Seven year-end strategies for Workers’ Compensation accounts
As year-end approaches, many businesses turn their attention to tax planning
with the goal of minimizing federal and state taxes. Few invest a similar
amount of time in reviewing their Workers’ Compensation, even though
significant dollars are at risk.
When a Workers’ Compensation policy is set up, premiums are based
on an estimated risk. After the expiration of the policy period,
a premium audit determines the actual exposure and premiums are adjusted
accordingly. While preparing for a premium audit and conducting a premium
review always has value for employers, it takes on increased importance
this year, as many employers have witnessed considerable changes in job
responsibilities and payrolls. Furthermore, many employers will be getting
money back this year and may be complacent about Workers’ Compensation,
leaving costly overcharges undetected.
Here are seven ways to plot year-end savings in Workers’ Comp:
- Strengthen payroll records with job titles
Job classifications are a central
factor in Workers’ Comp premiums.
With the exception of construction and agriculture, the overall
business operation, not individual duties, is assigned a governing
classification that best identifies the type of work being performed.
In most cases, this is the classification that contains the most
payroll and the first critical step is to be sure that it’s accurate.
Since some
workplace functions are common to all businesses, there are standard
exclusions for clerical, sales and driver classifications. Commonly,
errors are found in the clerical classification 8810 Administrative/Clerical,
often the largest classification outside of the governing class.
Employers
that take the time to place classifications into the payroll
records provide helpful information for the auditor; however,
many auditors will probe a clerical classification because it is usually
the least expensive, reflecting minimal risk. “What do they do?
Where do they do it? Do they do it full-time?” are common questions.
Key determinants of a clerical classification are physical separation
from the plant and exclusive performance of office work (non-clerical
duties can be, at the most, incidental).
While a company representative
familiar with the financial records and the operations of the
company should be present at every audit, it’s
not unusual for the person to be unfamiliar with an employee’s specific
duties and as a result clerical employees may be erroneously
assigned to the governing classification.
A simple solution that reduces the possibility
of error is to add job titles for each employee that provide
a common sense description of what people do, such as payroll
clerk, data entry clerk, receptionist, etc.
- Separate severance
pay
While payroll is often referred to as the basis
for premium, in most states it is actually remuneration and there
are a number of exclusions from what is counted as remuneration.
During a year fraught with downsizing and layoffs, a particularly
important one to recognize is severance pay. Dismissal or severance pay,
except for time worked or accrued vacation, is excluded from remuneration.
Employers need to show the auditor exactly what was paid in severance
pay.
- Document overtime
In most states, overtime pay can be reduced to straight
time when determining the Workers’ Comp premium. Records should
clearly document how much pay was overtime for the year. If the
rate of overtime varies, for example, time-and-a-half and double time,
be sure the records are distinct, as the adjustment will differ. This
information should be in a form that is easily determined by the auditor,
summarized by classification on an annual basis.
- Understand how employer perks are treated
Year-end often means bonuses
or gifts to employees. Cash or cash equivalents, such as gift
cards are included in remuneration, but employer-provided tickets
to entertainment events, an airline flight, employer-provided automobiles,
and club memberships are excluded.
- Special consideration for contractors
There is a major exception to the
usage rule of a single governing classification. Construction
operations are allowed separation of payroll and can assign multiple
Workers’ Comp
classifications for actual individual employees work. In the
pursuit of jobs, many contractors broadened the scope of their work this
year. Contractors that were specialists a few years ago (painters, carpenters,
plumbers, etc.) sought jobs outside their specialty and became generalists.
Most do not realize that this has significant implications for their Workers’ Compensation
premium.
As such, it behooves contractors to break down their payroll,
showing the specific hours for each Workers’ Comp class code performed
by employees. Percentages or estimations of this work are not
allowed. Documentation must show the actual hours per code. Misclassification
of Workers’ Compensation
codes in the construction industry costs employers thousands
of dollars each and every year.
- Increased vigilance about certificates of insurance
Certificates of insurance
are a chronic problem and are often the source of unnecessary
costs. A certificate of insurance is a written assurance that
subcontractors, temporary agencies or employee-leasing companies are providing
Workers’ Compensation
for the period of time that workers are engaged. If certificates
are not available at the time of the audit, the primary employer
will be charged for the exposure on its Workers’ Compensation
policy.
If payroll records are available, the charge will be based on
the payroll, if not it will be based on the contract price. Even
if a certificate exists, the insurance may not match the requirements
of the contract or a policy may have been cancelled for non-payment.
In a period of economic uncertainty, this troublesome area requires
constant monitoring.
- Determine the absolute legal minimum cost of Workers’ Comp
Faced
with tight budgets, employers have a propensity to shop for the
lowest quote. In this uncertain economy, it’s particularly critical
for employers to investigate the insurer’s stability as well as
its long-term commitment to the Workers’ Compensation market to
mitigate the possibility of a financial failure, Yet, most importantly,
with Worker’ Comp
shopping for the lowest price is not always the path to the lowest
cost. The potential for mistakes and overcharges in Workers’ Compensation
is higher than any other type of insurance. The items listed
above only scratch the surface. Errors commonly occur in other
areas as well, such as the handling of executive officers pay, unusual
exclusions, multiple state coverage, etc. Far more relevant than the lowest
cost, is the lowest legal minimum that can be paid.
Workers’ Comp savvy employers look for agents who are proactively
ensuring that they pay the lowest legal minimum. A year-end policy
review is a prudent first step.
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