If your business has employees, state law usually requires you have a workers’ compensation insurance policy to cover them if they're injured on the job. So, if you have to let them go or lay them off, you might think it makes the most sense to cancel your policy.
While that might seem like an obvious move to make, it’s not necessarily the best long-term strategy. If you’re going to rehire employees within 30 days, here are the reasons why you should try to keep your workers’ comp policy.
What to Consider Before Canceling Your Policy
Workers' compensation insurance policies mitigate the costs of health care from a job injury. They can cover medical bills, provide disability benefits, or pay death benefits if an employee passes away despite receiving medical care.
Even in a state like Texas, where employers don't have to provide workers' comp benefits or health insurance, having a workers' comp policy can save you money. If even a single employee has an accident and needs medical treatment, the costs you avoid paying can often exceed the premiums you paid for coverage.
Of course, once you have no employees, this all becomes irrelevant. If you don’t expect to hire workers anytime soon, canceling your workers’ comp policy makes a lot of sense. For example, you can definitely cancel your policy if you are:
- Closing your business for good
- Replacing all employees with independent contractors
- Pivoting your business strategy, so you won’t ever need help again
However, if you suspect you’ll rehire one or more employees within a month or so, it often makes more sense to hold onto the policy.
Generally, the longer you have a policy open, the easier it is to accrue discounts and rewards. If you cancel yours and start from scratch, you could end up losing money on the deal. To help you understand why this is, let’s take a closer look at how to calculate workers’ comp premiums.
How to Calculate Workers’ Comp Policy Premiums
You need to pay monthly or annual premiums to receive coverage from a workers’ compensation insurance policy. Here’s the formula used to calculate a workers’ comp premium:
Occupation Rate x Payroll Amount ÷ 100 x Experience Modifier = Premium
Let’s look at each of these variables in turn, starting with the occupation rate. State law assigns workers’ comp rates to employers based on their occupation. Thirty-five of the 50 states follow the National Council on Compensation Insurance's (NCCI) system, and most state-specific models are similar.
Rates are generally higher for occupations with a higher risk of workplace injury, while lower-risk jobs are cheaper. For example, the workers’ comp rate for roofers in your state is probably higher than for accountants. Business owners multiply this rate by their payroll amount to find the initial premium for their comp coverage.
If you qualify for an experience modifier (X-mod), multiply that amount to get your final premium for a period. An X-Mod is a way to reward employers for having fewer claims against them than average or charge them extra for having more. The standard multiplier is 1.0, and it goes up or down to reflect your history of losses and workers' compensation claims.
For example, say you run a small business mowing lawns in a state where the occupation rate for your type of work is 3.5. You expect to pay $75,000 in wages subject to workers’ comp in the coming year.
You strictly abide by all Occupational Safety and Health Administration (OSHA) standards, and your employees have never had a work-related injury or filed a workers' comp claim. As a result, you have an experience modifier of .95. Your estimated premium for the year would be $2,493.75. Based on our formula, here’s what the math looks like:
3.5 x $75,000 ÷ 100 x .95 = $2,493.75
At the end of the policy term, you’ll go through an audit to confirm that your premium matches your actual payroll costs. If you paid less in premiums than you should have, your insurance company will charge you more to make up for the difference.
Why You Should Keep Your Policy If You’re Rehiring Workers in 30 Days
If injured workers and medical expenses are rare occurrences for your business, you'll likely have a beneficial X-Mod to discount your annual premiums. In that case, you want to hold onto your workers’ comp policy if you plan to bring back staff in 30 days. Canceling resets your X-Mod so that when you apply for a new policy with an insurance carrier, you’d start from scratch.
It usually takes at least a year to qualify for an X-Mod again, and sometimes as much as three. Each state has its own requirements. Often, this includes a minimum premium or loss threshold in one or more of the previous years, called the experience period. The experience period often excludes the most recent year or two because claims from that time may still be ongoing.
For example, say you do business in a state where you must meet one of the requirements below to qualify for an experience rating and X-Mod, assuming the experience period doesn’t include the most recent twelve months:
- Have a premium of at least $10,000 in the last year of the experience period
- Have an average annual premium of at least $5,000 the previous two years of the experience period
With a new policy, you wouldn’t be able to qualify for an X-Mod for at least two years. If your premiums averaged $5,000, you'd have to wait until the beginning of your fourth year to start seeing a discount on your insurance costs.
Additionally, if you cancel your workers’ comp policy, you’ll have to go through the entire application process all over again to get a new one. That can be a significant waste of time and money.
When Can You Keep a Policy Open Without Employees?
Unfortunately, your window for keeping a workers’ compensation policy open after letting go of all your employees is very brief. You’ll probably need to rehire people within 30 days at most to keep your original policy intact.
If you take longer than a single billing period, you’ll have to report zero dollars in payroll to your insurance provider. If that happens, they’ll realize that you’ve let go of all your employees and take steps to cancel the policy.
There are two primary reasons why they can’t let you keep a zero-dollar policy open. The first is that you must meet minimum premium amounts to make the policy worth their while. If you fall below that threshold, trading your premiums for coverage no longer makes sense for the insurer. Zero dollars in payroll means zero premiums, a number that’s definitely below the minimum.
The second reason is that zero-premium policies are illegal in many states. These are commonly known as ghost policies, and many consider them dangerous to policy owners and any of their would-be workers alike, who must operate as independent contractors.
In states where it’s legal, ghost policies are typically an alternative for self-employed individuals with no employees. The workers' compensation benefits won’t cover you or any workers in case of an injury. These policies’ only purpose is to let you provide a certificate of workers’ comp insurance if a customer or contractor demands it.
The Exception to the Rule
In the vast majority of cases, you’ll only be able to keep your policy open after letting go of your employees if you replace them within 30 days at most. However, one significant exception to that rule occurred as a result of the COVID-19 pandemic.
For a short period, some insurance providers waived the minimum premium thresholds and allowed businesses to keep their existing policies, even if they had no employees left. However, that was a unique case. The pandemic forced so many businesses to lay off their workers that insurance providers had to make an exception.
They knew that most employers would soon need to rehire people. They didn’t want to cancel anyone’s coverage and risk losing them as customers when the world reopened. Unfortunately, that exception no longer applies, so don’t count on it to let you keep your policy open while you have no employees.
Make Changes on the Fly with Pay As You Go Workers’ Comp
It’s easy to adjust your employee count with a pay as you go workers’ comp policy, like Hourly’s. Hourly bundles payroll and workers comp so the premiums are tied directly to each payroll amount. Need to add or remove staff? The payroll platform and workers comp policy adjust on the fly.
And if you're still figuring out what to do after laying off your workers, it's not going to cost you anything to hold onto your workers’ compensation policy. Take the time to do your due diligence and weigh the pros and cons of trying to keep your workers’ compensation policy open, even if it’s currently zero.
If you’re going to be rehiring people soon, strongly consider doing so within thirty days to avoid losing your X-Mod and having to reapply. If there are extenuating circumstances that may complicate your situation, such as an injured employee with an outstanding workers' compensation case, get legal advice before taking any action.