Back to Basics: Workers Comp

Workers' compensation is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment.  Workers’ compensation insurance costs are based on a rate per $100 of payroll.  Although it is a fairly complex calculation involving a number of variables, the rate is determined primarily by your company’s type of business, the various types of job classifications present within the employee population and its experience with regard to medical expenses and replacement wages resulting from on the job injuries.  For example, in the State of Texas the rates range from a low of about $0.20 to a high of approximately $60.00 per $100 dollars of compensation that will then be adjusted for the experience modifier and other discounts or adjustments that might apply.  As you can see, the range is quite large and, depending on the company’s type of business, it can be a very expensive benefit. 

Remember that workers’ compensation is mandated by most states in the U.S.  The only effective way to manage this expense is to control the number and severity of on-the-job injuries.  Left unmanaged, this expense will drain very large amounts of cash from the operation through unnecessarily high payments for insurance premiums (penalties can be well in excess of 50% to 75% per year through the experience modifier).  To further complicate the situation, because the modifier is determined by the injury experience from a number of years, your ability to fully affect the cost is incremental over that same number of years (usually 3 to 4).  The difficulty will be in managing the timing of costs associated with changes in operating conditions (near-term) relative to the benefits derived from lower insurance premiums realized progressively over several years.  You should consult with a risk management professional to determine what can and should be done in your organization to control this exposure.  If the work environment and operational process are managed properly from the outset the risks can be mitigated, and therefore, the costs are contained.  However, if these issues are left unmanaged it will take years to recover and the relative cost to the company will be significant.