While there are a few variables that come into play, there’s a jumping off point from which you can determine the workers’ comp cost for contractors.
Employees are classified based on the specific type of work they do, with a specific rate for workers’ comp assigned to each employee classification. This premium rate varies by state and is expressed as dollars and cents per $100 dollars of payroll for each class code.
While the basic math is simple, the variables that come into consideration can make the final premium rate a little trickier to determine.
The Workers’ Comp Equation
Payroll x Classification Rate x Experience Mod = Premium
As you can see, getting to your exact cost is a bit more complicated. Let’s break it down:
Classification Rate
Determined in most states by the National Council on Compensation Insurance (NCCI), the classification rate is the starting point of your workers’ comp cost.
But how is the amount decided?
It’s simple: the more dangerous the work, the higher the rate.
For example, roofers are at much greater risk of injury than, say, a barista or restaurant server. That risk will reflect in their class rating.
Here’s an example of two very different employee class codes and their base workers’ compensation rates in California:
Roofers (class 5552) face major risks in their business, and their rates reflect that. According to the CA Dept. of Insurance, base rates for workers’ comp for roofers can range from around $24 to $80 per every $100 spent on payroll.
While the restaurant business brings its own fair share of risks to employees, it’s far less risky compared to roofing. Which is why the base rate for workers’ comp insurance for restaurant employees (class 9079) can range from $7 to $13 per every $100 spent on payroll.
As you can see, the difference can be significant.
These are just examples of manual base rates. These rates can be further modified by insurers through rating plans that reflect your individual business safety records and risk factors, including:
- Age of business
- Experience modifications
- Loss history
- Credits for favorable safety records/ procedures
If you’ve had a couple of years with lots of accidents on the books, your rates could be much higher than the manual base rate for your class code.
Because rates can vary from carrier to carrier, it’s always a good idea to have your insurance broker shop around for the best price for your class and risk factors.
Payroll
Workers’ comp rates are expressed as a dollar amount per every $100 dollars you spend on payroll per class code.
So, if you’re rate is $10 per every $100 for your restaurant employees - with a total annual payroll of $300,000 - your workers’ comp costs for the year would be approximately $30,000.
Experience Mod
Also determined by the NCCI, this portion of the equation is based on many factors and also varies widely.
Comparing past claims made by your company to those of similar companies helps insurers determine the risk involved in insuring your contractor business.
Those with a higher-than-normal rate of past injuries are, reasonably, assumed to be at higher risk of continued injuries in the future.
The NCCI has developed a complex formula that considers both the frequency of losses and the severity of those losses, as well the ratio between expected losses in your industry and what your company actually incurred.
Companies with many small losses are considered a bigger risk than those with one large loss, as they are more likely to incur a large loss in the future.
What does an experience modification rating look like?
If your EMR comes in at 1.00, you are considered an average risk.
> 1.00 = higher than average risk
< 1.00 = lower than average risk
And the seemingly smallest amount of difference in your EMR score can have a major impact on price.
A score of 1.3 can mean that your prices go up as much as 30% more than a competitor who’s EMR score comes in at 1.00.
Let’s look at what that could mean in the end with this examples:
Payroll x Classification Rate x Experience Mod = Premium
3000 x 3.25 x 1.00 = $9750
3000 x 3.25 x 1.30 = $12,675
That’s a $2925 difference, which ain’t nothin.
Of course, your equation will most likely be much different than this one, but in the end, the experience mod rating can make a big difference.
So, how can you keep you EMR low?
A Safe Workplace Equals Lower Workers’ Comp Rates
The fewer accidents – and resulting claims – the better your EMR.
It’s no secret that the construction industry is rife with hazards. In fact, in 2012 the construction industry was responsible for 19.5% of workplace deaths in the United States. 57% of those deaths were the result of a Fatal Four accident.
The Fatal Four are four leading types of accidents and causes of fatality in the construction industry that have been identified by the Occupational Safety and Health Administration (OSHA).
These dangers include:
- Falls
- Being struck by objects
- Electrocution
- Caught-in or -between hazards
Taking precautions to ensure that employee injuries in the workplace are minimized, both benefits those working hard for you and arms your business with an experience modification rating that will help lower your workers’ comp premiums.
Many factors go into determining how much workers’ compensation coverage is going to cost your contractor business.
From the amount you are paying out in payroll to the type of work being performed – and the state it is being performed in – to your business’ claims history, you will likely need to sit down with your insurer to discuss your situation and determine the amount that workers’ comp will cost you.
