Workers’ Compensation: Why Pay-As-You-Go May Be Your Way to Go

Calculating premiums for traditional workers’ compensation policies is a complex and confusing process.  It generally involves using a specified rate for each job classification that takes into account risks for the types of tasks typically performed by that type of employee.  Some states rely on data and job classifications set by the National Council on Compensation Insurance (www.ncci.com), while other states have their own classifications or utilize a different resource to determine rates. The job class rate is then multiplied per every $100 of the total annual payroll for all employees who fall under that classification and then each of the classifications are summed then totaled together.  Finally, in some states, an experience modification factor based on claims history is incorporated as part of the overall equation and premium costs may also include some rating specifics pertaining to your physical place of employment such as square footage and structure type. Additionally, since no one knows exactly what the payroll figures will be at the time that a policy is issued, the premium amount that employers pay with a traditional workers’ comp policy are based on estimates.

This arduous process leaves significant room for error on the part of the employer either in reporting an employee under the wrong job classification, miscalculating total annual payroll or some combination of the two.  This is why Workers’ Compensation insurance providers routinely conduct audits to ensure they have collected the appropriate premiums year after year and bill for any discrepancies that may have resulted in them being shorted premiums.

Every year, employers are left dreading the annual premium bill, which in spite of best attempts to budget properly, may include a sudden increase in premium for the next policy year either due to a claim, recalculation of job classification rates, errors caught in an audit, changes in procedures or safety protocols or a myriad of other components.  The anxiety of being at the mercy of the Workers’ Compensation numbers game and getting blindsided by premium hikes and audit adjustments now has a cure.

With a Pay-As-You-Go Workers’ Compensation policy, all calculations that determine the actual amount of premium owed are handled with the processing of every payroll. There are no more big dollar, up-front premium payments; time-consuming and costly audits or long hours spent compiling and preparing the necessary reporting.

While this type of policy arrangement is attractive in many industries, it can be especially so for retailers, restaurants and hospitality, and seasonal employers who may have more limited cash flow and/or more fluctuations in their staffing levels throughout the year.  For one low rate per pay period, you can meet your compliance obligations.