Workers’ compensation premium calculations: A primer

Some business owners may have a difficult time understanding how workers’ compensation premiums are calculated. This should come as no surprise, however, as the process is complex since workers’ compensation premiums vary for many reasons. What’s more, inaccurate calculations may lead to surprise bills down the line. To help shed light on some of the particulars involved with workers’ compensation insurance, we’ve interviewed Ken Snyder, former Sales Learning Consultant at ADP, LLC.

Business risk classification

Before calculating your premium, the insurance company classifies the business based on the risk of injury within the industry. The carrier then uses this classification code to estimate your premium. More potentially hazardous industries, such as construction, will end up with higher rates than those that have lesser risk, such as retail. Your employees will be classified based on this categorization.

“For many businesses, every employee has the same classification code,” says Snyder. “The logic is that employees might have to fill in for other roles at some point, so they all share the same risks.” If, for example, you run a restaurant, your bartenders and servers may have the same code.

However, there are some exceptions to this rule. For example,  clerical workers who only do clerical work could receive a less expensive code and lower rate than other employees who perform other tasks within your company.

Annual payroll estimate

The insurance company sets your initial workers’ compensation premiums by applying the class code rate to your expected payroll (per $100) for the upcoming year. The policy premium is calculated on estimated payroll for the upcoming year, which is difficult to calculate with any degree of certainty.

Once the insurance company calculates the premium, the insured business is required to make its initial payment.

“Likely, if your annual estimated premium is less than $1,000, you’ll have to pay for the entire year all at once,” Snyder explains. “If your premium is more than $1,000, the insurance company may offer an installment plan.

With installment plans, in order to remain ahead of the collection curve, the insurance company will usually collect a deposit premium representing 20 percent or more of the total estimated premium.”

Without workers’ compensation insurance in place, you may be at risk for not complying with your state's rules. If an employee runs into a problem that would’ve been covered by workers’ compensation insurance, you may be responsible for covering their expenses and may be sued by the employee.

End-of-year audit

At the end of one year, your workers’ compensation policy will expire. Once this occurs, you will need to buy or renew a policy to continue your coverage. However, the insurance company won’t be done calculating the premium for your old policy.

Within 30 to 60 days of your policy expiring, the carrier will audit your policy details, including payroll, class codes, and other applicable business records to see how the actual premium collected during the policy year compares with your estimate at the start of the new term.

The audit is required by the state and an obligation of every policy. At the end of your audit, you may have an audit variance that could require you to pay additional premium to cover the difference or receive a refund if you overpaid on your premiums.

We're here to help

At ADPIA we're here to answer your questions. Contact us and we can help you understand workers' compensation insurance and find the right coverage for your business.