Workers Compensation

Any business that employs anyone for any amount of time. Whether you have one part time seasonal employees or hundreds of full time permanent employees, you have have to get workers comp. There is no exception to this rule…. unless you’re so big that you can self-insure. That’s pretty rare though. There’s a second type of business that has to get workers comp, whether or not the have employees, and that is certain licensed contractors. If you have the following contractors licenses, you have to get a workers comp policy even if you have zero employees and zero payroll:

• C-8 Concrete
• C-20 HVAC
• C-22 Asbestos Abatement
• C-39 Roofing
• D-49 Tree Service

No, true independent contractors are not covered by workers comp. An independent contractor is by definition not your employee. Whether someone qualifies as an independent contractor or an employee is another story (one that you can read about HERE) and it is a situation can cause a lot of pain and suffering at the time of your final audit if not handled properly.

No, owners do not have to be covered. They can be excluded. By default, in a sole proprietorship, an owner is excluded, but can elect to be included by signing an inclusion form. In other entities such as LLCs, partnerships, and corporations, owners/officers are included by default but can elect to be excluded by signing an exclusion form. Typically, owners choose to exclude themselves because they don’t want to pay the premium, and they know that if they do file a claim, it could likely raise their rates. However, in many cases, the cost to cover yourself as an owner is pretty darn cheap and the benefits are abundant, making it worth any rate increase that could occur in the event that you suffer a major illness or injury on the job.

An Experience Modification (Xmod) is a discount or surcharge that applies to you no matter where you place your workers comp. The Workers Comp Insurance Rating Bureau (WCIRB) – the chartered entity that does all the data analysis and number crunching for California – determines whether you qualify for an Xmod and if so, what your Xmod would be.

I’ll keep it very high-level, but in order to qualify you have to meet a specific premium threshold. If your payroll and rates are high enough to meet their internal calculation, you qualify. Businesses with naturally high rates like roofers and tree trimmers tend to qualify with lower payroll than businesses with naturally lower rates like real estate agents or lawyers.

Whether your Xmod is a discount or a surcharge is also determined by a formula created by the WCIRB. Again, I’ll keep it very high level, but the way to get a discount Xmod (good) is to have high payroll with low claims and the way to get a surcharge Xmod (bad) is to have low payroll with high claims.

A good Xmod can save you up to 50% on your rates. High Xmods can infinitely raise rates. It’s uncommon, but we’ve seen Xmods in the  300-400% range.

Workers comp has a wide variety of payment options available. Here are a few of the most common:

Fixed Billing: This is the traditional way to pay, similar to the way most other types of insurance policies are financed. You take an annual premium based on estimated payroll, divide it up into monthly/quarterly/etc. installments, and true up in the final audit at the end of the year. This is common for businesses with salaried non-fluctuating payroll.

Monthly Self-Reporting: This is where you report your actual payroll to the insurance company every month and pay based on that data. This is good for businesses that have less predictable fluctuating payroll, like contractors and farms. You will still have a final audit to account for errors.

Payroll Service Integration: This is where your payroll company directly reports your payroll data to your workers comp carrier on your behalf. This works the same as Monthly Self Reporting but takes it a step further because you are freed up from doing the reporting. You will still have a final audit to account for errors.

This is the process at the end of your policy where your insurance company makes sure that you estimated or reported your payroll correctly over the course of the policy term. Your insurer typically initiates the final audit within 30 days of your policy expiring. They will ask for payroll records to determine the actual payroll. If you underestimated or underreported, they will invoice you for the difference. If you overestimated or overreported, they will send money back to you.

Final audits are a certainty in workers comp (unless you’re with a PEO, which has no final audits, and you can learn more about HERE), and they sometimes can result in shockingly different numbers than the ones you reported. Here are the typically causes of final audit variances that cause big invoices:

1. Misclassing employees
2. Inaccurate reporting payroll such as omitting PTO, vacation pay, bonuses, etc.
3. Improperly assuming someone was an independent contractor but was really an employee
4. Omitting owner payroll when the owner was actually included
5. Discovering you actually have a surcharge Xmod

Lastly, if you ignore the final audit process itself, the carrier will send you an invoice for an amount that’s roughly double what you paid.

The price of a workers comp policy is based on the unique information of the  company applying for a policy. So while it is impossible to give a specific answer to this question, we can give you an idea with a fictional case study. The basic formula for workers comp is the same: Annual Payroll  x  Rate  x  Credits  x  Discounts  +  State Assessments (approximately 5%)  =  Annual Premium. Here's an example of what a restaurant with $750,000 in payroll could look like:
 

Class Code	9083
Payroll	$750,000
Rate	4.03%
Experience Modification	0.75
Territory Surcharge	10%
State Assessments	5.04%
Total Premium	$26,191.76