Workers’ compensation rates vary, but by understanding the factors that go into comp pricing, you can get a better idea of how much you’ll need to spend on coverage and how you can save.
Workers’ comp is insurance that covers medical expenses and lost wages for employees who experience work-related injuries or illnesses.
An injured worker who files a workers’ compensation claim can receive weekly benefits if they’re unable to work, as well as money to pay for any medical care they need as a result of their injury.
In addition to medical care and lost wages, workers’ compensation benefits cover retraining if an employee can no longer perform their old job, disability benefits if they’re no longer able to work to their full capacity or at all, and death benefits (paid to dependents) if they lose their life due to a work-related injury or illness.
It’s important to note that comp does not cover personal injury claims, only work-related incidents.
As a small business, you can calculate your average cost using the formula:
(Payroll / 100) x class code rate x Experience Modifier or X Mod
Or use our handy calculator:
Let’s dive into each part of this equation.
One of the biggest factors in your comp rate is the size of your payroll: both your number of employees and the size of their salaries.
There are two simple reasons for this: more workers means a higher chance of one of them getting injured, and a higher salary means a higher payout if an employee is entitled to lost wages.
That’s why comp policies tend to charge employers a certain amount of money per each $100 of payroll and why it’s an important first step in calculating your total cost.
So what qualifies as payroll?
Things that don’t get counted include tips, insurance and pensions, severance pay, and reimbursement for business expenses.
Most insurance companies estimate your payroll for the year in order to calculate your cost. At the end of the year, they’ll perform an audit to see how your estimated payroll matches up with your actual payroll for the year. If the actual payroll is higher, they’ll charge you more to make up the difference.
But with Hourly, you can skip those fees. Our comp model is pay-as-you-go, and we charge based on your actual, real-time payroll numbers, so there’s no guessing. That means at the end of the year, your numbers are pretty spot-on, and any audit fees are minimal.
You probably wouldn’t expect an office receptionist to get seriously injured on the job, but a construction worker might be a different story. Certain jobs carry a higher risk than others, and this risk level gets translated into what’s called a classification code.
Class codes are four-digit numbers assigned to certain types of work, and they tend to be very specific. For example, the class code for carpentry work is 5403, but the class code for carpentry cabinet work is 5437.
There are over 800 class codes, and it’s not uncommon for a business to have multiple codes. For example, you might have a team of plumbers or repairmen, plus an employee who answers the phone and makes appointments. Or you may own a restaurant that employs waiters as well as cooks and dishwashers.
Your class codes help determine your rate—higher-risk jobs will require you to pay more per $100 of payroll, whereas lower-risk jobs will typically be cheaper.
The National Council of Compensation Insurance (NCCI) sets and oversees class codes for 35 U.S. states, plus the District of Columbia, and you can look those up on the NCCI website. The rest of the states are overseen by independent bureaus or are monopolistic, meaning the state sells and oversees comp coverage.
The third factor in determining your comp rate is your X Mod, also referred to as the Experience Modification Rate (EMR).
This just refers to your past claims history. If you have a history of employees getting injured, your rate will be higher, and your insurance policy will be more expensive.
Your EMR takes the form of a number, typically from 0.75 to 1.25. If you’re a new business with no prior history, you’ll start out at 1. If you’ve had multiple employee injuries in the past or one or two severe injuries, that number will be higher.
It’s important to realize that not everyone qualifies for an EMR. For example, you likely won’t have one for your first 1-3 years of business, and if you’re small enough, you may never have one. Since each state has different regulations around EMRs, it largely depends on where you’re located.
Payroll, class code, and EMR will give you a general idea of your workers’ comp premiums, but there may be other factors at play as well.
One of these is location. Some states, like California, tend to have more work-related lawsuits, so if you’re located in one of these states, you may have to pay more for your insurance coverage.
In calculating your premium, insurance companies will also look at your general workplace safety, including equipment, training programs, and whether or not you have a safety officer on deck.
Finally, insurance carriers may add on the Expense Constant, or money to compensate them for the cost of administering your policy.
So, while you can get a pretty good idea of your average rate, there’s no way to come up with an exact number until you’ve talked to your insurance agent.
Now that you know the specifics, how does this translate into real-world examples? Let’s look at that formula again:
(Payroll / 100) x class code rate x EMR
Let’s say you own a roofing company in Arizona, and you have 5 employees who each make $40,000 a year. The class code for roofing is 5551. Since it’s a higher-risk job, the rate hovers around $7.50 per $100 of payroll.
If you’re a fairly new business, your EMR would be 1, so your final number would be $15,000.
Again, since roofing is a high-risk job, your premium will be on the expensive side. But what about a lower-risk job?
Let’s say you own an accounting firm in Pennsylvania with 10 employees, all making $50,000 per year. Assuming they mostly perform clerical, in-office work, your class code would be 0953, and the rate could be as low as $0.07.
Remember that the formula is: (Payroll / 100) x class code rate x EMR
If you’ve been in business for several years without any history of workers’ comp claims, that number might be even lower, as your EMR could be below 1.
The maximum payout in most states is 66%, or two-thirds, of the employee’s average weekly wage, up to the state maximum. Each state has a different maximum, which usually changes every year.
How much an employee receives depends on the extent of their impairment. For example, if their injury has left them with a total disability, meaning they are completely unable to work, they’ll receive the maximum of two-thirds, or 66%, of their average weekly wage.
The number of weeks an employee will receive benefits depends on how long their recovery takes and whether their disability is permanent or temporary.
Each state also has different rules for when an employee will get paid. For example, in New York, if you are unable to work for more than seven days, the payout begins within 18 days of the date of injury.
Workers’ comp is required in every state except Texas.
But certain states have an employee minimum: for example, Georgia and North Carolina only require it for businesses that employ three or more workers.
There are also certain types of workers that may be exempt, including:
In general, though, if you have at least one full-time or part-time employee, you’ll need coverage. This also applies to seasonal workers.
You can calculate an employee’s average weekly pay as follows:
In Wisconsin, workers’ comp pays up to two-thirds of an employee’s average weekly wage, not to exceed the state maximum, which is $1,870.50 for 2023.
In Illinois, a workers’ comp settlement amount is calculated based on the employee’s average weekly wage and the extent of their injuries. Typically, the amount is determined by how much will be paid per week, multiplied by 60% of the worker’s average weekly wage, up to the state max.
In Pennsylvania, workers’ comp pays 66% or two-thirds of an employee’s average weekly wage, up to the state max of $1,273 (for 2023). That’s assuming the employee makes between $954.76 and $1,909.50 per week.
If they make between $707.22 and $954.75, they’ll receive $636.50 per week.
And if they make $707.21 or less, they’ll receive 90% of their average weekly wage.
Hourly makes coverage more affordable for small businesses like yours.
Instead of estimating your payroll and making you pay a huge premium at the start of the year, we price based on your actual payroll, and you pay as you go. That means low audit fees at the end of the year, plus much better cash flow.
Talk to your insurance agent to see how much you can save with Hourly.
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