4 Rules of Thumb Regarding Workers Compensation Insurance for Employers

4 Rules of Thumb Regarding Workers Compensation Insurance Compliance for Employers


In two previous “4 Rules of Thumb” articles, I discussed a few things that businesses can do to create the best possible environment for engaging new customers and providing quality service (4 Rules of Thumb for Business Success) and provided additional tidbits for service businesses – things the company can do to make sure that the work is done completely and correctly the first time, which is what leads to happy and loyal customers (4 Rules for Building Service Customer Loyalty). This article is focused a bit more internally to the business, discussing a few of the risks and considerations surrounding those dreaded tax burden issues: Workers Compensation Insurance, Worker Classification, and Unemployment Insurance. (Note that unemployment insurance is calculated just like workers’ compensation, using standardized arithmetic formulas. Queries are run by the IRS, Department of Labor, and States to compare these hours and dollars that may trigger audits.)

Workers Compensation Insurance is sort of the “elephant in the room” of compliance – it’s a big problem that is frequently the last item of consideration in business compliance and reporting. It is also a “below the radar” issue at the State level, so little attention is generally given it by accounting and human resource professionals. Workers Comp is one of those payroll reports where you select from a broad list of categories relating (hopefully fairly closely) to the work your people do, you calculate the cost, and you pay the fees. Ideally you’re classifying workers properly in terms of their being employees versus independent contractors – this being the big focus of most workers comp audits and where many advisors say to pay attention. But an equally big issue – the issue that impacts the business owner perhaps more than the employee – is classifying workers at a more detailed level, possibly saving the business hundreds if not thousands of dollars in annual workers comp premiums (or penalties, depending on the situation).

You see, most workers’ compensation policies issue blanket risk classifications, yet how these classifications are used in different industries is where the secrets to cost savings are.  For example, in the moving and storage industry the risk is in the warehouse. As soon as a clerk goes through that door, the employee is now working under a different classification (perhaps a warehouseman class). However, because that employee usually checks inventory and sells boxes as part of their job, they could be classified mostly as a salesperson, reducing premiums while keeping the company compliant. On construction sites, the basic work classifications can be subdivided into specific tasking on government jobs to save premiums and fringe benefit dollars.  These simple adjustments to reporting can make big differences in premiums and coverage.

When it comes to workers compensation insurance for the business, give these 4 compliance rules of thumb a bit of consideration.

Rule 1: Get informed and get help. It’s OK for a business owner to not be the expert in all facets of compliance and reporting – – you have accountants and tax advisers that can gain this knowledge from their annual CPE (continuing professional education) credit classes. The potential costs of mis-handling workers compensation and other aspects of having employees are too great to risk being uninformed and unprepared.

Rule 2: Call an employee an employee – it will turn out better for both in the long run even if it seems like the more expensive way to go. Misclassification of employee workers as contractors hurts everyone, eventually. There is a HUGE problem with businesses mis-classifying workers as contractors rather than as employees (sometimes to avoid paying taxes and benefits, but sometimes not). In these situations, the workers are not covered by the various protections and do not get the benefits that employees do and the trade-off is that the company saves money (but only until they’re caught).

Some business owners who are unsure of the current State administrative codes (rules) are paying workers’ compensation premiums on truly independent contractors, or sometimes they demand the contractor have a workers’ compensation account as a condition of ‘employment’.  At best, this is a hedge against the eventual audit but it does not protect the employer from wage claims from that worker who had “employment” conditions.

Because of the underground contract economy, honest entrepreneurs are bearing larger than necessary burdens of supporting injured workers and the unemployed.  Many a business owner has maxed out their personal credit cards to keep the business alive and their employees employed only to see these numbers continue to rise.

Deliberate mis-classification can save dishonest contractors upwards of 30 percent in payroll and other taxes, but for workers, taxpayers and honest employers, the practice amounts to millions in lost wages and revenue. – See more at:

http://www.ibew.org/articles/13ElectricalWorker/EW1305/Misclassification.0513.html#sthash.7u1vtjWP. dpuf

Rule 3: Details Details Details. (poor grammar, but you get the point). Worker classification, if done properly, can potentially save businesses large amounts of money simply by being more accurate. Yes, there may be tradeoffs in terms of labor to perform the calculations and reporting, but it is often well worth the effort. Particularly in businesses where workers may perform multiple duties or work in a variety of locations and conditions, it is important to delve into the details of time, location and work performed to make sure the business is adequately covering itself. Filling out the report by simply selecting the broad category that “seems most likely” is not the best way to go. There are details in the rules, and the smart business takes advantage rather than being surprised by them.

A home installation satellite company did not keep sufficient records for their most hazardous business classification: tower work. During the audit, all their hours were assessed in this one classification that was six times the reported amount. – See more at:http://cath235lni.wordpress.com/

Rule 4: If there is a worker injury claim, pay attention and deal with it right away. While it seems somewhat like getting car insurance after the wreck, there may be some risk mitigation that can occur if the issue is dealt with directly and in a timely manner – possibly avoiding a claims nightmare.

The last item is more of a suggestion than a rule, which is to be fair and truthful. Treating employees well is part of growing a successful team that will propel the business towards success. Surprisingly enough, the benefits to the business may not only be a more productive and happier workforce, but lower risk exposure and lower workers comp premiums due to more detailed use of classifications in reporting. Tell employees and independent contractors what workers’ comp does for them – it’s essentially a medical and lost wage policy to protect them and those close to them. Explaining to employees that keeping the boss informed about what is happening in the field (or in the plant) is simply part of helping ensure their proper protection.

Joanie Mann Bunny FeetMake Sense?


Many thanks to my friend Ted Carlson, Certified Fraud Examiner (retired), a 6 year veteran of the Department of Labor and Industries (L&I) in Washington State – responsible for Tax Discovery and Fraud Prevention field Audits.  Not only did Ted help edit this article, but he continues to address the elephant in the room by helping businesses reduce workers comp premiums and risk exposure.