How to plot year-end savings in Workers’ Comp

David Leng, CPCU, CIC, CBWA, CWCA, CRM

 

As year-end approaches, many businesses turn their attention to tax planning, with the goal of minimizing federal and state taxes, but few invest a similar effort in workers’ comp even though significant dollars are at risk. Here are six ways to control costs:

Know and document what can be excluded from remuneration

Not everything that is paid to employees is included in the workers’ compensation calculation and excluded remuneration can be significant. It behooves employers to understand and carefully document all exclusions. Auditors work for insurance companies and are trained to catch mistakes that result in higher premiums; they are not as vigilant in identifying mistakes that will lower premiums.

The sidebar has a list of common items included and excluded from remuneration. States have exceptions to the rules, so it is important to review the list with your WorkComp Advisor.

Records that clearly document all exclusions will lead to lower premiums. For example, in most states (Pennsylvania and Delaware are exceptions) records should clearly document how much pay was overtime for the year. If the rate of overtime varies, such as time-and-a-half and double time, be sure the records are distinct, as the adjustment will differ. This information should be in a form that is easily determined by the auditor, summarized by classification on an annual basis. Review the list of excluded remuneration possibilities and capitalize on them by having the necessary data to support exceptions.

When making year-end bonuses consider how they impact Workers’ Comp premiums

While the specific rules vary among states, in general, year-end bonuses and cash or cash equivalents, such as gift cards are included in remuneration. Some state exceptions are Tennessee that includes bonuses only when paid in lieu of wages and specified as a part of a wage contract, Oregon that excludes bonus pay that is not anticipated under the contract of employment and is paid at the sole discretion of the employer, New Mexico that excludes bonuses paid under a state approved safety program, and Texas that excludes safety awards paid in accordance with a written safety plan. On the other hand, certain gifts or perks for employees are not included in remuneration. These include employer-provided tickets to entertainment events, an airline flight, employer-provided automobiles, and club memberships.

Add job classifications and job titles to payroll records

There are nearly 700 job classifications in NCCI states and the definition and scope can change, so it is easy to understand that mistakes are made. In general, a business is assigned a governing classification that reflects the exposure of the overall operation. This is the classification that contains the most payroll and the first critical step is to be sure that it’s accurate.

It’s important to note that auditors cannot add a higher rated code at the time of the audit, unless there has been a change in business operations, misrepresentation or fraud. Agriculture, construction, and staffing are exceptions to this rule. If there had been a significant change in the business operations, it’s best to review the classifications with your advisor, prior to an audit.

Some workplace functions are common to all businesses; therefore, there are standard exclusions for clerical, drafting, clerical telecommuting, sales and driver classifications. Since this is usually the least expensive classification, employers should take steps to insure that all employees who qualify for this classification are properly identified. Adding job classifications and job titles can help reduce the possibility of error.

Understand separation of payroll opportunities and requirements

In some cases, rules allow an employee’s payroll to be divided over more than one class code. Some states only allow this in construction, agriculture and staffing, while other states have broader applications. If allowed, detailed records of the specific hours worked for each workers’ comp class code must be kept separately; percentages or estimates of this work are not allowed. Without adequate records, the entire payroll for the employee will be placed in the highest rated classification, increasing costs unnecessarily. Misclassification of workers’ compensation codes in the construction industry costs employers thousands of dollars each and every year.

Identify sole proprietors, partners, LLC members and executive officers

Sole proprietors, partners, LLC members and executive officers are treated differently than regular employees. In some states, sole proprietors and partners who choose to be subject to the workers’ compensation law and covered by the policy are generally assigned a payroll regardless of their actual gross income. This amount is adjusted annually to account for inflation and other cost of living factors. Each state allowing these individuals to “opt in” assigns its own payroll limit.

Unlike the payroll of sole proprietors and partners, executive officers’ payroll is generally limited by state specific minimums and maximums. It is important to make sure that executive officers payroll is accounted for correctly and that payroll is attributed to the correct class code.

Be sure certificates of insurance are in order

Certificates of insurance are a chronic problem and are often the source of unnecessary costs. Auditors will search the general ledger and match the certificates of insurance to the contract payments. If there is not a valid certificate of insurance, which is a written assurance that subcontractors, temporary agencies or employee-leasing companies are providing workers’ compensation for the entire policy period the contractor has worked for the employer, the auditor often uses the full contract price, thus inflating payroll. While the best solution is to obtain certificates of insurance, employers can minimize these charges by having a complete payroll record from each uninsured subcontractor so the charge will be based on the payroll, not the contract price.

The items listed above are a good beginning, but may only scratch the surface, depending on the complexity of the business. There may be issues of multiple state coverage, unusual exclusions, significant business changes, and so on. A year-end policy review is always prudent to ensure that you are paying the lowest possible cost.

Download FREE resources to help create your Error Free Audit at www.WorkCompAuditCheck.com

Contains Copyrighted Content from the Institute of WorkComp Professionals 2014