Worker’s Compensation can be a huge headache for HR representatives. There are so many different factors that go into the writing and pricing of Worker’s Compensation policies alone. A large majority of this headache comes from being unfamiliar with all the different parts and concepts revolving around Worker’s Compensation. A few items an HR professional should be familiar with are the classification of workers, experience mods, and the audit process. If you are new to the process or could use some guidance through the process, enlist your insurance broker or your payroll company for help.
Classification of Workers
All employees in your organization are assigned to a Workers Comp Class Code or SIC code. These codes classify the type of work an employee does to help determine the amount of risk that is involved with their actual day to day work. The classification of workers is put into place to group similar employers together and assign a rate based on the risks an employee is exposed to. For example, Suzy, Director of HR for a plumbing company has a different class code than Sam, who routinely goes out in the field on house calls. Simply put, Suzy has less risk of having an injury on the job than Sam. There is also a governing classification code that most accurately describes the operations of the business. Employees may be reclassified based on changing responsibilities or duties. Your insurance broker and payroll company can help you determine accurate class codes for your employees.
An experience mod, or experience modification factor, is a number that is assigned to your business based on how your loss history compares to other businesses in the same or similar industries to yours. It is calculated based on the frequency and severity of losses from three previous years, not including the most recent year. This rating is used in the overall calculation of your premium, if you are more of a risk than the average business, your rates will go up. If you are less of a risk, you will receive a credit and they will go down. Evaluating your experience modifier is an easy way to see what safety precautions need to be taken to help keep claim costs, and your experience mod, down. In many cases, keeping low frequency of claims is more impactful than having no claims of high severity. However, this is only true if you have a very low amount of high severity claims. It’s important to monitor both items. Fortunately for you, your insurance carrier or broker will have your experience mod score available.
Just the thought of an audit, makes most HR Directors want to turn the other direction. A premium audit, also known as a payroll audit, is performed every year to determine your actual payroll amount, which is the basis of your premium. Your worker’s compensation premium is based on your estimated premium for the year. The actual payroll amount is almost always different than the estimated payroll amount and your premium will be adjusted to reflect this difference. The audit process is a great place to review the classification of your employees and verify if you have any misclassified employees on your payroll An employee being classified at a higher or lower rate than their job duties call for may lead to a large change in premium. Premium audits are performed at the end of your worker’s compensation policy term, so it is important to know when your policy is up for renewal. Our advice is to spend the time on mastering the audit process by using resources available to you- as the audit will be similar from year to year. Brokers and carriers can often help gather materials for you and educate you on the rates and classifications within your industry and are a great resource for further education.
To learn more about the audit process, visit our blog here.
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