Workers Compensation Insurance
What Is Workers Compensation Insurance?
Employers are legally obligated to take reasonable care to assure that their workplaces are safe. Nevertheless, accidents happen. When they do, workers compensation insurance provides coverage.
Workers compensation insurance serves two purposes: It assures that injured workers get medical care and compensation for a portion of the income they lose while they are unable to return to work and it usually protects employers from lawsuits by workers injured while working.
Workers Compensation Insurance
What Is Workers Compensation Insurance?
Employers are legally obligated to take reasonable care to assure that their workplaces are safe. Nevertheless, accidents happen. When they do, workers compensation insurance provides coverage.
Workers compensation insurance serves two purposes: It assures that injured workers get medical care and compensation for a portion of the income they lose while they are unable to return to work and it usually protects employers from lawsuits by workers injured while working.
Each State Is Different
Workers compensation systems are established by statutes in each state. State laws and court decisions control the program in that state and no two states have exactly the same laws and regulations.
States determine such features as the amount of benefits to which an employee is entitled, what impairments and injuries are covered, how impairments are to be evaluated and how medical care is to be delivered. In addition, states dictate whether workers compensation insurance is provided by state-run agencies and by private insurance companies or by the state alone. States also establish how claims are to be handled, how disputes are resolved and they may devise strategies, such as limits on chiropractic care, to control costs.
To learn about the requirements where you live, visit your state’s workers compensation department Web site.
If your business expands to another state, you may have to deal with very different rules in the new state. The discussion here covers the general features of workers compensation programs.
What Injuries Are Covered?
Injuries employees sustain on the workplace premises or anywhere else while the employee is acting in the “course and scope” of employment are covered if their employer has workers comp insurance. For example, the leading cause of workers comp death claims is traffic accidents that occur when the employee is in a vehicle for work purposes, whether the trip is made in the company’s car or the employee’s own vehicle. Accidents driving to and from work are not covered.
In addition to injuries from accidents, workers comp covers injuries employees may sustain from other events that may occur while they are working, including workplace violence, terrorist attacks and natural disasters.
Workers comp insurance also covers certain illnesses and occupational diseases (defined in the state statutes) contracted as a result of employment. For example, employees who work with toxic chemicals can be made ill by exposure to the chemicals.
What Treatment Do Injured Workers Receive?
What Benefits Do Injured Workers Receive?
Income replacement benefits are based on whether the disability is total or partial and whether it is permanent or temporary. Impairment is generally defined as a reduction in earnings capacity, sometimes using the American Medical Association’s criteria.
Most states require that benefits be paid for the duration of the disability, but some specify a maximum number of weeks, particularly for temporary disabilities. The benefit amount is a percentage of the worker’s weekly wage (actual or state average).
What Benefits Do Injured Workers Receive?
Income replacement benefits are based on whether the disability is total or partial and whether it is permanent or temporary. Impairment is generally defined as a reduction in earnings capacity, sometimes using the American Medical Association’s criteria.
Most states require that benefits be paid for the duration of the disability, but some specify a maximum number of weeks, particularly for temporary disabilities. The benefit amount is a percentage of the worker’s weekly wage (actual or state average).
Do I Have To Buy Workers Compensation Insurance?
In most states sole proprietors and partnerships aren’t required to purchase workers compensation unless and until they have employees who aren’t owners. Most states will allow sole proprietors and partners to cover themselves for workers comp if they choose to. Some states don’t require employees to be covered if they are paid solely on commission.
Employees are generally defined as people performing services at the direction of the employer, for hire, including minors and workers who are not citizens.
Many states exempt employers with only a few employees from mandatory coverage laws. The threshold number of employees that triggers mandatory insurance is either three, four or five, depending on the state. Texas is the only state in which workers comp insurance is truly optional.
In some states, businessowners’ immediate family members—parents, spouse and children—who work for the firm may not have to be counted as employees for purposes of determining whether you must have workers comp insurance. These exceptions usually do not apply to other family members, such as sisters, brothers or in-laws.
Under some laws, independent contractors are not considered to be your employees. However, for the purpose of workers comp insurance, most states will treat an uninsured contractor or subcontractor or employees of an uninsured subcontractor as your employee—meaning you may be liable if he or she is injured while working for you. To avoid any unintended liability, larger companies often require any contractors or subcontractors doing work for them to provide proof they have workers comp insurance.
Regardless of whether insurance is required and regardless of how few employees you have, if an employee protected by the state statute is injured or killed in the course of working for you, you may be legally liable. One claim for a serious employee injury could bankrupt many small businesses. Insurance, through the payment of premiums for workers comp coverage, provides a predictable cost for handling this risk.
Who Sells Workers Comp Insurance?
Workers comp insurance is not part of your Businessowners Policy (BOP). It must be purchased as a separate insurance policy.
Each state has its own rules about where employers may buy workers comp insurance. In a few states all employers must buy their workers comp insurance from a state monopoly insurer, known as a state fund. In a number of other states, insurance may be purchased from the state fund or from private insurers. In the states that have them, state funds may serve as an insurer of last resort for businesses that cannot find coverage from a private insurer.
How Are Premiums Set?
Premiums are based on the employer’s industry classification code and payroll. Premiums for the most dangerous enterprises, such as trash hauling or logging, may be much higher than premiums for an accounting firm.
Location has also become a factor in workers comp premiums. Since the terrorist attacks of September 11, 2001, workers compensation insurers have been taking a closer look at their exposures to catastrophes, both natural and man-made. For businesses located in an area at high risk of catastrophe, premiums may be higher, regardless of the nature of the business itself.
Employers with an annual premium above a certain amount are usually eligible for experience rating, which adjusts the premium up or down depending on the claims history of the company relative to other companies in that industry category. Businesses with higher than average claims will pay a higher premium and those with lower claims will generally pay less.
Experience rating is more sensitive to the number of claims (loss frequency) than the dollar value of claims (loss severity). This is because of the insurance industry maxim, “frequency breeds severity.” Insurers know from experience that where more accidents occur, there is a greater likelihood of big losses. A greater number of accidents indicates that overall in working conditions are not as safe as an environment where fewer accidents occur, even if in a given year the few accidents that occurred were more costly.
What Are My Costs For Workers Comp?
Understanding Your Workers Comp Policy
Usually a workers comp policy has two parts: “Part One, Workers Compensation” and “Part Two, Employers’ Liability.”
Under “Part One”, the insurer contracts to pay whatever the state-required amounts of compensation may be. Unlike other types of insurance, workers comp coverage has no ceiling or limit on the policy amount. The insurance company accepts a transfer of the employer’s entire statutory obligation—whatever the employer is legally obligated to pay as a result of the injury.
“Part Two” of the policy provides coverage for an employer who is sued by an employee for work-related bodily injury or illness that isn’t subject to state statutory benefits. It has a monetary limit.
Understanding Your Workers Comp Policy
Usually a workers comp policy has two parts: “Part One, Workers Compensation” and “Part Two, Employers’ Liability.”
Under “Part One”, the insurer contracts to pay whatever the state-required amounts of compensation may be. Unlike other types of insurance, workers comp coverage has no ceiling or limit on the policy amount. The insurance company accepts a transfer of the employer’s entire statutory obligation—whatever the employer is legally obligated to pay as a result of the injury.
“Part Two” of the policy provides coverage for an employer who is sued by an employee for work-related bodily injury or illness that isn’t subject to state statutory benefits. It has a monetary limit.
Your Obligations
In most states you are required to keep records of accidents. You must report work-related accidents to the state workers compensation board and to your insurer within a specified number of days.
Studies suggest that the faster the insurer receives notice of an injury and can initiate medical treatment and benefits, the faster the injured worker recuperates and returns to work. To help get medical treatment to the injured worker faster, some insurers help employers file promptly a “first notice of injury” with the state agency responsible for overseeing the workers compensation system, a step which can trigger the claim process.
The Importance Of Getting An Injured Worker Back To Work
Long absences from work can have a lasting negative impact on workers’ future employment opportunities and thus on their economic well being. A study of injured workers in Wisconsin by the Workers Compensation Research Institute found that the duration of time off from work and periods of subsequent unemployment are lower for injured workers who return to their pre-injury employer than for those who change employers.
Effective communication by employers is critical to facilitate the injured worker’s return to work. You should explain to workers how the workers compensation system works and that they are required to report an accident immediately and get medical attention promptly.
Your expectations relative to work-related injuries or accidents should be part of the employee handbook (if there is one), conveyed to new employees as part of orientation, posted on bulletin boards and communicated periodically in safety reviews.
Communicate regularly with employees who are off work due to a work-related injury. Workers who know they are thought about, missed and still part of the workplace team are generally more eager to return. Some insurers will keep employers informed about how the employee’s treatment is progressing.
Another aspect of the return-to-work process is successful reintegration into the workplace. Workers comp insurers help you assess the injured worker’s needs and capabilities and encourage you to let workers know, in advance of any injury, that you will try to modify work activities to accommodate those who are disabled.
Your expectations relative to work-related injuries or accidents should be part of the employee handbook (if there is one), conveyed to new employees as part of orientation, posted on bulletin boards and communicated periodically in safety reviews.
Communicate regularly with employees who are off work due to a work-related injury. Workers who know they are thought about, missed and still part of the workplace team are generally more eager to return. Some insurers will keep employers informed about how the employee’s treatment is progressing.
Another aspect of the return-to-work process is successful reintegration into the workplace. Workers comp insurers help you assess the injured worker’s needs and capabilities and encourage you to let workers know, in advance of any injury, that you will try to modify work activities to accommodate those who are disabled.
Are My Employees Covered When They Work Or Travel In Other States?
Your workers comp policy covers claims made only in the states named in the policy “Declarations.” If an employee is injured while working in another state, and that state has benefits more generous than the state(s) named in your policy, the employee could file a workers comp claim in the other state and it would not be covered by your policy.
The solution is in the “Other States” section of the policy, which allows you to list states where employees might work from time to time so there will be coverage for claims filed in those states.
The “Other States” portion of the policy cannot be used to cover claims in states where coverage must be obtained from the state workers compensation fund.
“Other States” coverage is intended to provide protection only for incidental exposures in states where the employer does not operate as of the effective date of the policy. If you set up an operating entity in another state, notify your insurer, as this state should be added to the “Declarations” page of the policy.
Factors That Affect Your Premiums
Premiums for workers comp vary among the states. In states where benefits are more generous, premiums for workers comp insurance may be correspondingly greater. In most states, workers comp benefits continue even after the worker begins to collect Social Security and Medicare.
However, benefits are only one part of the equation. In some states with low benefits and costs, premiums may be high due to the inefficiency of the system for awarding benefits. The generally increasing cost of medical care impacts premiums as well. Although states are working to make changes, for the most part, workers comp doesn’t have the types of cost control measures that have been applied to health insurance. Workers comp claimants do not have to pay deductibles. In many states they may visit as many doctors and specialists as they like. There is generally no requirement for doctors to prescribe generic rather than brand name drugs.
Assigned Risk Plans Or Pools
An assigned risk plan or pool is a means of providing insurance for businesses that may not be able to get workers comp insurance in the private market. High-risk businesses, businesses with a history of many claims and businesses in new industries without a previous industry claims history are the most likely to get insurance through the assigned risk plan.
Typically, the employer or the agent applies to the plan. The application is then assigned to an insurance company that the state has designated to write the policy. Premiums in assigned risk pools often carry a surcharge over the regular premium rate.
Assigned Risk Plans Or Pools
An assigned risk plan or pool is a means of providing insurance for businesses that may not be able to get workers comp insurance in the private market. High-risk businesses, businesses with a history of many claims and businesses in new industries without a previous industry claims history are the most likely to get insurance through the assigned risk plan.
Typically, the employer or the agent applies to the plan. The application is then assigned to an insurance company that the state has designated to write the policy. Premiums in assigned risk pools often carry a surcharge over the regular premium rate.
What Is A Second Injury Fund?
About half the states have second injury funds to encourage the hiring of workers who are partly disabled but still able to work. Employers would be reluctant to hire such workers due to the risk they could sustain an injury that would combine with the prior injury or condition to cause a disability. Without second injury funds, the new employer would be liable for the entire cost of the claim. When a partially disabled employee suffers a second injury, part of the cost of the second injury is apportioned to the second injury fund.
Some states discontinued their second injury funds following passage of the Americans with Disabilities Act (ADA). Although the ADA requires employers to maintain confidentiality about employees’ disabilities, the confidentiality rule does not apply to communications with state workers compensation authorities or second injury funds.
What Can I Do To Reduce My Workers Comp Premiums?
- Manage Your Risks
- Take Advantage of Saving Opportunities
- Be Sure Your Premium is Correctly Figured
- Raise Your Deductibles
- Try to Avoid Assigned Risk
- Coordinate Disability Programs
Manage Your Risks – Most small companies do not believe they can afford to hire a risk manager. Nevertheless, someone in the company should have a continuing responsibility for loss control and the management of workers comp claims. This involves a variety of programs to keep workers safe, the medical management of claims and early return to work for any injured workers.
In some states insurers must provide accident prevention services to employers. Even if not required to do so by law, the majority of workers comp insurers can help you improve safety. In some states, employers are required by law to set up safety committees and other programs to deal with unsafe conditions in the workplace. Even when not required by law, safety committees can be very effective at reducing accidents. For example, after UPS set up worker safety committees at each of its locations to identify the most frequent workplace accidents and took measures to reduce them, injuries that caused workers to take time off from work decreased by 59 percent.
You may also be legally required to have a written injury and illness prevention program. Again, even if not legally required to do so, having and following a written program can help reduce accidents.
Take Advantage of Savings Available in Your State – Several states allow merit rating credits. Smaller businesses that typically pay $5,000 in premiums or less may be entitled to a credit of 5 to 15 percent if they have not had any lost-work-time claims during a designated period. In some states there are premium credits for drug- and alcohol-free workplace programs and safety programs. Some insurers may give you a discount if you hire a professional risk management firm to help you with your safety program.
Be Sure Your Premium Is Figured Correctly – Make sure you have been placed in the right industry category. Check that the insurer’s payroll computation adjusts for overtime pay and allocates the payroll of different employees correctly.
Raise Your Deductibles – A majority of states provide for optional medical deductibles in workers comp insurance policies as a cost saving measure. Deductibles tend to encourage greater safety consciousness on the part of the employer who must pay the deductible amount.
Try to Avoid Assigned Risk – Cutting down on your claims is the best way to stay out of the state’s assigned risk plan, or insurer of last resort, which usually costs more. You may have been put into assigned risk without knowing it. Ask your agent to check on your status.
If you have been put in assigned risk, find out from your state workers comp agency if rates are higher. If they are, make a concerted effort to get other insurance. Just because one agent is unable to find something better for you doesn’t necessarily mean that it doesn’t exist. Talk with other agents, investigate group self insurance programs that may be available in your state and talk with other people in your industry and owners of other businesses of similar size and age and with a similar risk level.
Be Sure Your Premium Is Figured Correctly – Make sure you have been placed in the right industry category. Check that the insurer’s payroll computation adjusts for overtime pay and allocates the payroll of different employees correctly.
Raise Your Deductibles – A majority of states provide for optional medical deductibles in workers comp insurance policies as a cost saving measure. Deductibles tend to encourage greater safety consciousness on the part of the employer who must pay the deductible amount.
Try to Avoid Assigned Risk – Cutting down on your claims is the best way to stay out of the state’s assigned risk plan, or insurer of last resort, which usually costs more. You may have been put into assigned risk without knowing it. Ask your agent to check on your status.
If you have been put in assigned risk, find out from your state workers comp agency if rates are higher. If they are, make a concerted effort to get other insurance. Just because one agent is unable to find something better for you doesn’t necessarily mean that it doesn’t exist. Talk with other agents, investigate group self insurance programs that may be available in your state and talk with other people in your industry and owners of other businesses of similar size and age and with a similar risk level.
Coordinate Disability Programs – This option isn’t available everywhere, but in some states businesses are trying to bring costs under control through the coordination of workers compensation, health care and disability benefit plans. The integration of workers compensation and other employee benefit programs is a broad concept that ranges from a simple marketing approach that promises savings from using the same insurer for both coverages to programs that offer a managed care approach to the management of all types of disability, regardless of whether they are work-related.
Besides limiting overlapping programs and streamlining administration, proponents say the change to a broad approach addresses the increasing difficulty of distinguishing between work- and nonwork-related injuries and illnesses, such as injuries due to repetitive motion and mental stress claims. It improves productivity, since nonwork-related disabilities are managed with the same focus of getting the employees back to work as work-related cases.
Can An Employee Who Has An Accident Sue Me?
Prior to the states’ adoption of the workers compensation system in the first half of the Twentieth Century, injured workers sued their employers after workplace accidents. This was a long, cumbersome and costly process from which the worker might gain nothing if the court failed to find the employer totally responsible for the injury. With so few employers liable for workplace accidents, support for injured workers and the families of deceased workers was a societal problem.
The workers compensation system was adopted to provide injured workers and their dependents timely compensation became regardless of who was at fault for a workplace accident. As part of the compromise that made the employer liable for work-related injury and disease costs regardless of fault, the employee surrendered the right to sue the employer for injuries. For the most part, the system works as intended. Injured workers accept workers comp payments and do not sue. This is why workers comp is referred to as the employee’s “exclusive remedy.”
Nevertheless, there are certainly instances where “exclusive remedy” may not apply and injured workers may sue their employers. Conditions under which such suits are lawful vary among the states. In Florida, for example, injured employees may sue their employers in the following situations:
- The employer commits an intentional and deliberate harmful act or engages in conduct that is certain to result in injury or death
- An employee sexually harasses another employee
- The employer violates the law prohibiting the firing, coercing or intimidating of an employee due to a workers comp claim
- The employer has violated federal law regarding housing and transportation of migrant workers
The injury is excluded from coverage by workers compensation (such as a claim for psychological stress injury without any physical injury, a type of claim that is not compensable by workers comp in Florida)
1. Instructions:
If the person for whom the services are performed has the right to require compliance with instructions, this indicates employee status.
2. Training:
Worker training (e.g., by requiring attendance at training sessions) indicates that the person for whom services are performed wants the services performed in a particular manner (which indicates employee status).
3. Integration:
Integration of the worker’s services into the business operations of the person for whom services are performed is an indication of employee status.
4. Services rendered personally:
If the services are required to be performed personally, this is an indication that the person for whom services are performed is interested in the methods used to accomplish the work (which indicates employee status).
5. Hiring, supervision, and paying assistants:
If the person for whom services are performed hires, supervises or pays assistants, this generally indicates employee status. However, if the worker hires and supervises others under a contract pursuant to which the worker agrees to provide material and labor and is only responsible for the result, this indicates independent contractor status.
6. Continuing relationship:
A continuing relationship between the worker and the person for whom the services are performed indicates employee status.
7. Set hours of work:
The establishment of set hours for the worker indicates employee status.
8. Full time required:
If the worker must devote substantially full time to the business of the person for whom services are performed, this indicates employee status. An independent contractor is free to work when and for whom he or she chooses.
9. Doing work on employer’s premises:
If the work is performed on the premises of the person for whom the services are performed, this indicates employee status, especially if the work could be done elsewhere.
10. Order or sequence test:
If a worker must perform services in the order or sequence set by the person for whom services are performed, that shows the worker is not free to follow his or her own pattern of work, and indicates employee status.
11. Oral or written reports:
A requirement that the worker submit regular reports indicates employee status.
12. Payment by the hour, week, or month:
Payment by the hour, week, or month generally points to employment status; payment by the job or a commission indicates independent contractor status.
13. Payment of business and/or traveling expenses :
If the person for whom the services are performed pays expenses, this indicates employee status. An employer, to control expenses, generally retains the right to direct the worker.
14. Furnishing tools and materials:
The provision of significant tools and materials to the worker indicates employee status.
15. Significant investment:
Investment in facilities used by the worker indicates independent contractor status.
16. Realization of profit or loss:
A worker who can realize a profit or suffer a loss as a result of the services (in addition to profit or loss ordinarily realized by employees) is generally an independent contractor.
17. Working for more than one firm at a time:
If a worker performs more than deminimis services for multiple firms at the same time, that generally indicates independent contractor status.
18. Making service available to the general public:
If a worker makes his or her services available to the public on a regular and consistent basis, that indicates independent contractor status.
19. Right to discharge:
The right to discharge a worker is a factor indicating that the worker is an employee.
20. Right to terminate:
If a worker has the right to terminate the relationship with the person for whom services are performed at any time he or she wishes without incurring liability, that indicates employee status.
What is Workers’ Compensation?
Workers’ comp is a form of insurance that provides for the payment of medical care and/or to provide cash benefits to the injured employees because of work-related injuries or illnesses. The cost of the insurance is borne solely by the employers and most states require this form of compulsory coverage for organizations with employees. The tradeoff for providing this benefit to the workers is that the worker forfeits their right to claim against the employer–at least in theory.
Workers’ Compensation provides two parts; Part A provides the benefits to pay for the lost time and medical expenses related to the worker’s injuries or illnesses, and Part B which provides Employers Liability protecting the employer from third party claims due to their negligence and the breach of their duty to provide a safe working environment to the injured worker or the family members.
To enforce, govern, and regulate workers’ compensation, agencies are generally set up in each state, known as Workers’ Compensation Boards. These state entities can also be responsible for overseeing and ensuring the payment of claims to injured employees and sometimes to their family members that become ill from communicable diseases. Examples of the latter were spotlighted by the ongoing asbestos claims in the 1970’s.
The payment of benefits from workers’ compensation are no-fault and are generally not subject to other judicial or punitive awards that are common with civil and criminal cases. Benefits can be paid once it is assumed the injury or illness was work related. This usually follows a process of filing a claim form by the employer.
If the employer disputes the nature of the claim or if it was work related, a hearing may be requested to allow a worker’s compensation law judge to make the determination. During this process, the judge may review the documents and reports from the employer, testimonies from employees and others, evaluate evidence, and/or examine medical documents to determine the cause of injury. The injured worker can lose their rights for benefits if the injury is determined to be unrelated to work, or due to intoxication, acting in an illegal manner, or caused by their own intent.
Compensation benefits amounts or remuneration vary by state, but usually never exceed two thirds of the earned income lost because of the injury. In addition to capping the remuneration, most states limit the length of time compensation payments are made. Settlement amounts can be offered to quantify the loss, limit the exposure, and expedite the closure of the claim.
What Information is Needed for a Workers’ Compensation Audit
by William F Schaake, CIC, CRM, CLCS
Insurance carriers generally audit workers’ comp policies at the end of a policy term but reserve the right to audit at least every three years. Sometimes policies are audited many times per year. The employer may be required to provide payroll records, general ledgers, journals, canceled checks, and other financial information. In New York State, the penalty for not maintaining accurate and adequate records can be as high as $ 1,000 for every ten days of non-compliance.
Prior to the policy term, the employer will estimate the payroll for the upcoming year and a provisional premium is determined. The estimated payrolls are broken down by the classification of the employees’ duties and the rates are determined by multiplying the rate for the class code by the estimated payroll for that class. This number is aggregated for all the employees in that class and then added to all the other amounts for each class code to determine the estimated annual premium. The final number is then multiplied by a experience modification or merit factor which can either increase or decrease the adjusted premium. Discounts or assessments may then be applied as would any state or federal taxes and fees.
When the audit has been completed, the adjustments to the payroll figures can either increase or decrease based on the actual payroll. These changes can be subject to the economy, regulatory issues, the industry, but most likely the market changes affecting the organization such as greater or less than demand for its goods or services directly impacting its payroll. It is recommended that projections of payrolls prior to commencement of the policy year to be as accurate as possible to avoid large fluctuations in payroll and premium computations resulting in either audit premiums due or refunds for overpayments. In fact, if an employer intentionally understates payroll, it can be deemed as fraud subject to a class E felony, so it is in best interest that the payroll be estimated as close as possible.
Most states do not make any advance determinations regarding the status of an independent contractor until either an audit dispute or if a claim is filed.
Determining the Remunerations for Premium Computations:
Once the total payrolls are calculated and the subcontractor costs are identified, the premiums are determined by including the following remunerations which are either in the form of money or any substitutions for payment:
Remuneration for determining premiums includes for New York (Source: NYS Workers’ Comp Board**):
- Wages or salaries including retroactive wages or salaries, commissions and draws against commissions, bonuses including stock bonus plans, annuity plans, most extra pay for overtime, paid holidays, vacations and sick days. Payments for salary reduction, employee savings plans, retirement or cafeteria plans (Internal Revenue Code §125) which are made through employee authorized salary deductions from the employee’s gross pay are also included.
- Payment for piecework, profit sharing or incentive plans.
- Payment by an employer of amounts otherwise required by law to be paid by employees to statutory insurance or pension plans, such as the Federal Social Security Act;
- Payment or allowance for hand tools or power tools used by hand provided by employees.
- The rental value of lodging, an apartment or a house provided for an employee based on comparable accommodations.
- The value of meal, store certificates, merchandise, credits or any other substitute for money received by employees as part of their pay. Refer to Exclusions below for certain fringe benefit exclusions.
- Expense reimbursements to employees to the extent that an employer’s records do not substantiate that the expense was incurred as a valid business expense;
Note: When it can be verified that the employee was away from home on the business of the employer, but the employer did not maintain verifiable receipts for incurred expenses, a reasonable expense allowance within prescribed limits will be permitted.
Payment for filming of commercials excluding subsequent residuals which are earned by the commercial’s participant(s) each time the commercial appears in print or is broadcast.
Remuneration for determining premiums excludes:
- Tips and other gratuities received by employees;
- Certain payments by an employer to group insurance or group pension plans for employees
- The value of special rewards for individual invention or discovery.
- Dismissal or severance payments except for time worked or accrued vacation;
- Certain reimbursed expenses and allowances
- Payments for active military duty;
- Employee discounts on goods purchased from the employee’s employer;
- Supper money for late work;
- Work uniform allowances;
- Sick pay paid to an employee by a third party such as an insured’s group insurance carrier which is paying disability income benefits to a disabled employee.
- Employer provided perquisites (“perks”) such as:
- An automobile;
- An airplane flight;
- An incentive vacation (e.g., contest winner);
- A discount on property or services;
- Club memberships;
- Tickets to entertainment events
- Employer contributions to salary reduction, employee savings plans, retirement, or cafeteria plans ((Internal Revenue Code §125)–Contributions made by the employer, at the employer’s expense, which are determined by the amount contributed by the employee.
Wages Paid for Time Not Worked
Some employers pay employees for time not worked. The entire amount of wages paid for idle time is to be included as payroll.
*PRESENT LAW AND BACKGROUND RELATING TO WORKER CLASSIFICATION FOR FEDERAL TAX PURPOSES
Auditing of Payroll – Independent Contractors
(Source: NY Workers’ Compensation Board)
The New York State Workers’ Compensation Law does not require sole proprietors, partners or officers of one or two-person corporations to provide coverage for themselves. The situation is more complex when a business that is exempt from coverage requirements either engages subcontractors or is a subcontractor that is engaged by a general contractor. In many instances, under Section 2 and 3 of the WCL, a Judge finds a subcontractor to be the direct employee of the general contractor. In addition, WCL Section 56 provides that a general contractor or its insurance carrier is liable for payments of compensation to an injured employee of an uninsured subcontractor.
Insurance carriers protect themselves against such claims by charging an additional premium for any policyholder that uses independent contractors.
Upon Audit, most insurance carriers will assess the exposures of the “subcontractors” on the job site for general contractors. Proof of insurance is usually requested showing coverage for the subcontractors and their employees on a certificate of insurance. This is generally used to offset the remuneration* of the subcontractors cost in the determination of the general contractors workers compensation premium calculations. Since the sole proprietors, partnerships, and many one or two person corporation can have the owners or officers excluded from coverage, it is recommended that the inclusion or exclusion of the executive officers be listed on the certificate of insurance. Many newer certificate forms show this as a Yes or No box.
Since an organization provides the benefit of workers’ compensation to its employees it may also require that its subcontractors do the same including covering its owners and/or executive officers. It is normally accepted that an independent contractor is a entity working on behalf of another that generally maintains its own identity, may provide insurance and benefits for it owners and employees, keeps separate books and records from the general contractor, and it deemed to be a separate establishment. The litmus test often used by most states for the purpose of workers’ comp audits and payroll determinations is the IRS 20 factor test.
Workers Compensation and Statutory Disability
Each state has its own requirements for workers’ compensation insurance and employer’s liability if employees are hired and under the control and direction of the landlord. This rule may even apply to independent contractors hired by the management of the building if it is determined there is vicarious liability due to the nature of worker delegated and/or performed by the contractors. It is important to check with the department of labor in the various states as well as the Office of Consumer Affairs in the local community to check if independent contractors are required to carry their own coverage and to what extent. If so, it may be important to list the landlord or building owner as an additional insured with respect to any liability claims. Contracts between the parties protecting the rights of each can also prevent confusion in the event of a claim. Language that addresses rights of subrogation, disclaimers of liabilities, hold harmless clauses, etc. often make up the language that can clearly identify which insurance responds in the event of a claim and how the process of a claim should take place. Hence, it is highly recommended that a competent attorney review and/or draft these contracts before executive by the parties.
Statutory Disability Insurance is only mandated in a handful of states. Often called DBL policies, coverage is afforded to those employees injured by sickness or illness that is not employment related. The remuneration is determined by the level of pay if the employee was actively at work. The duration of payment generally lasts no longer than six months and often has a deductible of one week for hospitalizations. Please check the policy for the terms and conditions and whether your state requires workers’ compensation and/or statutory liability. Read More>>
* The above article is intended as a tool to assist in the evaluation of coverage and offer a method to determine if certain exposures may have been overlooked and should be filled. If is not intended to offer advise which coverage to offer or suggest any levels of coverage. Please read the terms and conditions as well as the exclusions and the coverage forms before making you own determinations. It is recommended that an independent appraiser be hired to assess the value of the property, qualified legal council hired to review the contracts, work orders, and lease agreements, and that a competent agent or broker be used to sought our carriers that can package the necessary coverage at affordable prices while maintaining their financial stability.
By William F. Schaake, CIC, CRM © 2011-2012 All rights reserved