While insurance is typically one of a business owner’s least favorite subjects, the issue of Workers Compensation and Employers Liability coverage (WC) can stand alone as an irritant. The shear expense and the lack of knowledge combine to create a business issue that is long in frustration and fear, and short in satisfaction and understanding. Like a shotgun wedding between business owners, employees, insurance carriers and state government, it fosters a general feeling of helplessness and victimization, and often anger. The goal of this white paper to dawn light upon WC and provide a better understanding of the coverage, as well as how to navigate it to your advantage.
To start, it should be noted that we are not alone on this planet with regard to WC. Programs are in place throughout most of the civilized world to provide WC coverage. The one and only reason for WC coverage is to protect the well being of employees while on the job. In the United States, prior to the existence of WC coverage, injured employees were literally tossed aside and replaced with the next warm body in line. In theory, the injured employee could sue the employer, but most did not have the resources to do so. Furthermore, even if they did have some resources, the employer would almost always have far greater resources, and a positive outcome for the plaintiff was rare.
Around 1900, a few states began to enact WC laws to protect employees, with most following suit by 1950. Interestingly, it was not the insurance industry that came up with WC insurance, but rather the individual state legislatures. Accordingly, the insurance mechanism was an obvious choice for funding the requirements set forth in the law. Based on the law of large numbers, if every business paid in a “small” amount to a pool, there would be funds available to pay out for a future loss. To gain the approval of powerful business leaders, the government made a deal; if businesses would carry WC insurance, the coverage would be the sole remedy for injured employees, and an employer could not be sued for a work related injury. Ultimately, the parties agreed and WC insurance was born, having a very stabilizing effect on society.
Unfortunately in the original format, there was no financial consequence for those employers who had employees using the program often and for those who did not. Insurance is designed for the loss that occurs as an exception as opposed to the rule. Soon enough the WC system began to collapse under its own weight. To cover the enormous number of losses, rates went sky high.
Over time, reform offered improvements and efficiencies to many states’ WC programs. In Massachusetts, the system was saved by the arrival of the Experience Modifier (MOD) and the All Risk Adjustment Program (ARAP). Before describing these two factors, a review of how rates are set is needed.
The amount you pay annually for WC is based on the amount you pay your employees and what those employees do for you. Currently, a secretary’s WC coverage will cost twelve cents per hundred of payroll while a carpenter’s will cost seven dollars and fifty cents per hundred. At the beginning of each policy period, a business estimates the annual payroll for each class of employee, and is then charged a deposit premium based on the estimates. The final premium bill is based on the actual annual payroll total, which is adjusted via audit at the end of the policy period. Business owners often lament this correlation between having a good year and the additional WC premium that results from it. Although this is due to a lack of understanding of how the system works, this frustration is understandable. Understanding the Mod and the ARAP is not an easy task, but once understood it can alleviate headaches.
As stated above, the original WC program did not differentiate between the big and little users of the system. While still not perfect, the Mod and the ARAP saved the system and brought rates down dramatically. The Mod was designed to differentiate the level of use of the system by each employer. The state came up with a formula that predicted what the expected losses would be for each class of labor at each level of payroll. Each individual business’ actual past WC losses were then compared to the expected industry losses, and if lower than the expected amount, a discount would apply. Alternatively, if a business’ actual past losses were higher than the expected amount, they would have to pay more into the system.
When losses get big enough, the Mod calculation by itself becomes bloated and indeterminate. This is where ARAP comes into play in order to calculate an appropriate premium. MOD and ARAP together determine what should be paid into the system for prior use from high losses.
The following chart shows the effect these two factors have had on selected sample rates since 1991:
Job Description
| Class Cod | Rate per $100 (2008) | Rate per $100 (1991)
| Delta
| % Reduction
|
| Carpentry | 5457 | 7.50 | 16.67 | -9.97 | -222% |
| Tile | 5348
| 6.45 | 17.63 | -11.18 | -273% |
| Electrician | 5190
| 3.17 | 8.05 | -4.18 | -254% |
| Sheetmetal Install | 5538
| 5.74 | 18.18 | -12.44 | -317% |
Plumbing
| 5183
| 3.88 | 10.89 | -7.01 | -281% |
Sales
| 8742 | .20 | .75 | -.55 | -375% |
Clerical
| 8810 | .12
| .37 | -.25 | -308 |
So while paying back into the system hurts, the dramatic effects are apparent. The Mod and the ARAP provided the stimulation needed to have employers embrace risk management practices. With the introduction of these two programs it became quite obvious that having a safer work place was a win-win-win proposition for the employer, employee, and the WC system. Let’s look at the effects of different Mods and ARAP for a plumber at $100,000 of payroll per year.
Job Description
| Code
| 9/1/08 Rate
| Cost per $100K Payroll at basic rate | @ .88 Mod | @ 1.25 Mod | @ 1.25 ARAP
|
| Plumber | 5183 | 3.88/100 | $3,880 | $3,414 | $4,850 | $6,062 |
A plumbing contractor with a clean record and low Mod as opposed to a high Mod and ARAP saves $2,648 for every $100,000 of payroll($6,062-$3,414=$2,648). Considering that a business carries its losses in the Mod and ARAP for 36 months, the $2,648 becomes $7,944 and that adds up quickly. $7,944 pays for a substantial amount of risk management tools not to mention the savings associated with a stable work force
(hiring, training and ramp up expenses).
With this understanding of the system, it is now time to look at how the following issues that each play a role in WC premium calculation each year.
1. WORKERS COMPENSATION CONSTRUCTION CREDIT PROGRAM (WCCCP).
In an effort to be fair to unions which traditionally pay higher wages and thus higher WC premiums (remember premium is based on a rate per $100 of payroll), Massachusetts instituted the WCCCP, which allows contractors to apply for a credit annually if their average hourly wage is more than $18/hour. The higher the average wage, the higher the credit applied to the premium. The application is in all WC policies that contain construction classes. Essentially, this is just money waiting to be had. Every year, many construction companies leave money on the table simply because they are not aware of the WCCCP.
2. RISK MANAGEMENT PRACTICES (RMPs).
RMPs can make the biggest difference in long-term premiums. Risk Management is the art/job of reducing the odds of a loss and reducing the size of a loss once it occurs.
Here are RMPs to consider:
- Review Contracts with your agent for insurance requirements with other parties.
- Risk Transfer Agreements Utilized with your Sub Contractors.
- Risk Releases.
The 3 practices listed above can make a huge difference in that WC claims can be transferred away contractually. If an employee is injured, WC is the sole remedy, and they cannot sue their employer. But they can sue the GC. If a signed risk transfer agreement with the GC is in place (often in the middle of the work contract) then the liability suit against the GC from your employee is transferred back to the employer. This is where lack of knowledge steals the advantage from you and gives it to someone else.
Walk Away Training (Avoidance)
Employees should know it is OK to walk away from a situation they feel is dangerous. Often they feel they must get the job done no matter what the risks are or face the boss’s wrath. They should know what their employer’s priorities are.
Certificate of Insurance Review
Certificate of Insurance Tracking Program
Certificates of insurance should be collected from all Subs and the GCs to ensure that all are all carrying WC. Since courts decide when and where coverage is applied, it is a sticky situation to be the only employer on the job site with WC in force. Uninsured contractors can find a way to other’s coverage, having a negative effect on future premiums (remember the Mod and ARAP!).
Get a certificate for every project!
COBRA / MASS Continuation Letters
When employees leave an employer, it should be documented that they have been offered the proper health coverage options. This will help avoid false claims because they have nowhere else to turn due to a post-non-employment injury.
Driver Record Checks prior to hiring
Company Driver Policies
GPS Systems in Auto Fleet
Remember, auto accidents that give rise to an injured employee count as WC claims even if the accident was 100% the employees fault. Avoid hiring or employing bad drivers!
Fit to Work Exams
Utilize Fit to Work programs to get a third party (doctor or medical office) to sign off that the potential employee or the returning employee is capable of physically doing the job.
Drug & Alcohol Free Work Place Program
Obviously, workers that are drinking or using drugs have a higher chance of being injured or injuring those around them. Don’t chance it. This is an easy way to protect your employees and your reputation.
Safety Talks (Paycheck stuffers / Tool Box Talk Program)
Safety Manual
Risk Management Checklists
New Employee Orientations
Employee Exit Interviews These RMPs communicate the employer’s position on safety and how tight the ship is run. This can be a real deterrent for someone who feels they can file a phony WC claim.
3. CARRIER DISCOUNTS.
There are several discounts to be aware of:
- Premium Discount for premium over $10,000. This is offered on voluntary policies. An employer in the MA WC Pool does not qualify for this discount. There are WC insurance carriers that will insure contractors on a voluntary basis and get them out of the pool, even if their Mod is very high. Never assume you are stuck in the pool.
- Deviations. If the insurance industry is in a soft market and other factors line up, it is possible to qualify for WC carriers that offer a rate Deviations. This is up-front guaranteed savings regardless of losses that occur during the policy year.
- Dividend Programs. This is when a carrier offers to give a premium back after the policy term has expired if an employer has had a loss free year. If all else is equal then these can be attractive. However, this is the last consideration as dividend programs vary greatly and the envisioned savings can vaporize quickly depending on the actual program.
There are several other issues a business owner should know about when it comes to managing their WC program.
4. IS THERE AN ALTERNATE EMPLOYMENT?
Does your employee work for another employer? If so, beware of injuries from the other job bleeding through to your WC experience! Here are 2 scenarios to consider:
- Your employee works on the side for someone else and the other employer has no WC coverage. Your employee is hurt on other job and comes to work to report injury while on your clock. Watch Monday morning injuries closely!! If you do have a situation such as this, let your WC carrier know.
- Your employee is working for you as the side job. Due to an injury while working for you, he or she can no longer work at his or her other job. The lost payroll from the other position will then fall into your loss and your loss history. This could be substantial should it be a union person working on the side, or any type of highly paid person.
5. SUB CONTRACTORS AND SOLE PROPRIETOR ISSUE.
Just because someone is paid on a 1099 basis doesn’t mean that you can always avoid paying WC premiums. If there is an Employee – Employer relationship, then WC benefits can and will be paid. Follow the rules under chapter 149 of MA law as to who is an employee.
- The individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and
- The service is performed outside the usual course of the business of the employer; and
- The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
Remember that if the “sub-contractor” has no insurance, your WC carrier may collect WC premium based on what you paid them and this will include materials! Hired subs should have valid WC. If not, include what you pay the uninsured sub in your WC payroll calculations and ask the sub to provide billing segregating payroll from materials.
6. ARE YOU WORKING OUTSIDE OF MASSACHUSETTS?
If you are, make sure you are reporting your payroll by state. Otherwise you may find you have some nasty news from the Department of Labor from the states in which you are working.
7. ULTIMATELY, JUDGES DECIDE WHO GETS PAID.
Many employers get frustrated and angry over how each carrier handles claims, especially when benefits get paid to someone they feel didn’t deserve them. These statements uncover another basic misunderstanding about the system. The WC claims process provides that injured employees have certain rights. If the injured disagree with how a carrier is handling a claim they can go before a judge. It is the judge who decides what happens in the case, not the carrier.
It is for this reason that claims handling by both the carrier and the employer is so important. If an injured person feels they are being treated fairly, they will probably go along with the process. Once irked, however, they will push the system to its limits. That gets expensive for everyone.
8. YOUR HIRING PRACTICES.
Understanding this concept sheds light on why a business’ hiring practices are so important. Once into the system, an unsavory employee is little more than a scam artist and can wreak havoc, and you have opened the door for them. This illustrates why risk management in hiring is critical.
9. PAYING OUT OF POCKET.
While tempting, this is a bad idea unless it is reported to the carrier. Part 4 of a WC policy states you should not assume the cost of care unless you are prepared to pay for the claim yourself. Imagine a splinter in an eye. You give the employee a check to pay the Emergency Room. The following week the employee says they are disabled due to the eye injury. Who owns this claim? You do not want to risk this. There is a way to pay out of pocket, have the hospital bills reviewed for accuracy, possibly resulting in savings while keeping the carrier in the loop.
10. SNEAKING WC INJURIES THROUGH GROUP HEALTH.
This is VERY unwise. There have been many cases in the past where employees go through surgery, and be in the middle of physical therapy when it comes out that the injury was work related. The health system will pull up short and the Group Health carrier will want their money back. The rate BCBS, Harvard, Tufts, NHP or Fallon pay at may differ from the WC carrier. Who owes the difference? Will the WC Carrier pay? Again, do not get into a situation where you could find out. In addition, the state may fine you for not reporting claims on a timely basis.
Summary
In short there are many things a business owner can do to protect and minimize their WC loss and premium exposure. It is important to understand the basics of how the system works or else it will feel like a very rough ride. Knowing how coverage is priced, what credits are available, and what risk management procedures can do to help keep premiums in check can help to provide a less bruising experience. While employers must carry and pay for the coverage, it need not be the train wreck that it often is.
IMPORTANT NOTICE: The information presented here is for informational purposes only and should not be relied on as legal advice. No one should act or refrain from acting on the basis of the information provided but should instead seek the appropriate legal advice on the particular facts and circumstances at issue from a properly licensed attorney.