Money-Saving Strategies for Workers’ Compensation

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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The owner of an asbestos-removal company in New York was sentenced to prison for failing to pay workers’ compensation premiums, according to a July 2009 article in the New York Times. His crime was classifying crew members as independent contractors rather than employees, avoiding payment of more than $1M.

Fortunately, there are ways to save on workers’ compensation expenses that don’t involve dodging obligations. The most effective method, according to Ryan Hanley, account executive with the Guilderland Agency Inc. in Albany, New York, is to cultivate “an organizational culture of safety.” His advice echoes what I’ve been told by veteran managers who have reduced workers’ comp costs.

Start by getting sound, free advice on actions you can take immediately. Identify and mitigate risks common to your industry, company type, and workers’ classifications.

• Invite your insurance agent to your facility and allow him (or her) to point out areas of concern along with simple remedies. Make changes, which may be as simple as installing safety mats on wet floors.
   
• If your company qualifies, arrange for a free site review by risk management pros. Ryan tells me that he recommends a risk control program offered by Travelers Insurance to his mid-market customers. See if your carrier offers this service.

Establish a drug-free workplace. According to the Substance Abuse and Mental Health Services Administration, “employed drug abusers cost their employers about twice as much in medical and worker compensation claims as their drug-free coworkers.” (See fact sheet — PDF.)

• Screen new hires — make job offers dependent on passing a pre-employment drug test. Because many small businesses do not screen for drug use, they are often the employer of choice for drug abusers.
   
• Arrange for random testing of all employees.

Set up a safety program. Expect improvements within the next few years, as your company’s 3-year experience record of losses compared to similar businesses is a major factor in premium rates. Incidents, claims, and losses should decline with new safety measures, reducing workers’ compensation expenses.

• Conduct new-hire training and refresher sessions with all employees on equipment operations, safety procedures, protective gear, and incident reporting.
   
• Form and oversee safety committees to evaluate safety conditions, present safety messages to employees, and recommend changes that address causes of injuries and worker safety concerns.
   
• Perform scheduled audits and impromptu site inspections to check compliance with safety standards; correct violations, create plans to avoid recurrences, and follow up on corrections.
   
• Offer training to employees in First Aid, CPR, AED, etc; designate employees to respond to emergencies.
   
• Document safety activities including training sessions and meetings.

Create an incident response plan, which may limit the severity of a worker’s injury as well as exposure of multiple employees to dangerous chemicals.

• Develop procedures for immediate reporting of any incidents along with prompt evaluation and treatment of employees with injuries.
   
• Establish relationships with healthcare providers (physicians, occupational healthcare and urgent care facilities) that can evaluate and treat employees quickly. Ask your employees for their preferred providers prior to an incident.
   
• Develop a light-duty program — identify projects or day-to-day duties that employees can perform while recovering from injuries.

Then, consider these steps:

Evaluate your policy or ask your agent to conduct an annual review. Make sure your carrier has a competitive loss cost multiplier, a factor in calculating premiums (you may be able to find these rates online; for example, New Mexico publishes LCM data). Consider getting competitive bids; compare expenses and elements such as workers’ classifications to verify that you are getting appropriate coverage but not overpaying.

Outsource dangerous operations. Analyze benefits of reducing expenses compared to vendor pricing, quality, and reliability; saving money on workers’ comp won’t be helpful if your company has difficulty obtaining parts, finished products, or services critical to your business.

Getting rid of high risk operations may reduce the frequency and severity of injuries, which can lower your claims and eventually reduce your workers’ comp premiums. Ryan suggests that you might be able to reap immediate benefits by asking your insurance agent to consider calculating premiums based on losses associated with your current operations, excluding the riskier areas.

Plan and properly report compensation. Though a too-low estimate of payroll dollars shouldn’t incur penalties, Ryan warns that inaccurate projections can harm a business’s financial health. Because the premium is calculated after the policy period (unlike most forms of insurance), a company may owe several thousand dollars more than anticipated.

Keep good records to challenge year-end premium calculations (aka audits). For example, if your state doesn’t count differential pay for overtime as remuneration, make sure that your reporting systems can separate overtime dollars from regular pay and give segmented payroll information to your insurance company’s auditor.

Know your state’s laws or talk to someone who does. And, be aware that workers may be classified as independent contractors for IRS purposes, but considered employees by state regulators.