General Business News for April 2005
Workers' Compensation - More Than Just a Paycheck
Use the term "workers' compensation" around a new entrant to the workforce and they might just define it as what you pay them to work. Use the same term around an employer with a substantial workforce and you may just see them cry or, at the very least, cringe. Regardless of the category into which you fall, workers' compensation insurance should be one of your main concerns. You see, new workers might not even have jobs available if workers' compensation insurance premiums in their chosen field are so high that prospective employers reduce hiring, and employers could see their profits dwindle and dry up if workers' compensation premiums climb too high. Even worse, what happens to the employee who has a legitimate claim, but the cost of insurance kept his or her employer from buying the coverage in the first place? (Don't get excited. Most, if not all, states require the employer to carry workers' compensation insurance.)
So what is workers' compensation insurance and is it really that big of a problem? In answer to the second part of the question, the rising cost of workers' compensation insurance is one of the small businessperson's big worries, if he or she has employees. There are numerous examples of one or two significant claims eventually destroying a business.
As for the nature of the term workers' compensation, at its most basic level workers' compensation is a compromise between labor and management where management agrees to cover the cost of injuries on the job (regardless of blame) and the worker agrees to not sue for anything more than the expenses and lost wages associated with an injury. Although in most cases, this definition is sufficient, it is not nearly strong enough to describe the magnitude of potential claims and that cost is what has insurers struggling to pay claims and employers struggling to pay the premiums.
Depending on who you talk with, the spiraling cost of claims is either the result of fraud, abuse and workers' collective disregard for proper safety precautions, or it is the result of corporate greed that leads employers to cut safety corners while the insurers are raking in obscene profits. The truth, however, is that there is fraud. Healthcare costs are skyrocketing - they have already exited the Earth's atmosphere and were last seen around Jupiter - many employers do not concentrate on their side of the safety equation and the same goes for employees. Except in isolated instances, the American employer and the American labor force are fairly conscientious within the limitations of their knowledge. The trick, then, is to increase that knowledge and that's what this month's discussion is all about.
It's said that you can't fix a problem unless you know there is one. Since most employers already know there is a problem, let's see about minimizing your costs. There are a number of practical steps you can take and they begin with a safety program. Ultimately, a major factor in your premium will be how well you manage your own risks.
First and foremost, you have to identify the risks in your operation that could lead to workplace injury and workers' comp claims. We suggest you don't take on this task alone. Involve your insurer and, more importantly, the workers you are trying to protect. For instance, you may run an independent grocery store. Most of the time, you will have cashiers, stockers, and a host of other people to keep the place clean and provide the customers with the service and the products they deserve. Do you ever have cashiers that help unload the weekly merchandise truck? Do you ever have the kid who is supposed to be stocking helping out in the meat department also - around the meat cutter? The list could go on, but you get the idea. Involve everyone in the risk management process from the very start.
Once you have a good list of the hazards, come up with a game plan to keep safety at the top of the employee's consciousness. Bring in safety experts, insurance investigators...in short, anyone who can get and keep the troops' attention. Communicate the seriousness of safety to current and new employees. Some managers have been known to tell new employees that they need to report injuries as minor as paper cuts. While these won't normally cause a loss of time on the job, something that minor tells the employee that you are serious about their safety. Develop a bonus system based on safety incidents. Establish clear goals and communicate them often. At the end of the month or quarter, award cash bonuses for meeting the appropriate goals. Perhaps you will spend more on payroll, but that small amount of added payroll will reap huge long-term dividends.
It's 4 AM on Sunday morning and you get a call from the plant. Jerry, the crane operator, has just dropped a portable generator on Sally. She has three broken ribs and two minor cuts. Aside from the obvious, what are you going to do to mitigate the cost of the incident?
If you or your insurer have already entered into contracts with certain preferred providers (a/k/a the folks who give you a break on the rates) you tell the supervisor to send Sally to those providers. Second, you call your insurer. Then, you get to work on the process of getting Sally back to work. Anything you can do to limit the days off is good for you and for Sally. The insurer really likes it. Studies have shown that short-term absences that cost on average $1,000 per claim get really expensive when they turn into 30 days and more (try $50,000 plus). Work with Sally, the medical care providers and your insurer to get Sally back on light duty as soon as possible with the goal of getting her back to full capacity when her health justifies it.
The whole trick in reducing workers' comp insurance cost is to reduce the claims that the insurer pays out (your experience rating). The lower your cost to the insurer, the lower your premiums will stay. While we are on the subject, make sure that the claims the insurer uses in your experience rating are no older than three years. They should drop off after that.
One final note about this insurance stuff. Workers' compensation costs per $100 of payroll are based on the workers' job classification. It will cost more to insure a coal miner than it will cost to insure the guy who delivers the interoffice mail. The more dangerous the job, the higher the cost. Many times, employees will be grouped into one or two categories. If the lower risk employees are lumped in with the higher risk employees, your rates will shoot up. Get the latest listing of worker classifications for your state and compare your understanding of your employees' duties with that of your insurer. It can mean a tremendous cost savings.
Well, here ends a very brief look at ways to save on workers' comp costs. As in every part of life, you are ultimately responsible for much of your fate. Take a moment to consider some of the possibilities in this article. If you feel you need additional help, give us a call. We're here to serve you and make sure you operate as efficiently as possible.
Have a great April!
These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.