Imagup General Magazine 2024
Workers’ compensation is a form of insurance offered by insurance companies to help cover medical costs for employees injured at work. The policy typically covers medical costs and lost income.
That said, workers’ compensation insurance can be referred to as a cost of doing business, and for good reason. The cost of insuring your workforce can be a significant expense, one that can easily add up over time. But, if you own and operate a small business or are just starting out as an independent contractor, workers’ compensation insurance could prove to be a financial lifeline.
However, the amount you can expect to pay will be determined by several factors, including your industry of operation, level of business activity, where you’re located, and how you operate your business.
As such, employers must understand how workers’ comp premiums are calculated so they can know how much they should be paying and which coverage options may be more cost-effective than others.
Continue reading to understand better how worker’s comp premiums are calculated.
The Risks Involved
The first thing you’ll need to know about workers’ compensation premiums is what types of risks you are insuring against. When you hire employees, you’re assuming some level of risk. Specifically, you’re assuming the risk to their health, workability, and likelihood of getting hurt on the job.
Since these are all risks you may have to cover if someone gets hurt at work, you also assume the risk of a workers’ compensation claim. Specifically, workers’ compensation insurance covers the costs associated with the following types of risks:
Punitive Damages
Employees can file a claim if they are injured on the job and are unable to return to work. This includes the costs associated with medical treatment and loss of wages.
Pain and Suffering
Employees can file a claim against the company if they are truly injured on the job and cannot return to work because of pain and suffering experienced as a result of their injury.
Death Benefits
An employee’s family can file a claim against the company if the employee is injured on the job and dies as a result. This includes the costs associated with the employee’s final expenses, such as a funeral and burial.
The Number of Employees Covered
It perhaps goes without saying that for employers to calculate the amount of workers’ compensation insurance they’ll need to cover, they’ll first need to know how many people they plan on covering. As such, the number of employees that you must contribute toward the workers’ comp premiums is determined by state law.
But in general, employers are only required to cover employees who work for them and under their supervision, regardless of whether they are full-time, part-time, seasonal, or intermittent.
Size of the Company
An interesting fact worth mentioning is that the amount you’ll need to pay for workers’ compensation insurance will also vary based on the size of your company. In other words, the larger your company is, the more you’ll likely have to pay in premiums.
Small businesses often get a great deal on workers’ comp coverage by spreading it to fewer employees. This helps small businesses who might prefer to forego worker’s comp insurance, which is not uncommon among smaller businesses trying to find their footing.
Insurance Claims History of the Company
The amount you pay in workers’ compensation premiums will largely depend on the number of claims filed against your company. If you’ve filed a large number of claims in the past, you will likely have to pay a higher premium for your future coverage.
The information that the insurance company will look at includes the frequency and number of claims filed by your employees, their age, and other details about their injury that could help determine the likelihood of them filing a lawsuit.
That being said, if there are more than a few claims filed against your company, it’s likely that the amount you’ll have to pay in workers’ compensation premiums will increase significantly. This is because you’ll have to increase your insurance coverage and pay out more in damages and settlements.
The Industry the Company Operates In
Another important factor you’ll need to keep in mind when calculating how much workers’ compensation insurance you’ll need to cover your employees is the nature of your business. After all, certain industries are much more likely to experience workplace accidents than others.
The insurance company will look at the industry in which your business operates and the risk your employees face when doing their job to determine a premium based on these factors. So, if you operate in an industry with a high occurrence of workplace injuries and incidents, such as construction, you’ll likely have to pay higher workers’ compensation premiums than if your company operates in a less-risky industry such as warehousing or mining.
Employee Job Classifications
When calculating workers’ comp premiums, your insurance company may base its premium assessment on a worker’s job description.
They will assess:
- The risk of the job is a combination of the risk involved in performing the job and the likelihood of being injured on the job.
- What type of equipment is required for the job, as well as the likelihood of using it?
- Whether the job requires an elevated level of skill and training.
- Whether the job is deemed “high risk” by the state’s regulatory commission.
The Bottom Line
As you can see, even though workers’ comp is a business expense, it can also save employers from paying out-of-court settlements and costly legal fees. Even if you operate in an industry with low levels of risk and don’t suffer any injuries, your employees could still end up filing a large number of claims and end up receiving a large amount in premiums over the years.
That said, it’s important to understand how a worker’s comp works and how it’s calculated. Doing so will help you determine the coverage level and the amount you need, making it much easier to protect your business and employees.
