The Million Dollar Question

How do you know if your business or organization is being charged the correct amount for workers compensation insurance? I'm not talking about whether or not you think your premium is too high. I'm asking what procedure do you have in place to confirm that what your business actually does is properly reflected in your rate classification? I'm waiting...OK that's what I thought.

Does This Describe Your Company?

When you first went into the widget manufacturing business you understood that if you were going to have employees, you were going to have to buy workers compensation insurance. (If you didn't realize it now would be a good time to read my previous article). So you called your insurance agent and said you were about to hire your first employee. Your agent had always done a great job on your car insurance so you figured she's probably an expert at workers comp insurance as well. The agent came out and looked around your new business. She then consulted her trusty workers comp rating manual from XYZ insurance company and picked one of the available 330 classifications approved by the Pennsylvania Compensation Rating Bureau (PCRB) and assigned it to your business. The insurance company then charged you a premium based on your classification and your payroll. End of story right?

Now It's 10 Years Later

Congratulations! Not only have you remained in business for 10 years you've really prospered. Now instead of just one employee, you have 50. And boy has your business changed. No longer do you just make widgets, you distribute, install, and service them. In fact, you don't really manufacture them at all. Five years ago you decided it was cheaper to outsource the manufacturing part of the business. Throughout this time your agent checked in with you and steadily increased your payroll as your number of employees increased. But she hasn't walked through your facility in 10 years and doesn't understand that your business has fundamentally changed. Therefore, you're still paying your workers comp premiums based on a manufacturing rate. Think a manufacturing rate might be higher than a service rate?

Is Misclassification Pretty Rare?

NO! Multiply that by the number of years you've been misclassified and you may begin crying like a baby. The industry consensus is that anywhere from 60%-75% of all companies have some sort of miscalculation figured into their premium.

What Could that Mean to My Organization?

Assume that the rate for widget manufacturing is $8 for each $100 of payroll. We'll further assume that 40 of your 50 employees are currently classified as such and as a group represent $1,200,000 of payroll. Your unadjusted workers comp premium for this group would be $96,000 per year. But what if your employees were properly classified at the lesser widget service rate? For this example we'll assume the rate to service widgets is $5 for every $100 of payroll. Well, you just saved yourself $36,000 a year. Multiply that by the number of years you've been misclassified and you may break down in tears!

How Can I Prevent This From Happening?

The answer here is twofold: (1) Partner with an insurance provider who doesn't forget about you as soon as they write your insurance policies. (2) Make sure that your provider understands the nuances of workers compensation insurance and is proactive in monitoring your account. In our example above, the agent did check-in periodically to update your company's payroll. But she didn't realize that the business had changed and that a re-classification was in order. A costly and unnecessary mistake!

So What Can You Do Now?

Next week I will be publishing a follow up article showing how you can find out if this has happened to your company and also how you can recoup some of your money. Until then, feel free to contact me using the information below.