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Workers' Comp Misclassifications Cost Companies Millions
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 making business you realized that if you were
going to have employees, you were going to have to purchase 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?
Isn’t Misclassification Pretty Uncommon?
NO!
In fact there are companies out there that do nothing but audit
organizations’ workers comp premiums looking for mistakes.
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?
Let’s
assume that the rate for widget manufacturing is $8 for every $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.
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