How Your Workers Compensation Premium Is Calculated
No matter the size of your company, one of the most basic costs of doing business is insuring your employees against injury on the job. This makes your workers compensation premium one of the most precious fixed costs any business owner can make.
How Workers’ Comp Premiums are calculated:
Workers compensation premium is calculated according to how employees are classified (with regards to the specific type of work they perform) and the rate assigned to each employee classification. The premium rate itself is expressed as dollars and cents per $100 dollars of payroll for each class code. In most states, the NCCI determines the classification rate and experience modification factor (MOD).
Factors that Go into Setting Workers Compensation Premium:
- Size of the employer’s payroll
- Employee job classifications
- Company’s claims experience
Premiums for work comp insurance are calculated by the formula below…
Payroll (per $100) X Classification Rate X Experience Modifier = Premium
How Your Payroll Affects Your Workers’ Comp Rate
The basis for an employer’s workers’ compensation premium is your payroll. For each $100 dollars of your payroll, there is a specific rate, which is determined by the classification codes of your employees. If you can keep detailed records for what employees are doing on multiple jobs or in different aspects of their job, you may be able to break out that portion of payroll and potentially save on premium.
Another huge thing to keep in mind is sub-contracted labor and 1099 employees. Many business owners make the mistake or think that if they have employees in this manner it does not affect their premium. If you are paying an employee as a 1099 instead of a W2 and they do not have their own work comp coverage then you are responsible for paying premium on those payroll dollars. There is not a week that goes by that I do not field this question or see this situation and I always have to educate business owners on it. The same thing applies to sub contracted labor. If you are not collecting certificates of insurance and verifying, they actually have coverage then you are responsible for the premium as well. Our goal is to help you understand everything possible that could end up costing you money at audit time. We do not want you to have a huge audit balance just as much as you do, so we do our best to let you know everything on the front side of getting a policy in place.
How Your Employer Classification Affects Your Insurance Rate
Businesses are separated into groups according to the type of work they do. The classification system identifies which type of work presents more risk to the employees performing these tasks.
How Your Experience Modification Factor Affects Your Premium
Your experience modifier – typically referred to as your Ex Mod – is a numeric representation of your company’s claim experience. Ex Mods are based on how your business compares to others in your industry with similarly classified employees. An average Ex Mod starts at 1.00. Employers with fewer and less severe accidents than average have a MOD of less than 1.00. This will generally take a few years of consecutive coverage to be effected one way or the other.