If you have employees, chances are you are legally required to have workers compensation insurance. This insurance will cover if an employee suffers an injury on the job. Nearly all states require coverage. The laws and regulations are determined on a state level so the specifics will vary by state. If workers compensation premiums make up a large portion of your budget, read on to understand employee classifications and their impact on premiums.
How classifications impact premiums
For some types of businesses such as those with most or all clerical office employees, the premium can be quite low even with a high payroll. For businesses that engage in more hazardous operations, the premium will be higher in proportion to the increased risk and can sometimes be quite high even with a relatively low payroll.
In general, premiums vary by type of work engaged in, by state and by insurers. (The state of Oregon releases a report every two years showing a ranking of how workers comp rates compare by state. See here for the latest report as of this writing)
Generally, each state classifies hundreds of employment types and assigns a fair level of risk per class relative to other classes. Insurance companies develop their rates based on this info. Specific businesses of a similar type will also see variations amongst others of the same type depending on their claims history, safety practices, and other factors.
Classification examples
To give you a rough idea of the vastly different premium amounts generated by employee type of work: Alabama is a mid-ranked state in the referenced Oregon report. A company with a payroll of $1,000,000 in office staff salaries will see a WC premium of approximately $200. A restaurant with the same amount of payroll would pay approximately $2500 while an auto repair shop would pay around $5000 in workers comp premiums. On the higher end of the spectrum, a roofer with the same payroll amount would pay approximately $25,000 in premium.
Vigilance is key to avoid overpaying
It is especially important for a business with sizable workers comp premiums and operations that include multiple different non-typical employee types to make sure they are not overpaying.
There is a multitude of classes and often the lines between similar-sounding classes are blurry. The difference in premium, even between what may seem like similar classes, can be very significant. Lack of vigilance on the part of the business owner or their insurance representative can often result in misclassifications that work against the business owner. Insurance companies are more concerned that you are paying them enough rather than that you are paying them too much. It is your vigilance and the vigilance of your insurance broker that can pick up on errors that may be costing you huge sums of money.
Questions and comments are welcome. Please either leave them in the comments section below or contact me directly.
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