New Wage and OT Laws May Increase WC Premiums
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.
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.
“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.
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.
“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.