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How Much Does Workers’ Comp Cost? A Guide To Rates & Premiums

by Ryan Berk on Nov 3, 2020 4:09:35 AM

How much does workers’ comp cost? It’s a question we get a lot from companies. That’s because, if you’re like most businesses, you’re responsible for carrying the coverage for your employees. But the truth is that the price of the policies can vary widely based on your industry and a number of other factors. We know this honest answer can be an annoying one, so we’ll explain why the costs vary and then give an example of how premiums are calculated.

At Complete Payroll Solutions, we help thousands of companies every day understand their responsibilities around workers’ comp and how to secure coverage at the most affordable price.

In this article, we’ll explain how workers’ comp costs are calculated and actions you can take as an employer to potentially lower your expenses. After reading it, you’ll have a good understanding of how much worker’s comp might cost you and you’ll be closer to selecting a worker’s comp plan that works for you.

What Does Workers’ Comp Cover?

Workers’ compensation insurance both protects your company from lawsuits by employees who experience a work-related illness or injury and provides care and compensation for injured workers. 

Typically, workers’ comp benefits for employees include:

  • Medical expenses related to the illness or injury
  • Lost wages due to time off to recover
  • Costs for ongoing care like physical therapy
  • Disability benefits if the worker is permanently or partially disabled
  • Funeral expenses for employees who die as a result of their illness or injury and death benefits to their beneficiaries

In addition to reducing your risk of being sued, this coverage is also required in most states and, if you don’t have it, you could face fines, a stop-work order, or even jail time.

Who is Required to Carry Workers’ Comp?

In every state, except for Texas, businesses are required to carry workers’ comp insurance once they hire a certain number of employees. It’s important to note that this is separate than general liability coverage. Depending on where you’re located, sometimes companies with just one employee whether they’re part-time, full time or temporary need to purchase it. For example, in Arizona, an employer has to carry workers’ comp insurance regardless of the number of employees they have or whether they’re part-time or full-time.

The rules for workers’ comp are governed by the state where you operate so you’ll want to check your specific laws to see if you’re required to have coverage or if you qualify for an exemption. You can find these through the website of your state workers’ compensation agency.

What Impacts the Cost of Workers’ Comp?

As mentioned at the start, the costs of workers’ comp can vary greatly based on your industry. That’s because the type of work your employees do is one of the three biggest factors impacting workers’ comp costs. Those factors are:

1. Class Code

A class code, also known as a classification code, are numbers set by the National Council on Compensation Insurance or, in some cases, states, that are used by insurance companies based on the risks associated with the category of work your employees do. For example, code 8810 is for clerical office employees and 9082 is for restaurant workers. In most states, known as competitive states, insurance carriers create a base rate for each code and submit them for approval by the state’s Department of Insurance or similar agency. In some cases, like Massachusetts, the rates are instead set by the state. Either way, typically the more risk employees face, the higher the rate for workers’ comp. 

2. Payroll

When it comes to workers’ comp costs, they’re calculated per $100 of payroll. This simply means that the more employees you have and the bigger your payroll, the more your costs will likely be.

3. Past Claims History

Based on your past claims experience and how that compares to others in your industry, you may be assigned an experience modifier. This acts as either a credit or debit against your premium. For example, if the average modification rate for your industry is 1.0 and you have fewer claims or accidents, then your rate would be less than 1.0. Conversely, if you have a 1.5 modification rate, you’ll pay an extra 50 percent.

To show how these factors work together to come up with your premium, let’s take an example.

  • State: Rhode Island
  • Business Type: Restaurant (Class Code 9082)
  • Payroll: $150,000
  • Class Code Rate: $1.43
  • Premium: $2,145

To run the calculation, premium = (payroll/$100) x class code rate. You’ll notice these figures don’t include any experience modification rate but at least gives you a sense of how the costs are calculated.

What Other Factors Drive Up Workers’ Comp Costs?

In addition to the factors described, there are a couple of other things that could increase your workers’ comp expenses.

One is having to also purchase a disability policy along with workers’ comp. This coverage is required in certain states like New York. If this applies to you, you’ll have to consider the additional costs of providing disability benefits coverage to your employees.

You may also have to pay more if you’re assigned to a risk pool in your state. A risk pool is a way for very high-risk companies or new businesses without a loss history to get workers’ comp insurance if they can’t get it through traditional insurers. Businesses who need to get workers comp through an assigned risk plan usually pay higher rates.

Are There Ways I Can Save on Workers’ Comp?

Workers’ comp can be a big expense so you may be wondering if there are ways to cut your mandatory workers’ comp costs. Generally speaking, there are four ways to positively impact your premium.

1. Claims

The biggest thing you can do as an employer to help reduce your workers’ comp costs is to decrease your risk of illnesses and injuries. Depending on your size, your insurance carrier may offer you loss control programs to help you implement best practices to mitigate your future claims, like providing ergonomic desks.

If you’re a smaller business, you may not have this kind of direct assistance. That doesn’t mean you can’t be proactive with risk management actions to make your workplace safer such as performing routine safety checks, encouraging safe behavior through policies and procedures, and training employees on safety procedures.

2. Covered Employees

Some states have coverage exemptions for certain types of workers. For example, LLCs in Massachusetts don’t need to include the members of the LLC in their workers’ comp coverage. By eliminating these individuals, the payroll costs used to calculate your premium will be less. 

3. Discounts

Some states offer discounts if you have workplace safety programs in place. For example, Alabama offers a 5% workers’ compensation premium discount for employers who establish a drug-free workplace. You may also be able to get a discount for belonging to a trade organization or association. The Utah Restaurant Association is one group that offers a 5% discount on premiums for enrolled members.

4. Captives

A captive is an insurance company that’s owned by its members. With a captive, similar businesses in like industries join together to share potential risk. By pooling liabilities, members can better manage their exposure so your rates could be better and you get back any surplus premiums. Plus, if you join a captive through an industry association, you may also benefit from loss control programs that can help you minimize your risk of claims.

Another way to have more accurate costs is by avoiding year-end audit surprises with pay-as-you-go workers’ comp. With pay-as-you-go, your actual payroll data is used so you’re less likely to have a shortfall during your audit that you’ll need to pay.

What Happens if I Don’t Have Workers’ Comp?

If you’re required to have insurance but don’t have coverage, you risk varying penalties. The severity will vary by state and on a case to case basis, but can include fines, stop-work orders that run until you secure coverage and even jail time. 

It’s also important to understand that if you don’t have coverage, you’ll be fully responsible for the cost of any employees’ injuries. And, in 2017-18, the average combined cost of a workers’ comp claim was $41,003

How Do I Select Workers Comp for My Business?

No matter what you do, workplace accidents may still happen. And they can have steep financial consequences for your business if you don’t carry workers’ comp insurance. To protect your company, Complete Payroll Solutions can help you find the best coverage options for your needs and budget. Check out our blog on the workers’ comp services we offer for more information. Still want to know more about choosing a workers’ comp provider? Learn more from our blog about what to consider when selecting a vendor.


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