What is Pay-As-You-Go Worker’s Compensation Insurance?

There are two types of people in this world – monthly subscribers and annual subscribers. 

Annual subscriptions usually offer a discount for paying one lump sum for the entire year. You’re locked in to that service, but you can budget your subscription services (we all know that streaming services love to sneakily increase their prices).

Monthly services, however, help you avoid paying a hefty amount at one time and give you the option to cancel if you don’t use or enjoy the service. 

You can easily see that there are pros and cons to both. While worker’s compensation is way more important (and complicated) than a streaming service, you can think of your two options for worker’s comp in a similar way. 

At Whirks, we’re committed to helping business owners understand what they need in order to win as a business and become better leaders for their teams. Part of that means giving your employees financial and physical peace of mind while they’re at work. 

In this article, we’re going to take a deep dive into worker’s compensation, and if the Pay-As-You-Go option is possibly the best option for your business. 

Wondering what insurance policies are a must-have for all employers? Read about the 7 Insurance Policies Every Business Needs.

What is Worker’s Compensation?

The first worker’s compensation law was passed in 1911 and has continued to evolve over the years, state-by-state, claim-by-claim, and injury-by-injury. 

The Department of Labor Office of Worker’s Compensation compensates employees who are injured in a work-related accident. Whether your employee is injured on-site, has contracted a condition or illness due to the job’s environment, or has an accident running an errand, worker’s compensation covers you (the employer) and your employees – regardless of who is at fault.

What does Worker’s Compensation pay?

Worker’s compensation pays your employee the following: 

• Wage replacement (usually two-thirds of their salary, non-taxable)
• Medical bills for treatment 
• Rehabilitation for their injury 
• Investment in new skills 
• Benefits for families of a worker killed on the job 

Who Needs Worker’s Compensation?

Most employers must offer worker’s compensation, but the criteria vary from state to state. 

For example, Tennessee does not require worker’s compensation for businesses with less than five employees. It’s wise to purchase worker’s compensation insurance, however, to prevent your employee from seeking legal action if they are injured on the job.

It’s important to remember that if you are not required to purchase worker’s compensation insurance and you choose to forgo it, you will give up your rights as an employer to have safeguards against employee lawsuits for work-related injuries or illnesses. 

Only your W2 employees are covered under worker’s compensation, which excludes the following from being covered:

• Independent contractors (1099s)
• Business owners
• Volunteers
• Domestic workers (home health care aids)
• Federal employees (i.e., railroad workers)

Your employees cannot receive worker’s compensation if: 

• They purposefully harmed themselves to sue or collect compensation
• It is not a job-related injury or illness
• It is incurred while committing a crime or violating a company policy, such as being intoxicated on the job 

For example, if an employee breaks into your office and gets injured doing so, they will not be covered by worker’s compensation.

How is worker’s compensation calculated?

Traditionally, worker’s compensation is calculated by your annual gross payroll and your EMOD, or Experience Modification Rating. Your EMOD is set by the state (not by the insurance company) and is used to calculate your premium. 

The higher your EMOD, the more your worker’s compensation premium is going to cost. 

For example, if you own a construction business, you are probably going to have a higher EMOD since you have employees working in higher-risk positions. If you own a law firm, the rate is going to be much lower because your employees aren’t in dangerous situations, so your EMOD will be lower.  much lower. 

According to Forbes, the average cost for worker’s compensation insurance is $1.00 per $100 in employee wages.

If you choose traditional worker’s compensation, your insurance broker will ask for your estimated gross payroll for every $100 per employee, and you’ll pay a percentage based on your EMOD factor. You will pay for this policy upfront for the entire year. 

For example, let’s say you own a company in Tennessee and your rate per $100 of employee wages is $0.82 and you have ten workers who make a combined total of $400,000 a year. 

Estimated gross payroll ➗$100 x EMOD rate = annual price for worker’s compensation

$400,000 ➗ $100 = $4,000 x ($0.82) = $3,280 paid annually for worker’s comp

At the end of the year, you will be audited by your insurance company and you will owe additional money if: 

• You hired more workers and your annual gross payroll was higher than your estimate; 
• You had worker’s comp claims (aka, an employee was injured on the job) 

If you didn’t hire more people and didn’t have to pay worker’s compensation to any of your employees, it’s possible you’ll receive a refund if you overpaid your insurance bill for your worker’s compensation insurance. 

Traditional worker’s compensation is purchased through a business broker or an insurance agency. Remember that requirements vary by state; for example, Wyoming, Ohio, Washington, and North Dakota are required to purchase it through their state.  

What is Pay-As-You-Go Worker’s Compensation?

Pay-As-You-Go Worker’s Compensation allows you to pay premiums on every single payroll which is deducted by your payroll provider.

If we go back to our previous example, the premium of $3,280 will be paid per payroll period in increments – instead of one lump sum at the end of the year.

Your payroll provider works with your insurance carrier to find the right coverage for your business at the right price, as well as: 

• Pay your premiums every payroll cycle
• Handle the audit at year-end 

During the audit at the end of the year, you will not owe anything to the insurance company or likely have a refund, considering that you’ve been paying on your exact payroll and haven’t over or underpaid. Instead, you will just reassess your risks as a business. 

Your audit occurs once your policy expires (at year-end) and the insurance company is required by law to let you know the audit is happening 60 days before your policy ends. You can either opt to continue your policy or find a new one. 

How much does Pay-As-You-Go Worker’s Compensation cost?

Pay-As-You-Go Worker’s Compensation varies by policy and payroll provider. 

Because your policy is dependent on how much you pay in gross payroll per year, your EMOD factor, and past claims, it’s difficult to provide an upfront cost for worker’s comp insurance. 

At Whirks, we suggest reaching out to your insurance agent or your payroll partner to get a quote for both Pay-As-You-Go and traditional worker’s compensation insurance.

What are the downsides to Pay-As-You-Go Worker’s Compensation?

Not all insurance companies allow Pay-As-You-Go, and commonly, your worker’s comp policy is through your property and casualty insurance provider. Because of this, you can sometimes get a discounted rate for traditional worker’s compensation that is lower than the cost for Pay-As-You-Go. 

However, if your broker isn’t annually reviewing your policy for accuracy, the year-end discrepancies likely cost the same if not more than the discount you are receiving. Ultimately, it comes down to what you value – predictability & cash flow management vs. a cheaper upfront cost.

What are my next steps?

Whether you’re a new business owner looking into worker’s compensation for the first time, or you’re a seasoned owner looking for a different option, you need to figure out what is most cost-efficient for your business and best for you and your team. 

You can start by asking your payroll provider if they offer Pay-As-You-Go worker’s compensation insurance. Because they act as your insurance broker, you’ll save time by allowing them to find the best coverage for the best price. 

Interested in switching providers or learning more about Pay-As-You-Go? Book a quick 15-minute call with our sales team to see how we can help you and your business get one step better, every day.