What is Workers Compensation?

Workers’ compensation provides wages and medical benefits to employees who have been injured because of a workplace incident, and financial benefits to a deceased worker’s family.

It is required by law in most states for most employers and highly recommended for all employers.

The federal government has a separate workers’ compensation program, mostly for federal employees.

Some states are “monopolistic,” meaning workers’ compensation coverage must be purchased through one designated carrier or state fund.

Employers pay an insurance carrier for this coverage or are self-insured. In states in which workers’ compensation is not mandatory, there may be other options for employers to compensate injured workers.

States develop the guidelines for what is covered and the benefits that are due. These guidelines can significantly vary on aspects like:

• • • Which employers are required to provide coverage
    • Who employers can purchase coverage from
    • Class codes and rates
    • Amount of benefits injured workers receive
    • Treatment guidelines and fee schedules

How is workers’ compensation premium calculated?

• The type of business, claim history, payroll, and location(s) all impact premium.
• The basis for workers’ compensation premium is this formula: Class Code Rate x Experience Modification Factor x (Employer’s Payroll/$100)

• • Businesses are categorized by class codes specific to the type of work their employees do. Insurance carriers charge different rates for each class code, because some types of work are riskier than others. Rates and class codes vary by state.
  • Experience modification factors are related to a business’s history of workers’ compensation claims. If a business has a claims history that is better (safer) than average for its type of business, then its modification factor will likely be below 1.00. If a business has a worse claims history than average, its modification factor will likely be above 1.00.
  • State workers’ compensation bureaus calculate this experience modification factor. In some states, smaller employers may alternatively have a merit rating which can also impact their premiums based on their claim’s history.
  • Insurance carriers use a payroll amount based on an estimate of the employer’s annual payroll.
• Credits or debits may be applied to the premium, depending on a variety of factors. Charges and state assessments may be added to the premium.
• After the policy has concluded, a premium audit will likely be performed. The purpose of this audit is to compare the estimated annual payroll used to calculate the premium with the employer’s actual annual payroll. If there is a difference, an adjustment will be made – either the carrier will owe the employer money (because the actual payrolls are less than the estimated payroll), or the employer may owe the carrier additional premiums (because the actual payrolls were higher than the estimated payroll).