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Workers’ compensation insurance is mandatory for most employers in most states, but that doesn’t mean it’s impossible to reduce your compensation premium costs.

In this guide, we start by explaining why workers’ compensation insurance matters and how it’s calculated. Then we dive into the seven main ways you can reduce workers’ compensation insurance premiums while still protecting your company from liability and giving your workers the coverage they need.

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Importance of workers’ compensation insurance

Workers’ compensation insurance isn’t just mandatory in most states; it protects your company from liability as well. Specifically, most workers’ comp plans protect your company from being sued by employees who are injured on the job.

It also provides protection and care for employees who are injured on the job and replaces lost wages. Having good workers’ comp insurance gives both employers and employees peace of mind. To learn more, check out our guide that explains how workers’ compensation insurance works.

How workers’ compensation premiums are calculated

The cost of workers’ compensation premiums are based on the risk of injury in the company’s industry. The higher the risk of injury, the higher the worker’s compensation premium will be.

While most employees are assigned the same classification code, there are some exceptions for this. For instance, an office worker at a construction company who only handles administrative work may be assigned a different code than the construction company at large. If independent contractors aren’t self-insured, they will also need to be classified accurately.

Under a traditional workers’ comp plan, lump sum estimated payments are made at the beginning of each year. To calculate these premiums, total payroll estimates are made for each classification of workers. Then the rate for each classification is multiplied by the estimated payroll total, then multiplied by 100 to get the final figure. The calculation is as follows: Carrier rate x Payroll (Per $100) = Premium.

Certain factors may increase or decrease this final premium number. For instance, some workers’ compensation plans offer adjustments, such as credits (premium reductions) for work safety plans. In contrast, companies with a history of many accidents and workers’ comp claims can expect to pay a higher premium.

Since estimating payroll accurately for the entire year upfront is difficult, states and insurance carriers require audits after the policy expires (typically at the end of the calendar year). If they overpaid, companies will be refunded the excess money. If they underpaid, companies are required to pay the difference.

7 effective strategies for reducing compensation premium costs

1. Review payroll and worker classifications

Incorrectly classifying workers doesn’t just increase your company’s liability; it can also increase your workers’ comp premiums as well. Take our earlier example: If the administrative worker is incorrectly classified as a construction worker, their insurance premium will be higher than it needs to be. Before renewing any workers’ comp policy, double-check all the payroll and worker classifications to ensure that they are as up to date as possible.

2. Switch to a pay-as-you-go system

Unless your business is located in Washington, Wyoming, North Dakota or Ohio, you have the option to switch to pay-as-you-go workers’ comp. Instead of paying one lump sum upfront and then retroactively adjusting the amount if necessary, pay-as-you-go systems allow your company to make a smaller workers’ comp payment every time you run payroll.

Choosing software that implements workers’ comp and payroll makes it easy to base the calculations on real-time headcount, spread the payments out over time and prevent overpayment. For more information, see our article that explains how to integrate your workers’ compensation insurance with your payroll program.

3. Implement a workplace safety program

Workplace safety programs reduce your workers’ comp premiums by decreasing workplace accidents and related medical and insurance costs. Some insurance companies even give credits or premium reductions in exchange for having workplace safety programs that meet or exceed certain standards. If you haven’t already, definitely inquire with your insurance company about the premium credits.

4. Double-check subcontractor insurance

One thing that will inflate your premiums is paying for workers’ comp insurance for subcontractors that already have their own policies in place. Every time you onboard a new subcontractor, confirm the status of their workers’ comp policy. You should also periodically check in with existing subcontractors to see if the status of their workers’ comp policy has changed.

5. Conduct a self audit before the insurance company

Within 30 to 60 days of the workers’ comp policy ending, the insurance company will conduct an audit of your insurance and payroll documents to verify that your classifications and payments were accurate. However, we recommend conducting your own self-audits throughout the life of the policy to look for incorrect updates to payroll, unexplained increases in premium bills and other mistakes that can raise your premiums. That way, you can proactively address them instead of waiting to settle everything retroactively after the policy expires.

6. Consider hiring a workers’ comp expert

Workers’ compensation insurance can be a complex topic to manage, and not every HR department has the in-house expertise to do it. Hiring a workers’ comp consultant or a PEO service such as Rippling can help your company conduct an audit, implement a safety program and lower your premiums. While these consultants and PEO services might cost more upfront, they will often save your company money in the long run by lowering your insurance premiums.

Need help managing workers’ comp?

Rippling’s PEO services can ensure your workers’ compensation is set up and optimized for your business. You can also get pay-as-you-go options if your state allows it, making it easier to spread out your payments and stay on top of your monthly finances.

7. Shop for a new policy

If you’ve made all the changes listed above and are still struggling with high workers’ comp premiums, it might be time to shop for a new policy. We suggest beginning this process at least several months in advance of your current policy expiring to give you plenty of time to compare prices. You might find that a different insurance company is able to offer you a better rate for the same coverage.


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