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Preparing for a reduction in force from a Workers' Compensation perspective

By Kevin Ring

Businesses all over the US are already being impacted by the outbreak of the COVID-19 virus. Manufacturers have been unable to get parts sourced from China and other areas of the world. The hospitality business is struggling with large volumes of cancellations as both business and leisure travelers cancel plans. Restaurants and retail operations have been shuttered. No industry will remain untouched.

The economic impact of these disruptions may lead you to decide it is necessary to reduce headcount and terminate employees. Thinking specifically about workers' compensation, consider the following as you make these decisions:

Terminations, particularly large-scale, tend to be followed by post-termination workers' compensation claims. Perhaps your employee has had a nagging problem they've never reported, or perhaps their fear about losing their income causes them to suddenly "remember" that time they got hurt but didn't tell anyone. Regardless of the situation, it should be your goal to make sure any legitimate injury is handled while they are still employed, rather than dealing with the much more complicated situation that arises when someone files a workers' comp claim after their employment is terminated.

One effective weapon in our battle against post-termination claims is the "Declaration of No Injury" form. The goal of this form is to unearth any unreported injuries an employee may have suffered prior to their termination.

This form is presented during the termination process with a message similar to this: "Unfortunately, while your time with us is coming to an end, it's still our responsibility to make sure any injuries you suffered while working here are taken care of."

It's important for you to deliver your message as non-threatening. Rather, you are letting them know that even though their employment is ending, you still care about them and want to make sure they are taken care of.

The goal of using the "Declaration of No Injury" is twofold: First, to make sure that any employee injury is taken care of and, second, to avoid a potentially fraudulent post-termination claim. Workers' compensation claims filed post-termination often involve attorneys. Workers' compensation claims that involve attorneys are far more expensive than those that do not.1 Having a document signed by the employee stating they didn't suffer an injury can make the entire case less attractive to an attorney and also make it more likely that an insurance company will fight to deny the claim rather than just paying a settlement and moving on.

Beyond concerns about post-termination claims is a more premium-related one: If you are planning a substantial reduction in your workforce, it's likely you will also have a substantial reduction in your overall payroll. Notifying the insurance company of this expected drop in payroll should result in lower installment payments for the balance of the policy. Of course, this adjustment would be made at the premium audit after expiration of the policy, but why let the insurance company hold the money for free?

If you choose to pay terminated employees severance pay, make sure you keep records regarding these payments. Severance packages are excluded from workers' comp premium calculations in most states. Not keeping appropriate records will result in these payments being counted as payroll and paying more than you owe come audit time.

It is always unfortunate and unpleasant when you must make a decision to cut staff. Following these steps can help you take better care of employees you must terminate and ensure these layoffs don't lead to higher experience mods and higher premiums down the road.

Kevin Ring is the Lead Analyst for the Institute of WorkComp Professionals, which trains insurance agents to help employers reduce Workers' Compensation expenses. A licensed property and casualty insurance agent, he is the codeveloper of a Workers' Comp software suite that will help insurance professionals working with employers.

1White Paper Reveals Impact of Attorney Involvement on Workers' Comp Claim Costs