Workers’ compensation insurance basics
Irrespective of the type of business you run, there’s a chance that your employees could get injured or sick. They might slip on a wet floor, fall off a ladder, cut themselves with a sharp instrument, or get in a car accident while running a business errand. Because of the numerous ways your employees can get hurt or sick, your business must have workers’ compensation insurance to cover them.
It’s state-mandated insurance that protects your business. The sick or injured employee receives workers’ compensation benefits to cover expenses, such as medical bills, job retraining, and pay while off from work. While the majority of states require businesses have workers’ comp insurance, in some states, businesses with a certain number of employees may elect to opt out of coverage.
When an employee accepts workers’ comp benefits, they typically waive their right to sue for the injury or illness. Workers’ compensation insurance covers employees regardless of who is at fault. The illness or injury could be caused by you, the employee, a co-worker, a customer, or someone else.
However, there are some restrictions to receiving workers’ compensation insurance. An employee cannot receive benefits if the incident was purposefully self-inflicted, not job-related, or was incurred while committing a crime or violating a company policy. If you suspect workers’ compensation fraud, you’ll want to take the necessary steps to counter it. And, while many states offer workers’ compensation insurance through a state-operated fund, there are also many private providers who offer the coverage.
If your employee has incurred a job-related illness or injury, you should not retaliate or threaten that employee to prevent them from filing a claim. If you attempt to take recourse against the employee, they can report you to your state or insurance agency.
Did you know that an employee doesn’t have to incur an accident or injury at work to receive these benefits? The illness/injury just needs to be work-related. An employee can get hurt while running a business errand or traveling for business. Or it can happen over a long period of time, such as carpal tunnel syndrome, chronic back problems, lung disease, hearing loss, and/or stress-related injuries.
Generally, employers can purchase workers’ compensation insurance from any provider they want (state or private). However, employers in North Dakota, Ohio, Washington, and Wyoming are required to purchase their insurance directly from the state. These four states are referred to as monopolistic states.
What is pay-as-you-go workers’ comp?
The pay-as-you-go method allows you to pay your workers’ compensation premiums based on your actual payroll and exposure risk, instead of the budgeted payroll you believe will be accurate for the year. This helps eliminate surprises during your workers’ comp audit.
You’ve probably received a few emails, phone calls, or letters offering pay-as-you-go as an alternative to traditional workers’ comp insurance. It lets you pay your workers’ comp coverage by bundling or combining it with your regular payroll. If you work with a payroll or HR service, they’ll make sure your employees and your workers’ comp premiums are paid every pay period. You’re then presented with a single bill to cover all the costs for that time period.
Traditional workers’ comp plans, compared to pay-as-you-go, require large lump sum payments to cover the estimated cost of your liability. With pay-as-you-go plans, your workers’ comp insurance liability is based on each payroll run. If you add or lose employees, your premium liability adjusts accordingly. Pay-as-you-go provides all the coverage and compliance of workers’ comp with none of the stress.
Unless you live in a monopolistic state (mentioned above), you can take advantage of pay-as-you-go workers’ comp.
What Are the Benefits of Pay-As-You-Go Workers’ Compensation Insurance?
Deciding which type of workers’ compensation insurance to select comes down to what works best for your company. For many business owners, pay-as-you-go workers’ comp is a good alternative to traditional lump sum payments. Here’s why:
- Making hefty annual payments can put a strain on your business budget and harm your business cash flow management. Depending on factors, such as where your business is located, the industry, and how many employees you have, workers’ compensation insurance can quickly add up.
- Knowing exactly how much your workers’ comp should be is difficult to predict. Pay-as-you-go calculates up-to-date workers’ comp rates with each payroll cycle. Traditional workers’ compensation insurance premiums are based on estimates. You might decide to hire or let go of some employees, which can affect your rate. Traditional workers’ compensation insurance requires that you project what your payroll will be for the year and pay it upfront. Then, at the end of the year, your insurance provider either refunds the difference or requests further payment.
- With pay-as-you-go workers’ comp insurance, the money you owe is based on your actual payroll. This lets you pay accurate premium amounts and avoid over- or under-estimating. And, as a result, you’ll incur a simplified audit process.
- Paying your premium can slip your mind. But with pay-as-you-go workers’ compensation, your policy provider automatically collects your premiums with each payroll and debits your bank account.
- Makes the auditing process is easier, which can save you time and money.
- What you pay to a payroll service is only your premium payment. You still need to work with a state-approved insurance provider for your coverage.
- Your premium is based on the payroll generated during a pay cycle and is based on a rate per 100 of payroll per job classification.
- Pay-as-you-go coverage often requires a down payment, so that a notice of cancellation can be covered if your provider cancels your coverage.
- This method is still auditable, because all workers’ comp insurance is auditable.
There’s also a down-side to consider
- You can’t budget each pay cycle for workers comp.
- You might not always see the true cost of your workers’ comp, as it is bundled with the rest of your payroll.
- Not all insurance companies allow a pay-as-you-go method, so your options may be limited and you may not get the best rates.
Reporting actual payroll wages and only paying premiums based off those actual wages make pay-as-you-go a great alternative to the traditional estimated billing process. However, ultimately, the choice has to be what works for your business. Today, insurance providers offer a wide variety of solutions and flexibility for their programs, so you may simply need to contact your provider to find out what they offer.
If you’re not sure what to do about your workers’ comp coverage, contact us at ASAP Payroll Service. We’ll discuss your options with you to help you make the best decision for your business.