Stand Alone versus Pay-As-You-Go Workers’ Comp Policies.
Any and all construction businesses with one employee or more are required to have worker’s compensation insurance. If you are a non-construction business then you are only required to have workers comp when you have four or more employees, full or part time.
With a pay-as-you-go payroll service, your company is billed for workers’ compensation insurance premium that is calculated on each payroll cycle. While that has long been a standard practice (and advantage) of using a Professional Employer Organization (PEO); using a PEO has traditionally required the client to use the workers’ compensation policy of the PEO. What if you want to use your own workers’ comp policy but still have a PEO process your payroll? That is where a pay-as-you-go payroll solution may be a better option.
Paying for Workers’ Comp and Payroll Together – Why it makes sense
In the days before PEOs, obtaining a workers’ compensation insurance policy required the business owner to:
- Make a substantial financial down payment
- Correctly anticipate the number of employees for the coming year and
- Correctly anticipate the types of work to be performed and estimate the amount of work to be performed in work comp code (type of work) and then estimate the amount of payroll dollars to be spent on each type of work.
- Make quarterly premium payments
Once these estimates were made, the policy would be written and the premiums payments would be based on these assumptions. At the end of the year (or end of the policy term) an audit would be conducted to determine if the estimates were accurate. Adjustments would be made and the client would be either billed for an additional premium or refunded overpaid premium.
For businesses that are relatively static in terms of growth, this model was adequate although inefficient. However, for other businesses this method created several problems:
- Businesses that were downsizing, this method often resulted in overpayment during the policy period.
- Businesses that were growing would be underpaid and an end of year audit would result in an unexpected additional premium payment, sometimes a substantial amount.
- Business that were adding new types of work (different work comp codes) found that they needed to constantly go to the carrier to ensure that the type of work being added was allowable under their policy.
The Pay-As-You-Go work comp model assigns workers comp codes (work risk type) for each worker and automatically bills your company for only the coverage your company needs - during the time you need it. No more, no less. Premium amounts are precisely calculated on each payroll for the exact amount owed. No more down payments to get a policy in place. No more estimates of payroll and no more end-of-year audits and associated surprise expenses. Payroll cash flow consistency is maintained.
Many of the nations’ top workers’ compensation insurance carriers are moving aggressively to partner with payroll service providers and ASO companies. In order to keep their clients’, they are offering Pay-As-You-Go work comp coverage that duplicates the way PEOs have done it for years. The Pay-As-You-Go model eliminates the overhead associated with end of year audits and inhering inaccuracy of estimating premiums. In addition, carriers have realized that work comp fraud is a significant problem and cost to their bottom line. Pay-As-You-Go ensures the carrier that they cannot hit for medical expenses for anyone who was not on the payroll. Someone who got hurt last month, cannot make a work comp claim if they were just hired last week. Carriers also like the fact that this makes it difficult for insured clients to intentionally misclassify the work comp codes (risk type) of the jobs being performed.
Is Pay-As-You-Go Work Comp More Expensive?
Work Comp Rates for pay-as-you-go coverage are in general the same price as a standard policy. As with a standard policy, the risk types covered are defined up front and an agreed upon rate is established for each type of work. Types of work performed that are not defined on the policy will not be covered unless the carrier has agreed. While a PEO may offer lower rates for certain types of business, it is anticipated that the increased efficiencies for the carrier of pay-as-you-go policies may translate into lower costs that get shared with their client companies.
How is Pay-As-You-Go Work Comp different that using a PEO
Using a Pay-As-You-Go payroll work comp solution only provides a portion of the advantages of using a PEO and leaves the client’s company with significant administrative tasks and employment related risks. However, for some companies in high-risk businesses like cell phone tower construction or roofing, there may be limited PEO options available and there may be a standard market work comp carrier who would write the policy. In those cases, Pay-As-You-Go work comp coverage may be an option. In other cases, a company may have internal staff to handle the administrative tasks typically performed by a PEO and be looking for a less expensive alternative to hiring a PEO.
Things to consider:
Most companies doing their payroll “in house” are reluctant to change software since there is always a learning curve with something new. BUT the good news is that many of the most widely used payroll software packages in use today, have built an interface to the major insurance carriers and can transit payroll data used for work comp premium billing directly to the carrier or agency. Once established, it’s automatic.
Finding a Pay-As-You-Go workers' compensation insurance solution for your company
We can help you review all the options that will be a good fit your company. In addition, if your current insurance agent has not offered a pay-as-you-go option, contact National Workman's Comp Solutions.