Workers Compensation for Small Business Owners

May 2, 2019 • Missouri Employers Mutual

Workers compensation can be a sticky topic to tackle for small business owners. These home-grown companies often have fewer employees and can even rely on a single owner/operator to manager day-to-day operations. Without a dedicated risk manager, small business owners must often figure out their work comp coverage on their own.

Scott Costello, president of Tri-County Agency, knows how essential work comp can be to a small business. Founded in 1980, Tri-County uses a hands-on approach to help clients identify their needs and find coverage that offsets their risk. Scott is both an agency owner and insurance counselor. He has made it his mission to connect his clients to the coverage they need. For small businesses, workers compensation insurance can be essential.

Listen to this interview on the WorkSAFE Podcast, or read the show notes below.

“I’m a small business owner, just like most of our clients are,” Scott explained. “Being a small business owner often means that you wear a lot of hats. Everything from being the janitor to the CEO of your business.” He has a unique view of what it takes to be a part of a small, family-run business. When he joined Tri-County – then his parents’ company – as a high school student, he started first with janitorial work.

Wearing many hats means that small business owners always have their hands full. However, work comp provides you with essential protection and support if an injury occurs. Although work comp insurance may seem difficult to understand, its value is irreplaceable.

When an injury happens, expenses pile up

For most small business owners, the success of their business directly affects their livelihood. This means that when an injury happens in the workplace, it doesn’t just impact the business. Costs—both company and personal expenses—can continue to grow while the business is sidelined. “The bills, the expenses, the overhead—they don’t end just because a key employee or the owner is injured and can’t show up to do the work,” Scott frequently reminds his clients. Without adequate coverage, both work and family life can suffer if an incident occurs.

Several states, including Missouri, require companies with just a few employees to carry work comp insurance. But businesses that have a sole proprietor aren’t often required to and can be hard to convince. Whether they decide to have a policy is their decision, but Scott reinforces the protection it can offer.

“Typically, we try to explain to our business owners that insurance should be looked at as a means of protecting what they’ve worked hard to create,” Scott said, “And workers compensation insurance is an important piece of that.” Work comp insurance offers small business owners peace of mind and, if an injury occurs, a way to navigate a difficult time with a little less stress.

How to find the insurance services you need

At Tri-County Agency, every successful partnership begins with the right information. To better understand the needs of each business, their agents collect essential data, such as how many employees are on staff, work locations, and what kind of services the company offers. Then they sit down with business owners to discuss the exposure – or risk – they encounter on the job.

To best identify your own risk, get in contact with other companies in your industry that do the same kind of work. Ask them what their exposures are and who they have coverage with. Peers are a great place to start because they are already familiar with the risks you face on the job. Then find an agent near you to sit down with and start the process.

The ideal work comp carrier should have exceptional customer service and be willing to answer any questions you have regarding your policy. Look for carriers that have a focus on fraud prevention and partner with you to improve safety in your workplace. Some carriers also provide discounted third-party services, such as drug and alcohol testing, for policyholders.

Determining the cost of premium

Understanding how the cost of premium is calculated can often seem like a mystery when it comes to getting work comp coverage. However, three key factors go into deciding how much premium your small business pays:

  1. Payroll
  2. Classification rates
  3. Experience modification (e-mod) factor

Payroll is the foundation of your premium. For every $100 you pay out to your employees, insurance companies will charge a specific rate for the type of work, identified by a classification code. This rate depends on the state you work in, your industry, and your insurance carrier. The National Council on Compensation Insurance (NCCI) has over 600 different classification codes to ensure that you’re paying the most accurate price for the work that you do.

Your policy will likely be based off of an estimated rate of your payroll, or how much you anticipate paying out to your employees for the year. The actual amount may differ; an audit at the end of your policy year will help determine if you need more coverage or less.

The last element is your experience modification (e-mod) factor. This number uses your past losses to predict how your future safety performance will compare to your industry. Having an e-mod that is higher than 1.0 means that you may be paying more premium until you can improve it. An e-mod lower than 1.0 means you’ll likely pay less. While there are other elements that may influence your final premium number, the formula below can help you begin to estimate your costs.

Payroll x Classification Rate (per $100 of payroll) x E-mod = Premium

Can I reduce the cost of my premium?

Yes! You can reduce premium costs by showing that you maintain a safe, injury-free workplace. This can include providing safety training to your employees and holding regular safety meetings. You can also reduce the risk new hires pose by conducting post-offer employment testing (POET). Maintaining a safe workplace can be rewarding in more ways than one – you’ll send your employees home safely, save money on your premium, and you could receive a financial return on safety.

What if I can’t afford my premium, even though my business needs coverage?

Having to put a large sum of money into a policy can often inhibit business owners from pursuing the coverage they need. In order to better support small business, pay-as-you-go premium is a great way to prevent a major impact to a small business’ finances. Many companies have a cyclical business, or experience financial highs and lows throughout the year. As an insurance agent, Scott works with his clients and insurance companies to work out payment options to ease any potential strain. No matter the size, Scott likes to make sure even the smallest businesses get covered: “Helping those businesses start up and find ways to be insured without being cash-poor is important.”

Subcontractors and work comp coverage

Work comp coverage is a vital topic to discuss if you work with subcontractors. Unless subcontractors provide you with a Workers Compensation Certificate of Insurance (showing you that they have their own coverage), they are often considered your employee for work comp purposes. If you don’t have enough coverage for them on your policy, you might owe additional premium after your audit.

Having coverage is also important if you are a contractor. Scott finds that many contractors are afraid of carrying work comp because of the additional cost. Worried that raising their prices will make them less competitive, they sometimes avoid getting the insurance they need. However, while it may be easy to undercut the competition by skipping out on coverage, it can cause problems later. If your state carries out a compliance audit and discovers that you have payroll with no coverage, you may face a penalty in addition to having to secure work comp insurance.

Audit or premium consultation

When you first receive your work comp policy, your carrier calculates estimated premium based on your anticipated payroll and exposure based on the NCCI classification codes. However, both your payroll and your risk can change throughout the year. Your insurance provider will carry out an audit to determine if your policy needs any adjustments.

Your carrier may adjust your premium based on whether you’ve added new employees or parted with employees throughout the year. Have you had a busy season and needed to bring on extra staff to help out? Your premium will increase, as your payroll has grown. Did an employee or two leave the business and you’ve decided not to replace them? Money will be owed back to you, as you’ve overpaid throughout the year and payroll was lower than expected.

How can I prepare for my audit?

Every work comp insurer has the authority to look at company payroll at the end of the policy term. Some may simply ask for reports or want to discuss over the telephone, while others may want to meet and review payroll documents in person. They may request documents reflecting a small business’ payroll, such as quarterly wage and earning statements. Audits ensure that you are paying the correct amount of premium for your business.

Since an audit can help you save money, the following tips can help make the process smoother and easier:

  • Keep good records. Keep essential documents well organized and up-to-date.
  • Break out deductions. You may be able to reduce the overall cost of your premium by deducting applicable items, such as tips and certain portions of overtime.
  • Separate payroll by classification. The NCCI allows you to split your payroll between certain classification codes to get the most accurate rate for the work you do.
  • Manage any subcontractor records. For each subcontractor that you work with, make sure to obtain a valid Workers Compensation Certificate of Insurance. If they don’t have one, they are considered your employee.

An audit will help your insurance company determine if your current payroll status will be the new normal going into the next year. If it isn’t, your insurer will adjust the policy to avoid unexpected surprises at the end of the policy term. Tri-County helps clients prepare for their audit with consulting services and even attending in-person audits.

Reporting a claim [bonus clip]

In this episode’s bonus clip, Scott discussed best practices for filing a work comp claim.

Most small businesses don’t have an internal specialist who’s familiar with the claim reporting process, but they can rely on their agent and carrier to help. “What we want all of our clients to do [in case of injury] is to notify us right away,” Scott said.

Get in touch with your agent and insurance carrier as quickly as possible when you learn about a workplace injury. They will help you complete a first report of injury and determine how to move forward with the claim. In cases of low-severity injuries, your claim may be “report only.” Report only laws vary by state, but in general, this means that your company handles the costs and your employee is back to work in a few days.

Scott shared this example: An employee handling sheet metal gets a small cut on his hand. It needs a few stitches, but he can return to work the following day. While this claim could be report only, it’s still important for the business to make the report to their carrier. Filing a report only claim ensures the best outcome in case the injury is worse than it seems or causes complications later – perhaps the employee damaged a nerve and needs surgery.

For an injury of any severity, proper care and early treatment are the best ways to minimize the long-term cost of the claim and ensure the employee’s most complete recovery. Scott also noted that work comp benefits are generally not a full wage replacement. Recovering more quickly and getting back to work will allow the employee to get their full wage back sooner.

Protect your small business with workers compensation insurance

As a small business, work comp can be challenging to figure out on your own. With the help of an expert and the right resources, you can protect the business you’ve worked hard to build. Learn more about the basics of work comp and visit our resource library for the information you need to build a safer workplace.

May 2, 2019
Missouri Employers Mutual
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