How Furloughed Employees and Using 0012 Will Effect Your Workers Compensation Experience Modification Rate (EMR)

Furloughed employees will effect your workers compensation experience modification rate calculations. Lets take a look at what may happen to your workers compensation EMR.

During the COVID-19 Pandemic many employers have moved employees into a paid leave of absence work status. Furloughed employees are those workers who you have sent home and who on a temporary basis no longer perform any work duties for your business but who you keep on paying. Many NCCI states have adopted the use of code 0012 for the purpose of reporting the payroll you provide to these employees.

When you report payroll under code 0012 there will be no premium rate assigned to that payroll. In other words the payroll assigned to 0012 will be excluded from your premium calculation. This is very important for an employer. By taking advantage of this special rule an employer may keep employees employed but not be charged a premium for doing so.

In addition that payroll will not be included in your experience modification rate, EMR, calculation. While it is assumed that most employers will not see much of a change in their EMR due to the use of code 0012, some will. And for some that change may become a big problem. Lets explore that situation.

Lets look at some examples.

Example 1:

Say you are an employer in the State of Arkansas who operates a metal products manufacturing plant where your governing classification code is 3076, Sheet Metal Products Mfg.. Your normal annual payroll is $750,000 and you incurred a single claim a couple of years ago totaling $8,000. Here’s the recap:

  • State: Arkansas
  • Governing Class Code: 3076 – Sheet Metal Products Mfg.
  • Normal Annual Payroll: $750,000
  • Single Claim: $8,000
  • Calculated EMR: .99

Now lets look at how code 0012 payroll may effect your EMR calculation.

  • State: Arkansas
  • Governing Class Code: 3076 – Sheet Metal Products Mfg.
  • Normal Annual Payroll: $750,000
  • Payroll Shifted Into Code 0012: $500,000
  • Single Claim: $8,000
  • Recalculated EMR: 1.05

Granted shifting $500,000 in rating payroll into Code 0012 may be extreme. However it is possible a manufacturer may find themselves in this situation.

Example 2:

We now have another employer, this one is located in the State of Georgia whose business is that of cutting and polishing stone for custom made counter tops. The governing workers compensation class code is 1803 – Stone Cutting and Polishing. Their normal payroll is $750,000 and they incurred a single claim of $100,000 that is showing up in their current experience period. Here’s the recap:

  • State: Georgia
  • Governing Class Code: 1803 – Stone Cutting and Polishing
  • Normal Annual Payroll: $750,000
  • Single Claim: $100,000
  • Calculated EMR: 1.0

This employer takes advantage of using code 0012 for paid leave absence of most of their work force moving $500,000 of payroll into 0012. Here’s how that shift will effect their EMR calculation:

  • State: Georgia
  • Governing Class Code: 1803 – Stone Cutting and Polishing
  • Normal Annual Payroll: $750,000
  • Single Claim: $100,000
  • Payroll Shifted into Code 0012: $500,000
  • Recalculated EMR: 1.06

Here’s what happens if we use the same circumstances but instead of using $500,000 payroll shift we use only $250,000:

  • State: Georgia
  • Governing Class Code: 1803 – Stone Cutting and Polishing
  • Normal Annual Payroll: $750,000
  • Single Claim: $100,000
  • Payroll Shifted into Code 0012: $250,000
  • Recalculated EMR:  1.03

Now for some reality. It’s generally accepted thinking that an employer using the furloughed employee rule and applying class code 0012 will only experience very slight changes in their calculated EMR. I would agree with that statement. However I would also caution those with interest in this topic to stay aware of the potential impact this may have on your business. Here’s a couple of things that should be kept in mind:

  • For most employers there is a time lag between when they take advantage of moving payroll into 0012 and when the resulting effect will show up in their EMR calculation You must keep in mind that the data used in an EMR calculation is delayed. For example under most circumstances moving payroll into 0012 in the policy year of 2020 will not show up in the EMR calculation until 2022. Remember the experience period used for most EMR calculations is data generated during a 4 year look back from the current year with the most recent year past data thrown out. Simply stated, results of what you do today will not show up for a year or so.
  • Many employers must keep their EMR at or below 1.0 in order to gain or keep certain contracts for work – This will more than likely be the single most important issue coming out of this topic. Many employers out there have gained contracts to perform work where one of the critical components of their contract is that the employer in question MUST maintain a 1.0 or lower EMR rating in order to keep the work contract. Most of these will be employers who work bid work for large companies and or who perform certain government work. When looking at Example 1 above, you may think the increase from .99 to 1.05 is not that big of a deal. In fact you may be right. But what if that employer has a 10 Million Dollar contract riding on their ability to meet that 1.0 contract requirement?
  • It’s not always about the effect the EMR may have on the premium an employer pays – Small changes do count. Especially when a small change in an employers EMR may put at risk their future ability to secure and perform certain work contracts.
  • These small changes in the calculated EMR will effect an employer for several years to come – I’ve mentioned this a few times in the above text. EMR calculations are based on data that is present throughout the experience period in question. Typically the experience period is a 3 year period of time. Think of this as a sliding period where the most recent year of data is thrown out for use in the current EMR calculation but then presents itself a year later. So data created in the 1-1-2020 to 1-1-2021 policy period will not show up until 1-1-2022. This also means that the data created in that policy period will continue to be used for 3 years! Here’s what I mean:
    • A 1-1-2021 Effective EMR consists of data from these policy periods:
      • 1-1-2019 to 1-1-2020
      • 1-1-2018 to 1-1-2019
      • 1-1-2017 to 1-1-2018

Things you should do and questions you should ask:

  • Contact your workers compensation insurance agent – Your agent is the first place to start. They will be familiar with your business operations and will be able to advise you as to whether a furloughed employee rule exists in your particular state. Your agent may be able to help you with experience modification rate or EMR projections to help determine the effect of shifting payroll may have on your future EMR.
  • Contact your State Department of Insurance or Department of Labor – You’ll find a great resource for you is your own individual state. After all, workers compensation is state mandated and controlled.
  • Contact your States individual Rating Bureau – Most states use NCCI. Others, like California and the WCIRB, have their own individual rating bureau. Your rating bureau will be another great resource for you.
  • Be sure to ask your workers compensation insurance agent to help you project the effect of shifting payroll may have on your EMR calculation.
  • Reach out for help from an independent workers compensation consultant if you need additional help!

Hope this post has been of some help to you. Stay safe and keep learning!

Thanks, for reading!

 

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