Every small business is looking for ways to reduce expenses and increase cash flow. Switching to a pay as you go workers compensation insurance policy can keep expenses down and increase your available cash flow.
Intro
If you have a small business with more than one or two employees, you will need to provide them with workers’ compensation insurance. While some states exempt businesses with five or fewer employees from workers’ comp requirements, in other states one person on the payroll will trigger the need to provide such insurance. However, in some states, even small businesses that would normally prove exempt from workers’ comp may have to provide it if they are engaged in construction work, a job category with a high rate of worker injury.
In many states, farm workers, seasonal workers and domestic workers are exempt from workers’ comp insurance laws, but these are among the few exceptions. In other words, if you have employees, you’ll almost certainly need workers’ comp insurance. Independent contractors, however, do not fall under workers’ comp rules, but there are strict standards in place in determining who is and who is not an independent contractor for such purposes.
If your business is very small, check with your state to see if it falls under the mandatory workers’ comp requirements. In some states, if your employees consist only of immediate family members, you may not have to provide workers’ comp insurance. If you fail to carry workers’ comp and are required to do so, your business may face substantial fines. In some states, you may even face criminal penalties for failing to provide workers’ comp insurance. As a small business, you want to find the best options for paying for workers’ comp insurance, and pay as you go workers’ comp insurance offer various advantages over standard workers’ comp policies.
What is Workers’ Comp Insurance?
Workers’ compensation helps replace the lost wages and pays the medical bills of people injured in job-related accidents, as well as disability benefits if they are unable to return to work. Occupational diseases are also covered. The coverage includes services that can help injured employees return to work, such as educational opportunities and job training. It is actually a great benefit to employers, as under the rules of workers’ comp an employee cannot sue the employer for on the job injuries unless they result from the employer’s gross negligence. Without workers’ comp, the damages from a successful lawsuit by a worker injured on the job could bankrupt a small business, and even if the lawsuit were not successful, the legal fees involved may have the same effect. Workers’ comp covers almost all job-related injuries, with the exception of injuries caused because the worker was drunk or under the influence of illegal drugs, injuries that were self-inflicted or sustained during the commission of a crime. Injuries that occur because the worker was violating company policy are also not covered under workers’ comp. Even in a worst-case scenario, as when a worker is killed on the job or eventually dies of the injuries, workers’ comp provides income to the worker’s dependents.
The exact requirements for workers’ compensation coverage varies by state law, and each state has its own worker’s compensation office and website where you can get information on the particulars in your state. Workers’ comp insurance rates also vary by state, your payroll, the nature of your business and its claims history.
Generally, workers must visit a doctor chosen by the employer for treatment of workers’ comp injuries rather than their own physician. Workers’ comp does not cover pain and suffering experienced by injured workers. For that reason, some workers may decide to forego workers’ comp insurance and sue the employer instead, if the injury resulted from the recklessness or negligence of the employer.
What is Pay as You Go?
Pay as you go workers’ comp insurance is not a new concept, but it has increased greatly in popularity for small businesses as workers’ comp premiums rise. With standard workers’ comp insurance, a business pays a premium based on their anticipated payroll for the following policy year. When the year is over, the insurance company compares the business’ actual payroll to the anticipated amount, and calculates the premium difference. Either the insurance company sends your business a check or credits your excess to your account, or sends you an invoice for the money owed. Think about your personal income taxes and you’ll see the similarity. You paid them based on your earnings, and you might receive a refund or owe the government money, perhaps a substantial amount. If you receive a refund, it’s really just your money returned to you, whether an insurance company or the government does it. Pay as you go gets rid of the uncertainty, allowing you to pay the insurer what you actually owe, not more and not less.
What are the Advantages and Disadvantages of Pay as You Go?
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Advantages of pay-as-you-go
When using pay as you go workers’ comp, your business pays less upfront. There is no large initial premium, although there is a small one, and payments are broken down into smaller chunks payable monthly. Compare that to standard workers’ comp insurance, which requires a 25 percent down payment based on your payroll estimates, with the rest of the payments made over several months. Using pay as you go frees up more of your operating capital than purchasing conventional workers’ comp insurance. You pay premiums to your insurance company based on your actual payroll data, not estimates, so you pay what you owe when you owe it – otherwise known as pay as you go. It’s a much more efficient way to pay your workers’ comp insurance premiums. When you use pay as you go, you no longer have to worry about audits at tax time or end of the year reconciliation. Since you know the numbers on a monthly basis, you can properly budget for pay as you go insurance payments rather than get hit with that large lump sum payment.
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Disadvantages of pay-as-you-go
If there are any disadvantages to pay as you go, it’s that if you use a payroll service, they will take care of the payments automatically. The plus side is that your business doesn’t have to write and mail the checks, but you might not keep on top of the changes in your premiums as workers are hired or leave as you might have previously. Pay as you go is really a system with far more pluses than minuses for the small business owner.
Companies That Offer Pay as You Go
The Hartford Insurance Company is a leader in providing pay as you go insurance to small businesses. Other well-known insurance companies offering pay as you go policies include Travelers, with its TravPay service; AmTrust Financial, with its PAYO program, and Berkshire Hathaway’s Guard Insurance. Many of these companies offer other sorts of pay as you go policies, including general liability, directors’ and officers’ liability, commercial auto insurance and more. Bundling such policies may save your company money. As when purchasing any type of insurance, make sure you buy your workers’ comp policy from a quality provider specializing in workers’ comp insurance. These companies will know the specific type of coverage necessary for your small business, and they are experienced in claims handling. If you are a member of your local Chamber of Commerce, Rotary Club or similar small business organizations, ask other members about their experience with pay as you go insurance and for insurance company recommendations.
Most payroll processing services also offer pay as you go once you have chosen your insurance provider. The payroll services integrate with the insurance brokers and send payroll information automatically.
How to Get Pay as You Go Workers’ Comp Insurance
While not every insurer offers a pay as you go option for workers’ comp, it’s always worthwhile to contact your current insurance company and see if they have pay as you go and if you can switch to that type of billing. More businesses are demanding pay as you go workers’ comp insurance, and insurance companies are responding. Insurance companies want to keep the business of a good customer, but if your insurance company doesn’t offer pay as you go workers’ comp, you have options on obtaining it. A commercial insurance agent can help you find the best pay as you go workers’ comp policy for your needs, or you can contact a company offering such policies directly.
If your business is located in Ohio, North Dakota, Washington state or Wyoming, you cannot purchase workers’ comp insurance through a private insurer. In those states, all workers’ comp policies go through state agencies. While these states do not offer pay as you go policies per se, they may offer extended payment plans that are very similar. Many states allow businesses to self-insure for workers’ compensation, and that often allows businesses to pay for such insurance in a way similar to pay as you go.
Sources:
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https://www.thehartford.com/business-playbook/in-depth/workers-comp-insurance-automatic-premium-payments
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https://www.nolo.com/legal-encyclopedia/workers-compensation-benefits-faq.html
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https://www.travelers.com/iw-documents/business-insurance/travpay-overview-cp-8183.pdf