Whoever said "you can’t live with it, nor can you live without it” must have had workers’ compensation in mind.
At times the premiums seem exorbitant and impossible to live with; other times, when a worker is injured and the medical costs are covered and protection provided from employee lawsuits, it is indeed a blessing.
Still, no matter how you look at it, workers’ comp premiums constitute a major cost of doing business for any contractor, and as an overhead it can seem both elusive and burdensome. It is elusive when you try to get a handle on rising premiums and wrestle them down to a manageable size. It is burdensome, especially in today’s tight economy, when you are faced with competitors who, in order to shed this cost, only use 1099 workers (independent contractors) and so often can afford to come in as lowest bidder.
How to Control the Premiums
When a problem is squarely faced, most answers turn out to be simple to find, and managing workers’ comp premiums is no exception. Two things determine the size of workers’ comp premium payments: job classification and experience modification rate.
Job Classification. Job classifications are normally defined either by the National Council on Compensation Insurance or by the North American Industry Classification System, which was developed under the auspices of the Office of Management and Budget.
The purpose of these classification systems is to analyze and group employee duties under descriptive categories, which in turn are ranked by risk for injury. In other words, some jobs are more "dangerous” than others.
Say you live in Missouri and run a lumber company. You will then have to pay $52.22 in workers’ comp for every $100 a logging or lumbering employee earns. The risk for injury is obviously very high in this business.
On the other hand, for every $100 your office and clerical staff earns, you need to pay only $0.42.
If you run an entertainment company, the rate for your show folks will be $2.30 per $100 earned. A trucker is rated at $13.71 per $100 earned. All of this is reflective of the statistical risk of injury.
Now, you cannot do anything about the classification itself—that’s the part you simply have to live with it. But what you can and must do is ensure each of your employees is correctly classified.
First, ask your insurance agent for a full description of all applicable classifications. Too often, both employers and agents simply match an employee’s job title with a classification heading, and leave it at that. Digging deeper you may find that by matching the actual employee duties to the full classification description, you can realize significant savings on your premiums.
This may appear too basic to bother with, but some very long faces have ended up smiling all the way to the bank when employees were found in an incorrect—and more expensive—classification.
Experience Modification Rate. Once each employee has been assigned to the correct job classification, you can now calculate your base premium. However, to arrive at what you actually will pay, you must multiply the base premium by the experience modification rate.
The experience modification rate, or "mod” rate, is established by your insurance carrier, based on your claims losses for the previous year compared to the average claims losses for a wall and ceiling contractor for the same period, where you will rate either average, better than average or worse than average. It’s a ratio.
If your rating is average, it’s a 1-to-1 ratio, and your base rate by job classification is then multiplied by 1.0 to arrive at your actual premium for the next year. If your claim losses are higher than the average, the experience modification rate may be 1.1 or 1.5, and you’ll now pay 1.1 or 1.5 times the base rate.
If your injury losses are lower than average, your ratio may be 0.55, or 0.4. In fact, some companies have reached EMRs as low as 0.22, which, as you can calculate, constitute significant savings.
The Key. In other words, the key to lowering your workers’ comp premiums is first to make very sure that your employees are correctly classified, and then to do all that you can to drive down the experience modification rate as far as possible.
Safety, Safety, Safety
How do you lower the mod rate? There only seems to be one answer, and this answer is echoed by every contractor who has successfully lowered it—safety.
Kathy Coffey, safety director at Grayhawk, LLC in Kentucky, has overseen a very successful safety program for years now. She puts it this way, "Safety training, safety training, then some brush-up training on safety.”
Jon Clark, general manager of Porter Drywall, Inc. in Maine, could not agree more: "You need a safety director who eats and breathes safety and a crew for which personal protective equipment is second nature.”
Charles Antone, consultant at R.J. Kenney Associates, Inc. in Massachusetts, and a contractor PM in his "former life,” worked extensively with safety. His take is, "Safety gear should be a non-issue these days. Crews should not even think about not wearing PPE.
"We also used incentive programs quite successfully, such as $100 gift certificates to the employee with the best safety record that month. And practice what you preach. As a PM or superintendent you have to demonstrate personally and abide by all safety rules on the job, or your crew won’t take you seriously.”
Robert Coyle, operations manager/vice president and safety director at Dayton Walls & Ceilings, Inc. in Ohio, says, "When it comes to our employees, we put safety before anything else. And not only does this drive the EMR down, but we have noticed that 90 percent of the time, increased safety also increases production—employees feel safer, more relaxed and produce better.”
Joe O’Connor from INTEC, safety consultant for the Association of the Wall and Ceiling Industry, ratifies the view of the contractors, "Keep your workers safe; that will keep the EMR down. Also, manage each claim to make sure your employee returns to work as soon as possible.”
Coffey agrees: "If I have someone out on compensation, I always keep in close contact with him or her. I call them at least every week, and I visit them often—weekly, if I can. I do what I can to help them, drive the wife to the grocery store, for example, if she doesn’t have a license. I care for my guys, and I keep in very close touch so I know the moment they are ready to return to work.”
"Another thing to keep in mind when it comes to EMR,” O’Connor adds, "is to make sure that the insurance company does not hold the reserve longer than needed.
"What happens is that if an employee breaks a leg, the insurance company will put aside a reserve of, say, $100,000 to cover medical expenses and lost wages, and as long as that reserve remains in place, it goes against your mod. So you have to stay in close contact with the insurance company to make sure they reduce, or even remove, the reserve if the employee comes back to work sooner than expected.
"You may have to be persistent about this, and that’s why a good liaison between the contractor and the insurance company adjuster can save you a lot of money.”
Coffey stresses that same point: "I am all over the insurance company to retire the reserve the moment the employee sets foot back at work.”
A Long-Range Success Story. Travis Holiman, safety coordinator at F.L. Crane & Sons, Inc. in Mississippi, has been the safety director at her company for more than 20 years, and has seen her company’s EMR drop from 1.3 in 1990 to as low as 0.43 some years. And this happened as the number of employees has more than doubled.
"Historically,” she says, "a safety program consisted of ‘y’all be safe now’ and a hope for the best. We have come a long way.
"Management support is essential. A good safety program has to start from the top. We kicked off our program with a full company meeting where management made a commitment to safety.
"Our first step was a drug screening program, which produced results right away. Word got around that we were screening, and the percentage of positive tests dropped drastically over the first few months, and along with that, the injuries as well.
"Today most of our foremen have 30-hours of OSHA training, and we’re working toward getting all of our employees through the same 30-hour OSHA curriculum.
"And not only did our EMR drop, and with that our premiums, we have also seen an increase in production—and not just from lack of injuries but also from a more coordinated crew, with all now pulling in the same direction.”
Rob Little, vice president at Little Construction Co., Inc. in Indiana, adds yet another benefit to a low EMR: "Recently, we were awarded a contract because our mod rate was better than the low-bid competitor’s. The GC told me that their insurance company felt more comfortable with our company and EMR rating than with the low bidder. In fact, I’ve been told by another GC that if a contractor goes above a certain EMR score, they will not look at the bid.”
North Dakota Program Success. Gerald Roach, owner and president of Forks Lath & Plaster, Inc. in North Dakota, reports that the North Dakota state-run workers’ comp program is doing so well financially that next year they will refund 50 percent of this year’s premiums by applying them to the 2011 premiums.
"The state is also awarding grants from their workers’ comp surplus funds to fund safety equipment and programs,” he says. "In fact, I got the better part of a new forklift paid for by this state program.
"Injury rates are down, and the state is putting their money where their mouth is: promoting safety, helping our industry getting safer.”
The construction worker is traditionally of the tough variety and not one to complain about a little back pain or a minor wrist-sprain. No, the long-standing tough-guy policy is to "work through the pain and it’ll probably be all better tomorrow anyway.”
This philosophy works great when that one time out of 10 it really is all better the following morning. The other nine times, the sprain or strain or damage may be exacerbated by "working through the pain,” often to the point where what was initially treatable by physical therapy may now require surgery or a lengthy rehabilitation.
What is a safety director to do?
Coffey recognizes this situation very well: "I know all of my guys, and when I notice someone grimace or look like he or she is in pain, I tell them to check it out right now.
"I have found that traditionally it’s the more seasoned employees who will try to fight through the pain. New hires are trained to have things checked out right away.
"But you have to be diplomatic about this, especially in these times when work is at a premium. Everyone is concerned about keeping his job. I tell them no one will be terminated due to injury, and that’s a fact.”
Clark agrees: "You must create an environment where people can admit to having a nagging problem or sense an injury coming. With us, even the ‘tough guys’ now own up to a sore shoulder.
"Actually, we view our crew as professional athletes. We evaluate any symptom that may develop into an injury, and we catch problems before they become big ones. Of course, we understand that our guys don’t want to appear injured or ill, especially in these hard-to-find-work times, but we have to get the message across that it is safe to let us know—it avoids all kinds of long-range problems.”
Holiman concurs: "We’ve always encouraged our people to let us know if they’re hurt, even if only a little.
"Also, in order to catch any and all injuries, even the minor ones, at the end of each work-week we have each employee sign a sheet attesting that either they were not hurt at all or, if they were hurt, whether it required no treatment, first aid or a doctor.”
The 1099 Syndrome
Here we have the competing contractor who does not carry any employees on his payroll, only "Independent Contractors” who, on paper, are responsible for their own insurance. That means this contractor does not carry any workers’ comp premium overhead, so he is likely to underbid you.
This is more prevalent in some state than others.
Clark, for example, says that in Maine, "Most of our competitors are 1099 based and so they do not worry about workers’ comp.”
Nowadays, Kathy Coffey encounters it daily: "This has all come about due to the prevailing low-bid mentality. Sometimes we ask ourselves how some contractor can underbid us $15 million, only to discover that they don’t have any employees at all, so no workers’ comp payments.
"I’ve spoken to some of these 1099-workers, and they’re told by their contractors that if they do sustain an injury, they must lie to the medical facility and hide the fact that it is work related.”
Of course, the contractor who only fields 1099-workers is not protected by workers’ comp laws, and can in fact be sued by any of his workers who sustains injury on the job, but that’s easily overlooked in the low-bid world of today.
Whether your workers’ comp glass is half-full or half-empty, know that you can control those premiums by first classifying your employees correctly. That done, work to reduce your mod rate with an excellent safety program.
And then, perhaps those premiums will be neither elusive—nor burdensome—after all.
Coeur d’Alene, Idaho–based Ulf Wolf writes for the construction industry as Words & Images.