How to Reduce Your Workers Comp Mod – Part 3, Payroll as a function of the mod calculation
So we’ve discussed in the past couple of posts how to reduce your workers comp mod that the only two variables in your mod are payroll and claims. We’ve discussed claims and in another post, we’ll talk about safety, safety culture, and best practices, so in this post, we’re going to talk about payroll.
Now payroll figures may seem like a pretty simple thing – – – how can payroll get fouled up you might be asking?
It’s pretty simple – right?
The payroll that makes it into your mod is based on your annual workers’ comp payroll audit, and in my experience, there are several ways that can go sideways and often do. Here are a few of the most common ones:
First, are the class codes. On occasion an auditor may add a class code which is not really correct for your operation, but more often it’s the fact that the auditor allocated payroll to incorrect class codes. Something as simple as taking a portion of clerical payroll and allocating it to outside sales. Both codes have fairly low rates, but outside sales in NY is 2.5 times the rate of clerical. In other instances, I’ve seen the difference between where the payroll went into the wrong code and it was 20 times the rate. This not only can cost you unnecessarily more in audit premium but also in your mod. And remember errors in the mod can stick with you for four years!
Second, along the same lines of using the wrong class codes at an audit, we’ve seen in some prospect’s policies the wrong codes being deployed in the actual policy. This is due to an agent setting up an account when the insured is a startup and getting the code wrong, or the insured’s operations changed over time and never were adjusted properly. Again, the wrong codes can be a costly error in your policy and your modifier.
Third – Sub-contractors. At the time of the audit, if you do not have certificates of insurance for all your subcontractors available and they include workers comp insurance, you’ll get charged for the total cost of the sub-contract work as payroll. That means the sub’s payroll, materials, overhead and profit are all includable as payroll in your audit and you’ll be paying through the nose for this error. You fix that by making sure you have all certs for the right time frame in hand for all subs, prior to the audit taking place.
Fourth – Technical errors like not capping some payrolls as allowed by the comp board rules, and including some remuneration like tips or perks like a company car which are includable for tax purposes but not workers comp purposes. Also, overtime comes into play here where only the straight time is includable and not the overtime component. If each of these areas is not clearly illustrated in your books and records, the auditor is typically not going to take the time to figure it all out and charge you more than you should be.
As you can see, there are numerous ways an audit or a policy can be incorrectly structured which will lead to overcharges. Often these overcharges appear not only in the policy but also show up as anomalies in your modifier which can only multiple the problem in overcharges.
It’s really about preparation, and we have a simple 10 point checklist that helps you properly prepare for audits. If you’d like a copy, drop me a quick email which you can find in the comments below and I’d be happy to send it to you.
Two final points
- Always get the auditor’s worksheets and permit the auditor to share these worksheets with your agent or broker. These are necessary to make sure all the audit rules are followed properly.
- One of the most frequent reasons why experience mods are wrong is because audit information is not communicated from your insurer to the rating board. How do I know that? Because when we pull the mod worksheets, we’ll see zeros for payroll in certain years. This has a tremendous impact on your mod and can blow it up way out of proportion.
Here’s the bottom line.
Workers comp and the experience rating mod are complex. It’s not as simple as rate times payroll equals premium – that’s why you need an expert skilled and schooled in this area to get you the lowest cost and maintain the lowest costs possible.
I am an expert in this field and have studied and applied my knowledge in workers comp, safety, the experience mod process, and more with clients for the past 30 plus years. If you’re frustrated by your workers’ compensation program, claims, complacency with your broker, or inaction by your broker to fix what you suspect is wrong, give me a call. I’d love to chat and see if we’re a good fit for you and your firm. I promise no high-pressure sales nonsense, just some conversation, and troubleshooting.