How is the cost of Workers’ Comp insurance calculated?
Insurance companies calculate your workers’ compensation premium by considering several risk factors, including:
1. Your type of business or industry
Insurance companies determine workers compensation insurance costs by assessing the specific risks of your trade. Higher-risk industries like construction will usually see higher rates than office-based professions due to the increased frequency and severity of claims.
Each job title in an industry is assigned a workers’ compensation classification code by insurance companies. These codes help insurance companies decide on the risk level for each role.
That means your workers’ comp premium can depend on the type of work each person at your business does. For instance, an administrative assistant at your plumbing company will likely have a different workers’ comp cost from a staff plumber.
2. Your number of employees
If you have five full-time employees, your workers’ comp insurance policy cost will likely be higher than if you’re a sole proprietor who works alone.
While state requirements vary, eligibility for coverage usually begins the moment you hire your first employee — whether they’re full-time, independent contractors, part-time workers or seasonal help. This ensures that any work-related injury is covered.
3. Your business location
If you own a bakery in California you’re probably going to pay more for workers’ comp coverage than if you sell bread and cupcakes in a small town in North Dakota.
Each state has its own workers’ compensation laws that dictate how much coverage a business must carry. Some states are monopolistic states, meaning they require business owners to buy coverage through a state fund. However, most states allow businesses to compare the cost of workers’ compensation with private insurance options.
4. Your experience in the industry
The number of years you’ve operated a business in your industry can impact your workers’ compensation coverage cost.
For example, if you’ve been a caterer for 12 years without filing a claim, you may pay less than a caterer who’s been in business for six months. Insurance companies often reward business owners with a proven history of workplace safety and success in your field.
5. Your claims history
Your record of safety, losses and claims can also have an impact on your workers’ compensation insurance cost.
For example, if your painter suffers an injury that requires a workers’ comp claim for medical costs and/or legal fees, you may see an increase in your insurance rate when it’s time for renewal.
6. How you set your insurance coverage limits
You can elect to have higher insurance coverage limits on your policy to give you more protection over more covered incidents. While more coverage can be a good thing, higher coverage limits can increase the cost of your policy.
Note: These are only a few common factors that affect your workers’ comp costs. Insurance companies take many other external factors into account such as economic conditions and market trends.
3 tips that could help reduce Workers’ Compensation costs
You can take control of several actions to help lower the cost of workers’ compensation insurance, including:
1. Use pay-as-you-go billing to manage cash flow
One of the most effective ways to handle your workers compensation insurance cost is by choosing a pay-as-you-go payment structure. Unlike traditional policies that require a large upfront deposit based on estimated payroll, this option lets business owners pay their premium in real time as they run payroll.
This ensures your workers compensation insurance rates stay aligned with your actual headcount, helping you avoid large, unexpected balance payments during your annual workers’ compensation audit.
TIP: If you’re a business owner, sign up for workers’ comp through an ERGO NEXT Connect partner payroll services provider. ERGO NEXT offers pay-as-you-go workers’ comp through over 100 partners, including Gusto, Toast, OnPay, Homebase and more.
2. Reduce your business risks
A safe and secure workplace environment can help limit the likelihood of accidents, workplace injuries and filing an insurance claim. And if you take action to reduce harm you’re more likely to keep your premium low.
Consider enhanced safety programs and practices in the workplace and on a job site, such as:
- Installing a fire-retardant sprinkler system.
- Installing more fire extinguishers and smoke detectors.
- Upgrading your security system.
- Minimizing tripping and falling hazards wherever you work.
- Conducting regular safety checks and employee training sessions to keep your employees safe.
3. Learn from previously filed claims
Analyze your previous business insurance claims and figure out what you could have done to avoid those events.
For example, if you filed a workers’ compensation claim because of employees who suffered a repetitive stress injury on the job, you could train employees to recognize early signs of repetitive fatigue, encourage exercise or physical training to help combat muscular strain or rotate employee tasks to prevent potential pain and injury.
