Know the Facts About Workers’ Comp Insurance and Take Action to Lower Your Losses

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Workers’ compensation (workers’ comp) insurance provides important protection for businesses and their employees. It’s a key business coverage that protects both employees and employers, which is why most states, including Michigan, Ohio and Indiana, require businesses to carry it.

Workers’ comp claims represent significant monetary and human resource costs for businesses, so it’s important to know the facts about workers’ comp coverage and to implement strategies that reduce the likelihood that claims will occur. In addition, having a robust workers’ comp loss prevention program can help to reduce the risk of fines related to OSHA (Occupational Health and Safety Administration) infractions.

Key facts about workers’ comp loss for business owners

There are many factors to consider when selecting workers’ comp insurance and mitigating risks in this area. To begin, let’s look at some of the most critical facts related to workers’ comp loss control for businesses:

Fact: Workers’ comp coverage includes two components. There are two types of protection provided by what is commonly referred to as a workers’ comp policy: 1) workers’ comp and 2) employer’s liability.

Fact: Employers should be aware of who is defined as an “employee” for workers’ comp purposes. Workers’ comp law takes a broader view of which workers are actual employees of a business and so should employers when it comes to reviewing their workers’ comp needs. For example, under workers’ comp law, the majority of individuals providing services to a for-profit business will be considered employees and require coverage for workers’ comp insurance (unless the services are specifically excluded under workers’ comp law).

More and more workers’ comp (and IRS) audits are scrutinizing worker classification. Business owners should be aware of the following factors that are used to determine whether an individual is considered an employee under workers’ comp law.

  • Right to control – A person or organization that controls the way that work is performed indicates that the task is being performed by an employee. If the person doing the work controls the time and manner in which the work is done this may indicate that the person should be classified as an independent contractor.
  • Character of work – If the individual is performing work that is the same as the primary work of the business that hires them, this points to an employer-employee relationship.
  • Method of payment – If a worker is paid in terms similar to the way that an employee would be (i.e. they are paid wages on an hourly, daily. weekly, or monthly basis) and taxes are withheld, this is likely to be viewed as an employer/employee relationship for workers’ comp purposes.
  • Equipment and materials – If a business owner is providing the equipment and/or materials so that a person can perform work for them, this usually indicates an employer-employee relationship.
  • Right to hire and fire – A business that has the authority to hire and fire an individual performing work indicates an employee relationship. Alternatively, an independent contractor’s services are generally terminated through cancellation or completion of an agreed upon contract.

All of the above factors may be considered and no single factor determines whether a person is an employee under the workers’ comp law. During a workers’ comp hearing, a judge determines whether a person is considered an employee or not.

Fact: Failure to carry workers’ comp insurance can result in stiff financial penalties. If an audit indicates that your business is not carrying workers’ comp coverage you can be liable for fines of a $1,000 day for a minimum of 30 days. Other fines can also be levied for inadequate coverage.

Fact: Employers need to understand the Experience Modification Factor. A key factor driving workers’ comp premiums is the Experience Modification Factor (EMF). The EMF is based on data reported to the Workers’ Compensation Rating Bureau and is used by insurers to adjust employers’ workers’ comp premiums based on the number and severity of their workers’ comp claims. Insurers consider an employer’s Workers’ comp loss history as a predictor of future losses, as well as an indicator of a company’s commitment to, and management of, safety protocols. The EMF takes into consideration an employer’s prior four years of payroll and loss data, comparing it to state average loss data for all other employers in the state who share the same classification codes.

Fact: A lower Experience Modification Factor may reduce workers’ comp premiums. The average experience modification factor is 1.00. Employers with more workers’ comp losses will have an EMF above this and as such will pay more for their coverage. For example, an employer with an EMF of 1.20 would pay 20 percent more for their workers’ comp premium than an employer with an EMF of 1.00 or less.

Consider the flipside, where employers have lower EMF ratings—the savings on premiums are significant, and could be the equivalent of a 30 to 40 percent discount on workers’ comp premiums. How can an employer lower their EMF? The answer is simple, but not necessarily easy: by implementing and enforcing a solid workers’ comp loss control program.

Fact: Putting safety first is critical for managing workers’ comp losses.

In addition to protecting the well-being of employees, businesses that take safety seriously are more likely to benefit from lower EMFs and lower workers’ comp premiums due to having fewer and less severe claims. It’s important to note that insurers view frequent Workers’ comp claims as a red flag that may potentially lead to more severe losses, and penalize organizations with a spotty safety record accordingly.

Fact: Attending to workers’ comp claims quickly can also reduce costs.

Another reason why workers’ comp claims can be so costly is because they often take a considerable amount of time to process. That’s why it’s important to report workers’ comp immediately and to work to resolve them quickly.

How businesses can take action to reduce workers’ comp losses

While the burden of workers’ comp may seem heavy, there is actually significant opportunity for business owners to exercise control over their “workers’ comp destiny.” By being proactive and paying heed to the facts above and the action items below, businesses can position themselves to reduce workers’ comp losses and improve safety for their employees.

Action item: Take a multi-disciplinary approach to safety. Controlling the cost of Workers’ comp insurance premiums comes down to reducing and minimizing injury claims—the ultimate goal is to stop injuries before they happen and to get injured workers back on the job as soon as possible. This can be done by creating a culture of safety within an organization that keeps everyone accountable for supporting a safe work environment and the ongoing promotion of safe work habits. Another important factor: having an engaged and present management team that is committed to keeping business operations safe.

Action item: Tap into external resources to help curb workers’ comp costs. Implementing safety measures and staff training programs can seem overwhelming at first. However, tapping into external resources can make it easier. In fact, some insurance carriers provide their insured businesses with industry specialists who offer professional workers’ comp loss control expertise to help them create safety and loss control plans. In addition, business owners may wish to tap into other external sources for help such as industry trade associations or peer businesses for tips.

Action item: Implement common sense tactics that can help to reduce your risk of workers’ comp losses. It’s important to create, communicate and implement a comprehensive and concrete plan to mitigate Workers’ comp losses. As part of your workers’ comp loss control plan you may want to consider some common sense tactics including:

  • Establishing a safety council. In order to truly ingrain a culture of safety and the action steps that will reduce your workers’ comp losses, there needs to be an infrastructure in place to help organize and guide these efforts. Putting a safety council (or committee), comprised of members who represent all company stakeholders, in place is important. This group can help to create and document safety policies and procedures that are in compliance with OSHA regulations, as well as addressing safety issues as they arise.
  • Providing safety education and training. It’s one thing to put action items in place to reduce workers’ comp losses, it’s another task to make sure that all staff members are aware of them and that they understand how they will impact them on an individual level during their working hours. That’s why making a commitment to the ongoing education and training of staff on safety issues is a critical component of any plan to reduce workers’ comp losses.
  • Implementing a drug-testing program. According to industry statistics, having a drug-testing program can have a major positive impact on the number of workers’ comp claims for employers. Research shows that employees who pass drug tests are four to six times less likely to have a workers’ comp claim than those who don’t.
  • Utilizing video surveillance. Compliance with safety procedures and protocols is generally higher when a company has a video surveillance system on their premises. Employees know they are being monitored and become more compliant. An additional benefit? They also tend to become more productive and punctual as well.
  • Creating and enforcing a cell phone policy. Implementing a cell phone policy is an important element of any workplace safety program—especially for businesses with people who drive a significant number of miles for work-related purposes. A comprehensive cell phone safety program should be developed to help reduce the risks of cell phone use by employees while they are on the job.
  • Consider industry-specific best practices for mitigating workers’ comp losses. While all of the action items above are helpful for most businesses, it can also be beneficial to consider industry-specific tactics to reduce workers’ comp losses.

For example, day care center providers, contractors, auto shops, car dealerships, non-profits, restaurants and manufacturers all have unique workers’ comp exposures. As such, it can be very beneficial for business owners in these industries to learn about the specific best practices that are unique to their type of business and can help to reduce the liabilities they face in their own operations.

There’s no doubt that workers’ comp loss prevention should be viewed as a key issue for business owners. Beyond the negative impact that workers’ comp claims have on employee health and workplace productivity, the billions of dollars in financial losses related to workplace injuries severely hurt the bottom lines of U.S. businesses each year. Fortunately, companies can achieve considerable control over their workers’ comp destiny and reduce losses significantly by understanding the facts about workers’ comp insurance and taking effective actions, like the ones discussed above.

Let’s talk about a workers’ comp loss prevention program for your business.

The commercial insurance team at Kemner Iott Benz has a wealth of experience helping business owners get the customized workers’ comp coverage they need based on a comprehensive review of their unique workers’ comp risks. We work with top insurers to help your business minimize exposures and implement an effective workers’ comp loss prevention plan. If you’d like to talk to one of our experienced insurance professionals to learn more, contact us today.

Adrian:  517.265.7000   |    Ann Arbor:  734.971.1000   |   Cassopolis:  269.445.2425  |  Howell: 517.546.6350

smiling man wearing suit and tie | Kemner Iott Benz About the Author

A graduate of Olivet College’s insurance program, Ben Hughes came to Kemner Iott Benz in 2014 with several years of experience providing asset protection and risk management for area businesses. In his spare time, Ben enjoys spending time with his family, friends, being outdoors, and being a daddy to his beautiful baby girl, Nora.

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