DENVER, Jan. 16, 2025 -- Hiring new employees and promoting current workers can impact businesses in unexpected ways, including workers' comp insurance costs.
Let's start by understanding the factors that affect how workers' comp premiums are calculated.
Employee classification rate
Insurers assign businesses a workers' comp class code based on the type of business and specific jobs employees perform. Each class code has a corresponding rate that identifies the risk for that type of work.
Payroll
Total compensation is another key factor.
At the start of the policy year, employers provide their insurer with an estimate of their payroll for the coming year. The insurer uses that number to generate an estimated premium.
At the policy's year-end, the insurer performs a workers' comp policy audit to determine the actual payroll.
An overestimation of payroll results in a credit or refund. If the estimate was too low, the employer will owe more to the insurer.
Experience modification factor
An experience modification factor (e-mod) is a multiplier for calculating workers' comp premium.
An e-mod rewards employers for good safety practices and minimal claims. On the other hand, it can penalize companies that report higher-than-average claims and losses.
A neutral e-mod is 1.00. If a business filed fewer claims than the average business in the industry, its e-mod may total less than 1.00 and can lower the employer's premium.
However, filing more claims will lead to an e-mod greater than 1.00, and higher premium.
Workers' compensation equation
With those key factors in mind, here's how payroll impacts workers' comp insurance cost:
Rate x (Payroll/100) x e-mod = Premium
Hiring a new employee or issuing raises will affect workers' compensation premiums. After all, payroll and premium have a direct correlation.
Other forms of compensation can impact premiums as well.
The National Council on Compensation Insurance (NCCI) defines payroll beyond salaries and wages. It also includes remuneration, like commissions, bonuses, overtime pay, and more.
Avoid surprises by planning for payroll costs
To avoid unexpected costs at the end of the policy year, it's crucial to accurately estimate payroll and update coverage throughout the year. When employers hire new employees, give raises, or promote employees, they should adjust their workers' compensation coverage accordingly.
By understanding how payroll impacts workers' compensation costs and planning ahead, employers can ensure they have the right coverage at the right price.
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