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Pay As You Go Workers Compensation

Information employers can use about this new trend in workers compensation.

Remember... Workers Compensation Consultants is your FIRST RESOURCE for help with workers compensation problems including premium problems, audit errors along with workers compensation dispute resolution assistance. If you need help with a PAY AS YOU GO WORKERS COMPENSATION problem contact our office!

What is Pay As You Go Workers Compensation? -

Pay As You Go Workers Compensation is a new trend in the way to pay for workers compensation insurance. All you have to do is google "pay as you go workers compensation" and you will be faced with hundreds of internet sites proposing a "better way" to pay for workers compensation insurance. While there is an attraction to the pay as you go workers compensation concept there are issues with this process and how it may impact a business owners workers compensation program.

Under the "pay as you go" concept a business owner bundles or combines his workers compensation insurance with his payroll. He contracts with a payroll service to withhold and pay his workers compensation premium just as he does for his payroll. The business owner would be presented with a single bill from the pay as you go workers compensation approved payroll service which would then include his payroll, taxes and workers compensation premium for the pay period in question.

One of the big "selling points" on paying workers compensation premium under the pay as you go workers compensation method is that it allows the employer to pay his premiums based on a more accurate, payroll period based representation of his actual exposure basis. In other words, the employer is paying his premium based on what his actual payroll is rather than a pre-set budgeted representation of what he expects his annual payroll to be, followed by an audit and adjustment to determine the actual payroll exposure.

Now for a WORD OF CAUTION, what appears to be a great solution for a perceived problem, may, in fact, not be a solution at all for many employers. As you read below you will find more details of this concept and a discussion as to the good, the bad and the ugly of pay as you go workers compensation!

The Difference Between Pay As You Go Workers Compensation and Traditional Workers Compensation -

Before an informed decision can be made to use pay as you go workers compensation insurance an employer needs to know the basics, the differences between the traditional method in paying for workers compensation and the pay as you go method. We've outlined below some of the key points and some of the key differences between these two methods of paying for work comp premiums.

• Pay As You Go Workers Compensation:
  
  
  • Is a premium payment concept only. It has nothing to do with providing workers compensation insurance coverage. Coverage must still be provided through a state approved workers compensation insurance carrier or approved self-insured source. Payroll companies do not provide workers comp coverage, insurance companies do!
    
    
  • Bases premium on an employer's payroll generated during their normal payroll cycle. Example: Employer's pay period is every two weeks, when he reports his payroll to his payroll company the payroll company will, just like they do for taxes, add an additional charge for the workers compensation coverage.
    
    
  • Is based on a rate per 100 of payroll per job classification.
    
    
  • Requires some form of down payment. Reason: Workers compensation insurance is a state mandated and controlled coverage. Each individual state has developed through state statute specific rules regarding the cancellation of workers compensation coverage. If your state has requires a 30 day notice of cancellation be sent to the insured then the workers compensation insurance company must collect at least enough premium up-front from an employer to cover their (the insurance company's) exposure for this 30 day period.
    
    
  • Is auditable. Because pay as you go work comp is only a premium payment option, workers compensation policy conditions are not suspended. The audit function is a policy condition of the workers compensation insurance contract and is not suspended because of a premium payment option.
    
    
• Traditional Workers Compensation:
  
  
  • Is an insurance policy offered by an approved insurance company who also offers payment options. Insurance companies who provide workers compensation insurance coverage traditionally offer payment options ranging anywhere from 12 monthly payments to 1 single annual payment.
    
    
  • Bases premium on a projection of an employer's annual payroll. Example: An employer will determine what his budgeted payroll for the next policy period should be, provide that to his insurance agent and his workers compensation policy will be issued based on that projected premium. Payments will then be arranged to meet the employers needs.
    
    
  • Is based on a rate per 100 of payroll per job classification.
    
    
  • Requires some form of down payment. Reason: Workers compensation insurance is a state mandated and controlled coverage. Each individual state has developed through state statute specific rules regarding the cancellation of workers compensation coverage. If your state has requires a 30 day notice of cancellation be sent to the insured then the workers compensation insurance company must collect at least enough premium up-front from an employer to cover their (the insurance company's) exposure for this 30 day period.
    
    
  • Is auditable. Because pay as you go work comp is only a premium payment option, workers compensation policy conditions are not suspended. The audit function is a policy condition of the workers compensation insurance contract and is not suspended because of a premium payment option.
    
    

So, there you have some of the key points outlining similarities and differences between pay as you go workers compensation insurance and traditional workers compensation. The bottom line is that pay as you go workers compensation is just a payment option. Workers compensation insurance is still workers compensation insurance!

The Down Side of Pay As You Go Workers Compensation

Some believe the pay as you go work comp concept is new when in fact it is derived from similar payroll reporting form plans offered for years by various workers compensation insurance carriers. However, like any new or improved method being tried, the application and implementation may in reality differ from the concept. For some, the pay as you go method will help, for others there may be hidden issues that will only arise at a later date. We've outlined below some of the apparent problems an employer may incur when using the pay as you go payment method for workers compensation insurance.

• Emphasis is placed on "how to pay for workers compensation" not the product as a whole. Workers compensation is a complicated insurance coverage and contains many areas where mistakes and errors are made. It is a coverage that many professional independent insurance agents and insurance company employees do not understand let alone employees of payroll services. It is always our recommendation that employers work only with insurance professionals who have specific experience in dealing with workers compensation coverage. Many payroll services gloss over the need for an employer to work with knowledgeable, professional insurance agents and place the emphasis only on the concept of making easy payments. Always keep in mind, there is a lot more to the workers compensation product than just the method of premium payment.
  
  
• Restricted Classes - Insurance companies will still apply restricted classes on certain type of risk exposures. Just because an employer may use pay as you go doesn't mean the work comp insurance company will write insurance on all job classes.
  
  
• Deposit or Down Payment - Pay as you go work comp is generally sold with the idea that there is no or at least a low up front down payment. Consider this, an insurance company must follow the rules established by each state and one of those rules is how an insurance company is allowed to cancel a workers compensation policy. So as an example, if a state requires a 30 day notice be given to the insured prior to cancellation, that insurance company must have a method in place to project and collect enough premium up front to cover their exposure. This there will be a down payment that has to be made at least equal to 30 days projected premiums.
  
  
  
  
• Loss of Budgeting - When a business becomes well organized and efficient to the point they have passed the struggle for survival a key element in management is the ability to budget expenses. This is an important part of strategic planning and a process management comes to rely upon. Pay as you go trades the ability to budget a monthly workers compensation premium expense for the promise of an ease of payment. For well run business operations the attraction to pay as you go is minimal.
  
  
• Loss of Competition - Workers compensation rates, in most states, are competitive. Workers compensation rate competition is alive and well between insurance companies. It is not unusual to find a 40% swing among different insurance companies when competing for written premium. With pay as you go workers compensation an employer will find they are limited to the carrier arrangements made by the payroll company. This means an employer may well find the trade off of pay as you go work comp is paying a higher rate than if they were to secure their coverage over the traditional open market.
  
  
• Loss of Control - Because pay as you go workers comp bundles an employer's premium along with gross payroll, payroll taxes, and other items, an employer may lose direct control over his workers compensation program. In addition, an employer may become unaware of the true costs related to his workers compensation program.
  
  
• Limited or No Choice of Insurance Carrier - It's new! You'll find at this time not many insurance carriers are providing the option of pay as you go workers compensation. We're sure this will change sometime in the future as the bugs get worked and other insurance carriers become more interested in providing this as an option. However it remains a question as to how long this may take and knowing how insurance companies move slower than a glacial retreat, it may be some time before it is accepted. In the mean time, pay as you go will be limited to using those carriers who want to be involved. This usually means mono-line workers compensation carriers only, carriers who only provide workers compensation insurance and no other lines of insurance. This in itself creates a potential problem. Historically workers compensation is a loser line of insurance, one that many insurance carriers write only in order to secure the remainder of the more profitable insurance business such as the property, general liability and commercial auto. Not to say there are no profitable mono-line workers compensation insurance carriers, however those that are successful, with long, stable track records are few and far between. So this now becomes a "buyers beware" situation where opportunists are busy. Just remember, insurance companies do go out of business. So when using a pay as you go workers compensation program offered through your payroll service do your homework. Remember, working with a solid, well respected insurance company through a knowledgeable professional insurance agent is always in your best interest!
  
  
• Certificates of Insurance - An employer must still collect and properly issued certificates of insurance from others who perform work for them (subcontractors) and will have to provide these to the insurance company upon audit. Employers will also have to provide copies of their certificate of insurance to others for whom they perform work. No change in the workers compensation certificate of insurance and coverage verification requirements.
  
  
• Audits Still Required - The audit is a workers compensation policy condition and will still be performed. Keep in mind workers compensation audits not only discover remuneration and payroll but other related items such as job classifications and uninsured subcontract labor. So if an employer signs up for pay as you go expecting no audit will be performed they will be disappointed.

The Up Side of Pay As You Go Workers Compensation

Certain employers may find the pay as you go premium payment method for workers compensation insurance to be attractive and actually helpful in managing their business. While this is a new and still somewhat untested method we feel it does have a place in the world of workers compensation product delivery. Below we've outlined some of the more apparent good points about the pay as you go work comp premium payment method.

• Cash Flow - The concept of paying work comp premium based on the actual payroll generated from a given pay period is attractive to some employers. For smaller employers who may have fluctuating payroll, who employ seasonal workers or who secure a only few jobs during the year the effect may be one of improving their internal cash flow.
  
  
• Potential Ease of Doing Business - For new employers it's sometimes difficult to secure competitive workers compensation coverage simply because they are new in business and some insurance carriers will not take new in business operations. Another area that is sometimes difficult for new employers is handling payroll issues and figuring out the tax obligations. Because of this it may be easier for an employer to use a payroll service and include the work comp allowing the employer to concentrate on his business and not the details of these issues.
  
  
• Lower Audit Due To Payroll - While the workers compensation audit will not be eliminated, significant audit effects due to payroll issues should be minimized. Simply if the payroll reporting to the insurance company by the payroll service has been accurate and the premiums have all been paid by the payroll company to the insurance company then there should be no large additional premium or return premium at audit time. Keep in mind this will not eliminate other audit issues.

Some Final Thoughts About Pay As You Go Workers compensation Insurance

When we look at some of the advertising for pay-as-you-go workers compensation it becomes apparent that this is a product actively being sold as a "no hassle" approach to paying for workers compensation insurance. Not unlike any other sales pitch, we find those selling this concept seem to gloss over some of the more important aspects of a workers compensation program. Since this is a new trend in workers comp it is important to realize that the jury is still out on the ultimate impact pay as you go will have. We predict for some employers this will help improve their situation and for others it will not.

So here's a recap of some key points and checklist you may want to use when considering the pay as you go option:

• Recap:
  • Pay as you go workers compensation is not really workers compensation; it's a method of paying premium.
  • Don't believe all the hype when presented with this as the cure all, no hassle answer for down payments and audits.
  • Premium is based on a rate per 100 of payroll, just like traditional work comp insurance.
  • All work comp policies require some sort of down payment.
  • A workers compensation insurance policy must be issued by an approved work comp insurer.
  • All workers compensation policies, even pay as you go, are auditable.
  • Pay as you go work comp may help an employer with cash flow.
  • Using pay as you go may be easier for some employers.

So when considering whether or not to use the pay as you go option, an employer should keep in mind the many other factors involved in the management of a work comp program. An employer should also carefully weigh the pros and cons of this option and how it will impact their business operations. No doubt this is an option that will evolve and continue to be developed over the next few years.