Why Most Businesses Overpay for Workers’ Compensation – and How to Stop It

Workers’ compensation insurance is a critical expense for businesses, mandated in most U.S. states to cover workplace injuries and illnesses. However, many companies overpay due to common oversights and mismanagement. This article outlines the primary reasons for overpayment and actionable strategies to reduce costs, drawing on industry insights and expert recommendations.

Why Businesses Overpay for Workers’ Compensation

1. Misclassification of Employees
   Incorrectly classifying employees’ job roles can inflate premiums. Each role is assigned a classification code based on risk, with higher-risk jobs (e.g., construction) carrying higher rates than lower-risk ones (e.g., clerical). Misclassifying a low-risk employee as high-risk or failing to update classifications during audits can lead to overpayment. For example, a painting business might overpay if clerical staff are mistakenly classified under the high-risk painting code (5474) instead of the clerical code (8810).
2. Inaccurate Payroll Reporting
   Workers’ compensation premiums are calculated based on payroll, typically per $100 of payroll. Errors in reporting payroll, such as including overtime or subcontractor payments that should be excluded, can inflate costs. In Massachusetts, for instance, understanding what counts as “remuneration” (e.g., excluding certain bonuses) is key to avoiding overpayment.
3. Mismanaged Experience Modification Ratings (EMR)
   The EMR adjusts premiums based on a company’s claims history compared to industry norms. A high EMR (above 1.0) increases premiums, while a low EMR (below 1.0) reduces them. Many businesses overpay due to mismanaged EMRs, often from unreviewed claims reserves set too high by insurers. For example, a $25,000 reserve for a chiropractic claim was reduced to $5,000 after review, saving a business over $30,000 in premiums over three years.
4. Failure to Recover Premiums
   Retrospective audits can reveal overpayments due to errors like miscalculated experience ratings or unrecovered premiums from prior years. Businesses often miss these opportunities because they lack the expertise to challenge insurer calculations. One expert noted evidence of mismanaged ratings leading to significant overpayments, which audits can correct.
5. Lack of Safety Programs
   Companies without robust safety programs face more claims, driving up EMRs and premiums. The Bureau of Labor Statistics reported 2.7 million nonfatal workplace injuries in 2020, many preventable with proper training and risk management. Higher claim frequency and severity directly increase costs.
6. Inefficient Claims Management
   Lengthy claims increase costs by keeping EMRs high. Delays in returning injured employees to work or failing to close claims promptly can lead to higher reserves and premiums. For example, a claim left open due to excessive reserves can cost thousands in additional premiums over time.

How to Stop Overpaying for Workers’ Compensation

1. Verify Employee Classifications
   Regularly review employee job duties and ensure accurate classification codes. Work with a commercial insurance agent to confirm codes align with roles. Before audits, double-check subcontractor Certificates of Insurance (COIs) to avoid paying premiums for uninsured subcontractors. This can save thousands, as misclassification errors are common.
2. Conduct Regular Payroll Audits
   Ensure payroll reports exclude non-applicable payments like overtime or certain bonuses, as these can inflate premiums. Partner with a workers’ compensation specialist to prepare for annual audits and catch errors early. A specialized partner can ensure you “pay only what you owe.”
3. Monitor and Manage EMR
   Implement real-time monitoring of experience ratings to catch inflated reserves or errors. Work with an agency that automates this process to prevent overpayments years later. For instance, proactive management can reduce reserves, lowering EMR and premiums.
4. Implement a Robust Safety Program
   Develop a comprehensive safety plan, including risk identification, employee training, and a safety committee. OSHA’s On-site Consultation Program offers free advice to small businesses, helping reduce injuries and claims. A strong safety culture can lower EMR and premiums while improving employee morale.
5. Establish a Return-to-Work Program
   Create a program with light-duty or modified roles to bring injured employees back sooner. This reduces claim duration and wage-loss payments. For example, employers can list transitional jobs fitting medical restrictions, cutting costs significantly. Studies show early return-to-work programs also boost employee morale.
6. Explore Alternative Insurance Programs
   For businesses with strong safety records, consider loss-sensitive programs like captives, retros, or large deductibles. These bypass traditional experience ratings, potentially lowering costs. Consult a broker to evaluate eligibility based on claims history and industry risk.
7. Work with a Specialized Broker
   A knowledgeable broker can identify overcharges, navigate state-specific rules (e.g., NCCI or state rating bureaus), and negotiate competitive rates. They can also assist with audits and ensure compliance with local laws, such as California’s strict penalties for uninsured employers.
8. Leverage Technology and Expertise
   Use tools like incident management software to track safety and claims data. Partner with agencies offering automated EMR monitoring or claims analysis to catch overpayments early. Experts like Mike Lane emphasize that workers’ comp is “controllable” with the right processes.

Conclusion

Businesses overpay for workers’ compensation due to misclassifications, payroll errors, mismanaged EMRs, and inadequate safety or claims processes. By verifying classifications, auditing payroll, monitoring EMR, prioritizing safety, and implementing return-to-work programs, companies can significantly reduce costs. Partnering with a specialized broker and leveraging technology further ensures accuracy and savings. Taking these steps not only lowers premiums but also fosters a safer, more productive workplace.

For more details on state-specific regulations or to get a quote, visit your state’s workers’ compensation board or consult a licensed insurance broker.