Have you ever thought about the small business owners in your community? Coffee shop owners; druggists; local grocery stores; auto repair and body shops; contractors of every kind; floor covering stores; appliance stores; local owned manufacturers; car dealerships; music stores; machine shops; doctors; janitors; local owned restaurants of every kind all play a vital role in your community. These businesses, and many more like them, employ a ton of local workers! Many local business owners face a daily challenge of providing their services to their communities while eeking out some kind of small profit to make it all worth their while. At this point I should cite some government study that gives you proof of the value these kinds of employers provide but I’m not going to do that because you already know their value. In this blog we’re going to take a look at the burden workers compensation issues play in the operation of a small business.
For some employers, workers compensation insurance is expensive. For some, it may not be that big of a deal. If you run a carpentry contacting business your rate per 100 of payroll, depending on the state where you operate, may be as high as $26. Yep! That means that you are paying $26 in premium for every $100 of payroll that you give your workers. If you run a coffee shop your rate per 100 or payroll may be $2 which means that you are paying $2 in premium for every $100 of payroll that you give your workers.
Now on the surface you might see that as unfair. But it’s at this point that you need to understand the concept of risk, exposure and cost. If there’s anything that an insurance company knows it’s risk and exposure. The carpentry contractor has a much greater chance of having workers injured on the job while the coffee shop workers have a much less chance of incurring on the job injuries. Workers compensation rates are generated by detailed statistical computations based on very specific loss data reported to individual state rating bureaus. You can learn more about how rates are developed by visiting our website.
So there’s a big difference between a coffee shop and a carpentry contractor when it comes to how much they pay in workers compensation premium. But what kind of burden does this cause and what are some of the problems they may share?
To understand the burden that workers compensation insurance may cause an employer you should know something about the reason workers comp insurance exists. Prior to the implementation of the workers compensation concept in our country in the early 1900’s the only recourse an injured employee would have against an employer would be through the court system. An injured worker had several issues to overcome in order to win compensation in court from their employer. They included having to overcome:
- Contributory Negligence – Regardless how slight an incident, if the employer could prove the worker was responsible for their own injury the worker would not receive any compensation.
- Assumption of Risk – In order to get a job workers were forced to sign work contracts where they accepted the hazards of the job and where they agreed not to sue their employer for injuries.
- Fellow Servant Rule – If a workers injury was in any way caused by another worker the employer would not be held responsible.
And frankly workers could not afford the expense to seek payment through the court for injuries suffered on the job. You bet the system was rigged in favor of the employer. An injured worker would basically have no rights. The consequences for an injured worker and their family could be catastrophic. Think about that…your father works for some giant industrial company; he suffers a serious life threatening injury; is out of work for a year; receives no compensation from his employer…what happens to your family?
In 1908, Congress passed the Employers Liability Act (FELA) of 1908 which helped to establish comparative negligence and addressed how injured railroad workers could receive compensation. This action helped changed how restrictive doctrines affected injured workers and began to place more responsibility on employers to provide safer work places. In 1911, Wisconsin passed the first workers compensation law in this country which placed a value on work related injuries, paid medical expenses and replaced lost wages of the worker. The trade off for the employer and worker is that the worker would give up their right to sue the employer for the security of receiving a guaranteed benefit through the workers compensation law and the employer would give up the uncertain outcome of facing an injured worker in court for the certainty found in the workers compensation law. After Wisconsin, other states slowly started coming on board by passing similar workers compensation statutes for their individual states.
So individual state workers compensation statutes provide protection to both the employer and worker. They also provide direction as to who must comply with their statutes. Most states require any employer who employ workers to comply. Sure, there are a few states who may have numerical exceptions that must be met before compliance is required but for the most part if an employer has a worker they must come under the statute.
Falling under state statutes and being required to comply is one thing but the ability of an employer to pay the benefits required to an injured worker is another! This is where workers compensation insurance comes into play. A standard workers compensation insurance policy will stand in the shoes of an employer. The insurance company takes over the employers responsibility for paying the injured worker the required state benefits including medical expenses and lost wages for a premium the employer pays to the insurance company.
An often overlooked point is that when an employer is not required to come under the act they often may elect to freely do so. Typically, an election to come under the work comp statute is accomplished by the employer securing a workers compensation policy. When this is done an injured employee will look to the insurance company to take care of any work related injury sustained.
But what happens if the small employer does not secure coverage? Keep this in mind. Just because some employers may not fall under a state workers compensation statute doesn’t mean that an injured employee will not have recourse against the employer. It often means that the employer will be subject to exposure to litigation on the part of the injured employee. It doesn’t mean that an employer is still not responsible for their injured worker.
Here’s a list of some workers compensation related burdens small employers face:
- The Cost of Coverage – As mentioned above, the premium paid for workers compensation policies are based on an associated rate/100 of remuneration (payroll) that an employer pays their workers. Different types of business operations will pay different premiums. A carpentry contractor with $50,000 in payroll may pay a premium of $11,000 while a coffee shop with $50,000 in payroll may pay a premium of $1,100. Both will affect their respective employers as a business expense. Workers compensation insurance is not cheap! More on that later.
- Required Compliance – For many employers it’s not an option. They must secure coverage for their workers. And for some small employers even if they are not required to have coverage it is often in their best interest to do so.
- Trouble Securing Coverage – “New in business” is a hard concept for many insurance carriers to grasp. For a small business owner who has just opened up shop they will often find it difficult to secure a workers comp policy from the standard markets. Their only recourse to secure coverage may be to turn to the assigned risk plan for the state in which they operate. And while the assigned risk plan or “pool” may be the only choice for some, it’s not the place you want to stay.
- Trouble Maintaining Coverage in Place – Standard market insurance carriers often change their rules. Sometimes these rules will affect how they treat small employers. We’ve seen a trend over the past several years where workers comp insurance carriers have tightened up their rules by establishing minimum employee payroll levels for acceptance into their coverage programs. This often means that an employer, who in the past had been eligible for coverage by a certain standard market insurance company, now finds themselves non-renewed by their insurance company and having to search around for a new insurance company to place their workers comp coverage at renewal. This can be a real problem!
- Deteriorating Experience Mod or EMR – Small business owners who qualify for experience rating often face huge swings in their EMR when they incur losses or claims. Thresholds for being experience rated are based on premium size and in many states a premium around $3500 will force an employer into the experience rating plan. We’ve posted many examples of how a single claim can drive an employers EMR through the roof. With a small employer you’re looking at smaller payrolls and the resulting effect claims will have on their EMR will be much larger than an employer who has larger payroll.
There’s no doubt that workers compensation insurance and the associated premium that small employers pay can be a burden. That’s an easy one. But the behind the scenes issues that small business owners face in securing and maintaining their workers compensation coverage can be just a troublesome.
Hope this helps you out and thanks for reading!