With the economy still uncertain, many employers are continuing to look for ways to cut costs, and workers’ compensation is one area that can provide savings.
While the payoff is not immediate, knowing the right information and asking the right questions can significantly benefit your business. By taking the time to audit your workers’ compensation claims and coverage, you can save money and avoid liability in areas beyond workers’ compensation, according to Adrienne Asimou and James Boutrous of McDonald Hopkins LLC. Asimou is an associate in the Labor and Employment Counseling and Litigation Group, and Boutrous is co-chair of the Labor and Employment Counseling and Litigation Practice and a member.
Smart Business spoke with Asimou and Boutrous about workers’ compensation and how performing an audit can help save your company money.
How does the workers’ compensation system work?
Generally, workers’ compensation is a no-fault insurance system designed to cover and compensate employees injured in the course of and arising out of their employment. In the United States, each state is unique with respect to how it provides and administers workers’ compensation coverage. However, the three general categories that states fall into for workers’ compensation coverage are monopolistic states, where employers purchase coverage through the state; pure insurance states, where employers purchase workers’ compensation coverage from private insurance carriers; and hybrid states, where employers can obtain workers’ compensation coverage through the state or private insurance carriers.
There is also the category of self-insurance, which is available in most states, where employers cover their own workers’ compensation risks out-of-pocket, as well as four federal workers’ compensation programs, which apply to federal employees.
How is the cost of workers’ compensation insurance determined?
From a 30,000-foot perspective, workers’ compensation insurance rates are initially determined by looking at the type of work the employer’s workers perform (i.e. manual classifications) and the payroll for each category of employee. Employers with workers who perform more injury-prone work and/or that have a large payroll will have higher insurance rates than employers with workers performing less injury-prone work and/or with a small payroll.
To arrive at the base rate of insurance coverage, the payroll for each manual classification is multiplied by the insurance entity’s assigned rate of risk, which is determined by the frequency and severity of claims for all employees within that specific manual classification. The base rate of insurance generally applies to new or small employers.
An employer that has a history of workers’ compensation coverage or that buys a business with a history of workers’ compensation coverage will have its base rate impacted by that experience. Employers that manage their claims and have safe working environments are more likely to be discount rated, resulting in a lower premium, while an employer that fails to manage its claims and/or that has unsafe working conditions is more likely to be penalty rated, resulting in higher premiums.
What is a workers’ compensation audit, and what are the benefits of performing one?
A workers’ compensation audit is the periodic review of an employer’s coverage, claims and practices in an effort to identify ways to save money, avoid future claims, and identify as well as remedy ancillary legal issues. While workers’ compensation coverage is generally mandatory in all states but Texas, general liability insurance, employer practices liability insurance (EPLI), excess insurance and umbrella and/or gap insurance may also be appropriate, depending on the employer.
Moreover, the state in which workers’ compensation insurance is to be obtained is largely dictated by where the employee is performing the work, an issue that causes potential headaches for employers with employees in multiple jurisdictions or whose work frequently takes its employees across state lines. Penalties aside, being sued directly in court by an employee without the benefit of certain defenses or becoming the insurer of an employee’s injury can be the costly consequence of failing to have the appropriate workers’ compensation coverage in place.
Depending on the employer’s specific coverage, there may also be programs or groups that the employer can participate in to further drive down workers’ compensation coverage costs. An employer should periodically contact the entity providing its workers’ compensation coverage to see if it is eligible for any cost-saving programs and/or groups.
Employers using a third-party administrator (TPA) should use their TPA as an additional resource to find workers’ compensation cost-saving options that fit the employer’s specific needs and business.
Inspecting coverage and claims for potential discounts or reimbursements, fraud and subrogation interests can provide monetary benefits, while examining how employees are getting hurt may help to avoid future injuries to other employees. This measure can also minimize administrative and civil liability in other legal areas, including Occupational Safety and Health Administration (OSHA) and intentional tort claims.
Employers should consider how their workers’ compensation practices jive with their other employment practices. Reviewing contract clauses that implicate workers’ compensation coverage, handbooks, employment policies and employment practices can often avert future problems.
Finally, employers should always be mindful that workers’ compensation can overlap Family and Medical Leave Act (FMLA) and Americans with Disabilities Act (ADA) issues. By ensuring compliance under all employment laws, employers will save time, money and stress.
Adrienne Asimou is an associate in the Labor and Employment Counseling and Litigation Group at McDonald Hopkins LLC. Reach her at (216) 348-5760 or email@example.com. James Boutrous is co-chair of the Labor and Employment Counseling and Litigation Practice and a member at McDonald Hopkins LLC. Reach him at (248) 220-1355 or firstname.lastname@example.org.