Workers' Comp Premiums

New Wage and OT Laws May Increase WC Premiums

A higher payroll may mean an increase in premiums. Claims costs may increase as well.
By: | May 23, 2016 • 4 min read

The U.S. Labor Department’s new rule expected to make 4.2 million more workers eligible for overtime pay could increase the premiums some employers’ pay for workers’ compensation insurance.

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Many factors remain in play, however, including whether employers shift their hiring practices or adjust their pay structures and how underwriters react, making it difficult to say for now precisely how the rule finalized on May 18, 2016 will impact workers’ compensation premiums.

But there is a potential for some premium increases, especially for small employers, due to the rule’s impact on payroll amounts policyholders typically report to their workers’ comp insurers, brokers said.

Meanwhile, state and federal efforts to increase the minimum wage would have a more certain effect, increasing employer insurance expense, and self-insured company costs.

That would occur as minimum wage hikes directly increase the risk exposure. The greater exposure would follow from claims payers having to provide more indemnity benefits to match workers’ new earning capacity.

“It’s a genuine change in exposure because the injured worker now will have a higher benefit threshold in many cases when they are injured,” said Pamela F. Ferrandino, EVP and senior principal national casualty at Willis Towers Watson.

Sharon Brainard, executive managing director and national casualty practice leader leader at brokerage Beecher Carlson agreed.

Sharon Brainard, executive managing director and national casualty practice leader leader, Beecher Carlson

Sharon Brainard, executive managing director and national casualty practice leader leader, Beecher Carlson

“That obviously is going to have a direct impact,” Brainard said “It is going to increase the premiums and ultimate claims costs.”

Increases in overtime pay and minimum wages would both cause an employer’s gross payroll to expand. Underwriters typically calculate workers’ comp premium amounts applying a formula that includes an insured’s business type or employee classification, an experience modification, and the employer’s gross payroll.

The greater the payroll, the greater the premium paid. In most states, though, any overtime related premium increase is calculated by including only the regular hourly wage paid for overtime hours worked, not the additional amount a worker earns for each hour of labor conducted during overtime hours.

For example, for a worker regularly earning $10 per hour and time and a half, or $15 for overtime hours, underwriters apply only the $10 per hour, even for overtime hours worked, when factoring employer payroll impact on premiums charged.

The Labor Department’s new rule takes effect December 1, 2016. It increases the threshold at which employees are exempt from overtime pay from $23,660 to $47,470. Qualifying employees will be eligible for time-and-a-half pay for each hour worked beyond 40 hours per week.

While the amount of payroll employers report to their workers’ comp underwriters may increase due to more overtime pay, the actual risk exposure is not really growing if employees were already working overtime hours beyond 40 a week before the new rule goes into effect, but they were receiving a salary and not compensated for the  overtime.

How insurers will react to that remains to be seen, especially regarding larger employers that maintain large deductibles and enjoy negotiating clout when purchasing insurance, sources said.

Pamela F. Ferrandino, EVP and senior principal national casualty, Willis Towers Watson

Pamela F. Ferrandino, EVP and senior principal national casualty, Willis Towers Watson

Brokers will want to help clients capture payroll information to gauge whether their payroll expands due to more overtime pay, but the exposure does not correspondingly grow because employees are really working no more hours than they did before the rule takes effect, Ferrandino said.

“That is the thing as brokers that we are focusing on,” Ferrandino said. “Identifying the impact for the organization and communicating that to the carriers so there is not an inflated premium resulting from no change in exposure.”

In contrast, smaller employers purchasing first-dollar coverage because they need greater expense predictability or have less negotiating clout are more likely to feel the impact, said Mark Noonan, managing principal at Integro.

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“Where there is first dollar coverage in a guaranteed cost program every change in payroll impacts the ultimate cost,” Noonan said. It could be very impactful to a small employer who then suddenly finds out that there are going to be payroll changes and their fixed costs are going up by a percentage they were not contemplating.”

Depending on when employers renew their coverage, any premium increase could come during end-of-policy period audits. But employers may also react to the new rule by increasing employee wages so they do not qualify for the new overtime threshold. Or, they may mandate that employees not work overtime, or they could hire additional workers rather than pay overtime.

The new rule is intended to stimulate such actions, which would also impact an employer’s premium calculations.

Roberto Ceniceros is senior editor at Risk & Insurance® and chair of the National Workers' Compensation and Disability Conference® & Expo. He can be reached at [email protected] Read more of his columns and features.

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]