How are workers’ compensation rates determined?

Workers’ compensation insurance is a must-have for any business with employees. It protects you from liability if your employees are injured in the workplace and helps ensure injured workers get timely and effective medical care. However, workers’ compensation rates vary, depending on various factors, including your experience modifier rate, payroll, and employee class codes.

Your Experience Modifier Factor

Your experience modifier factor (E-mod or EMF) is a rating number that is calculated based on your company’s history of workers’ compensation claims payments. It shows the risk level of your company compared to other businesses like yours in size, type, and location. Calculating your E-mod is as simple as dividing “actual losses” by “expected losses.”

The EMF for every new business is 1.0, which is the industry average. After several years, your E-mod factor will either increase or decrease. If the E-mod is above 1.0, it means that your company is experiencing more claims that your peers. If the number decreases below 1.0, it means your company has a less than average claims history.

For example, a company with a clean history of workers’ compensation claims could earn an EMF of 0.85, while a company with several claims could have a rating of 1.23. The bad news is your EMF is based on the last three complete years of claims data, so one bad claim can have an impact for the next three years.

An E-mod less than 1.0 reduces the premium amount you pay. Simply put, a lower e-mod results in lower workers’ compensation rates.

Your Payroll

Your workers’ compensation rates are also based on your annual payroll and renumeration. Besides wages and salaries, the definition of payroll for the purpose of workers’ compensation insurance rates includes:

  • Bonuses
  • Commissions
  • Vacation, holiday, and sick pay
  • Overtime pay
  • Prevailing wages
  • Allowances
  • Annuity plans
  • Payments for incentive plans or profit-sharing

Based on your employees’ average weekly wage, you’ll pay a certain amount of workers’ comp premium for every $100 in payroll. Your company is required to complete a payroll audit a few months after renewing your policy. If you’ve underestimated your payroll, you’ll pay the additional workers’ comp premium. If you’ve overestimated, you’ll get a refund or credit.

Your Workers’ Compensation Class Code

Workers’ comp classification codes are 3- or 4-digit codes established by the National Council on Compensation Insurance (NCCI) to identify job types. Each employee is given a code based on the type of work they perform. Every code provides a description of a particular job and the potential hazards connected to it. Insurance providers use these class codes to estimate the level of risk associated with specific types of work and determine workers’ compensation rates.

Generally, riskier jobs carry higher insurance premiums. For example, a construction worker who works on upper-level buildings is at a higher risk of injury than an accountant. As such, it costs a company more to insure a construction worker than a desk job employee. Codes and risk levels also vary among contractors. Carpenters, for example, have a different code from electricians.

How to Reduce the Cost of Workers’ Compensation Coverage

While you can’t control your company’s or industry’s level of risk, improving workplace safety and reducing the frequency of claims are key factors in keeping your workers’ compensation rates down.

Here are a few things you can do:

  • Provide workplace safety training for new hires and continuous training for existing employees. Training should cover the procedures and equipment your employees need to complete their tasks safely. Establish an open-door policy for questions and concerns.
  • Provide employees with the right tools and equipment. Make sure they have appropriate personal protective equipment. Equipment should be maintained and in proper working condition.
  • Keep your workplace free of clutter and eliminate tripping hazards and loose cords in walkways.
  • Use the right signage and labels for slip-and-fall situations or hazardous materials.
  • Get your state’s most up-to-date employee classification code book and make sure to classify job descriptions correctly.
  • Hire with safety in mind. Make sure you go for candidates who best fit into your company’s culture and won’t pose a safety risk.
  • Implement a drug-free workplace.
  • Make sure your employees are aware of the procedures to follow in the case of a workplace accident.
  • Establish a return-to-work program to proactively help injured workers return to work faster.

Join a PEO

Partnering with a Professional Employer Organization (PEO) can help manage your workers’ comp costs while also helping with the safety challenges of running a business. By leveraging their size and the number of employees they carry, a PEO can negotiate competitive workers’ compensation rates with insurance companies. You also get a flexible payment schedule, where you pay your premiums based on each payroll you run.

When you join a PEO, you fall under the PEOs E-Mod, which may be lower than your company’s. This helps lower your premiums even further. Also, PEOs have a vested interest in keeping your workplace safe and preventing injuries. They’ll help design and implement safety and risk management programs to minimize workers’ comp claims. A PEO will resolve claims efficiently when they occur and implement a return-to-work program to reduce the length and cost of workers’ comp claims.

Get Access to Competitive Workers’ Compensation Rates with Vested HR

Vested HR acts as your strategic partner, assisting you with the workers’ compensation insurance selection process. We provide a network of highly-rated carriers and policies and use our economies of scale to help you get the best workers’ comp rates.

Our pay-as-you-go program allows you to spread your premiums out over the year instead of paying a large down payment. What’s more, we provide employee training, workplace safety audits, risk management, claims administration, return-to-work programs, and more. Contact us to schedule a consultation and learn more about how we can help get your workers’ comp risk and costs under control.