries and reduce the number of workers' compensation claims.

2. Developing a Return-to-Work Program: Developing a return-to-work program can help injured employees return to work as quickly and safely as possible, reducing the duration and cost of workers' compensation claims.

3. Reporting Claims Promptly: Reporting workers' compensation claims promptly can help ensure that they are handled promptly and effectively, minimizing the potential impact on the company's EMR.

4. Working with a Knowledgeable Insurance Broker: Working with a knowledgeable insurance broker can help companies identify opportunities to reduce their EMR and lower their workers' compensation premiums.

In conclusion, a company's experience modification rate (EMR) is an important factor that affects their workers' compensation premium. A high EMR indicates a history of workers' compensation claims and a higher risk of future claims, resulting in higher insurance costs. A low EMR indicates a good safety record and a lower risk of future claims, resulting in lower insurance costs. By implementing safety programs, developing a return-to-work program, reporting claims promptly, and working with a knowledgeable insurance broker, companies can reduce their EMR and lower their workers' compensation premiums.

Workers Comp Premium Audit Mistakes and Issues

Workers compensation premium audits are an essential part of managing insurance costs for businesses and one of the many items that we help our insureds with. These audits determine the premium that a business owes based on their employee payroll. However, there are several common mistakes that are made during these audits, which lead to large additional premiums. It is then our job to find and correct the issues. Here are some of the common mistakes that we correct.

Incorrect Employee Classification

One of the most common mistakes made during workers compensation premium audits is incorrect employee classification. Every employer generally has at least three class codes per state; Governing class, Clerical, and Sales. The Governing Class is the classification that best encapsulates the type of work that your company does. Every employee is classified as the governing class unless there is an exception. The common exceptions are employees who only work in the office (clerical) or who are engaged in outside sales. Employees can also be classified outside of your governing class if they are engaged in a different type of work and there is a physical separation, like Drivers.

Manufacturers, distributors, and contractors can easily have 4 to 6 different class codes. For example, many manufacturing companies have different codes for employees who work in the facility and for those who install/service at customer locations. Each classification has a different rate, and many times those differences are substantial. The average wholesale distributor will have a Drivers code, Warehouse Code, Sales, and Clerical. The Driver code costs 78 times more than the Clerical code! Just misclassifying one or two employees can lead to significant overcharges.

Owners/officers

Another common source of audit mistakes is the auditor adding the full owner/officers payroll to the governing class. Depending on the state and business entity (LLC vs Corp), you can choose to include or exclude the owners/officers in coverage. When you choose to or are required to include the owner/officer, you are allowed to cap the wages that are included in your WC audit. Since owners/officers are typically the highest paid employees or may take a large distribution, this is another potential source for getting overcharged on your WC audit.

Subcontractors and Vendors

Another mistake that we often correct on audits is including payments made to subcontractors or vendors to your payroll. The Workers Comp policy provides coverage to uninsured subcontractors as ‘statutory employees.’ If your subcontractor does not have their own Workers Comp insurance, then you are getting charged for them on your audit. When you complete your audit, you need to highlight payments made to subs/vendors and provide proof of their Workers Comp coverage. Many auditors simply add up all payments made to third parties and include with payroll, unless you provide the WC proof up front. The auditor then assumes those payments are treated as uninsured subs and issues the audit with a large increase. This is another reason why it always important to get Certificates of Insurance from subs and vendors.  

Overtime

Businesses that pay overtime have an extra step they need to take when completing their audit. The purpose of the WC audit is to accurately quantify your workplace injury exposure. Since payroll is used as the best metric to quantify work hours, it would not be fair to charge you based on paying overtime hours at higher hourly rate. The audit needs to factor in overtime work, but charge you based on regular rate, and not the overtime rate. Essentially, if you pay time and a half then you should be dividing your total overtime pay by 1.5 and adding that to your regular pay. If you are not breaking out overtime payments in the reports sent to the auditor, then you may be overpaying for your Workers Comp insurance.

COVID Pay

This is a new source of audit confusion but since 2020 most states adopted temporary audit rules to classify payroll you were required to pay an employee under the Families First Coronavirus Response Act as a separate “COVID/Telecommuter” class code at a minimal rate. During their audit, employers needed to specifically highlight these payments to their auditor in order for them to get reclassified. Employers who failed to do so were getting charged at a much higher rate than they should have bee.

Severance

Lastly, severance is one of the more rare audit issues we come across. Many companies that pay severance pay it out of payroll so these payments show up in the reports sent to the auditor. However severance should be excluded because it doesn’t quantify workplace exposure, since it is payment made to an employee who is no longer working there. Since severance is rare, it will always be up to the employer to highlight it on their payroll reports. Auditors will very rarely, if ever, ask an employer if the payroll reports include severance pay.

How Low Can Your Bid Go? Check Your Workers Compensation Premium.

If you are a contractor who bids for local or state jobs, you may have experienced losing a bid every now and then.  While I am sure you simply moved on to the next bidding process, did you stop to wonder how the winning bidder was able to bid so low and still maintain profitability? Obviously, the contractor that keeps his expenses the lowest will see the highest profits. What is not so obvious is how to keep one particular expense, which likely adds the most to your bottom line, the lowest it can be. The culprit expense is your Workers’ Compensation premium. If you haven’t reviewed your classification codes, your claims history or haven’t implemented back-to-work or safety programs, read on. We'll cover how to lower your Workers’ Compensation premium which will ultimately make your company more competitive when bidding for municipal or state contracts.

The first step to ensuring that your Workers’ Compensation is priced correctly is to review your classification codes.  Are your office personal classified as roofers or other field titles? If so, this can make your Workers’ Compensation much higher than it should be. Review the Workers’ Compensation policy to see what each of your employees is classified as and make changes if necessary.  Auditing and review of your current payroll for inaccuracies or deductions you can take, like overtime, Davis-Bacon Act wages, etc. can help lower your cost.  Confirming that subcontractors have valid certificates of insurance, and deducting valid business expenses like auto allowances can have the same effect. Your organization’s classification codes and payroll dollars are the foundation for the base premium.  An error on these numbers could cost severely.

The next factor in determining a Workers’ Compensation rate is the past three years of claims history, which contributes to your experience modifier.  The more claims against your Workers Compensation policy, the higher your experience modifier will be.  This, of course, increases your premiums. If you haven’t had an accident, ask your carrier for a loss run just to make sure there aren’t any accidents incorrectly reported. If you had an accident, unfortunately, this will show on your loss runs for the next three years. You can, however, control how much these claims will cost by implementing “back to work” programs.  The gist of these programs is that employers maintain communication with injured workers and, if possible and through permission of the physician, find work that can accommodate the worker’s injury.  By bringing the employee back to work, the claim will cost less by mitigating lost wage payments and ultimately will affect the claims reporting on your policy and shouldn’t hit your experience modifier as hard.

Various States have programs that can assist in lowering workers compensation costs, e.g. a certified safety committee credit, a contactors credit program, etc.  Utilize these whenever possible to lower your costs.

Finally, making sure safety procedures are developed and enforced will mitigate the risk of an injury. Depending on the type of work your organization does, you may want to institute a two-person rule when workers need to carry heavy objects over a certain weight limit; institute the use of safety harnesses for employees working in high areas or other procedures that would make sense for your individual organization.  After these policies are put into place, be sure to they are communicated to the employees and enforced.  

Keeping your Workers’ Compensation premiums low will take investigating your current policy and pre-planning when it comes to implementing procedures that keep your claims  low or non-existent.  While this takes effort, it will be worth it if you are able to keep your expenses low enough to be the lowest bidder in municipal and state bid processes.