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Workers Compensation Insurance is insurance coverage you are required to purchase that covers your employees medical expenses and lost wages for injuries they may receive while in your employ. In exchange for providing Workers Compensation coverage, you as the employer are (generally) exempt from being sued by the employee for these costs.
Workers Compensation insurance is very highly regulated by each state, and is sold to employers under these regulations by private industry insurance companies. Each state varies in the degree of their regulation and in the types of limitations and exceptions to how the insurance is sold and administrated within their state. These exceptions are important to note because it is strictly up to each employer to research and understand the regulations of their state and how they may apply to the use of TimeTrax.
Generally, Workers Compensation insurance policies are sold by estimating each employer's annual premium, which is then paid to the insurance provider in a series of monthly payments (typically spread out over 10 months) over the next year. At the end of the insurance year, the insurance provider requests a "self audit" or sends an auditor out to the employer's office to conduct an "on site" audit to determine the actual amount of payroll that was paid during the insurance year, upon which the actual premium is calculated and the difference between the actual premium earned and the amount already paid is calculated. If the employer under-estimated the annual premium, then the employer owes the difference. If the employer has overpaid (not likely, but it happens) then they typically receive a credit towards the ensuing year's premium.
Workers Compensation insurance premiums are generally calculated as a percentage of each employee's compensation, depending upon the employee's official Workers Compensation classification. These percentages are generally set by each state through a number of politically charged processes that most of us, lacking a personal paid lobbyist, rarely have any influence.
In addition to establishing the statutory rates, many states mandate one or several "incentive" programs that can influence the statutory rates. These programs can include formal job site safety programs, company drug prevention programs, hiring of a safety director, or having a good (or bad) safety record. Your WC premium can also be influenced by specific rules such as wither or not your state requires the full statutory rate to be applied to overtime pay, vacation pay, bonuses, etc. The best way to learn the rules in your state is through a detailed conversation with your insurance agent.
Further complicating these matters is that in many states, your "experience modifier", which is typically the across-the-board percentage adjustment you can take from the statutory rates, is not known to you until the end of the insurance year, and may be based upon either or both your own company's safety record and the safety record/loss ratio of your entire industry across the state. Again, the rules are different in every state.
At the risk of getting ahead of ourselves here, you should know that TimeTrax handles the Experience Modifier as a separate setting that can be revised after the end of the insurance year to revise and re-calculate all the effected records.
Workers Compensation Classifications
At the core of the Worker's Compensation industry's ability to set and apply rates is the classification system. The Workers Compensation Classification system is administrated by an industry organization known as the National Council on Compensation Insurance, which is abbreviated as NCCI.
NCCI is a non-profit organization (although you wouldn't know it from the prices they charge for their publications and Website access) that is empowered by the major national insurance companies to establish and maintain the Classification system used to define every occupation in the country. The NCCI sets the classification numbers and descriptions, the rules for how these classifications are applied, and conducts constant research into the safety records of different industries and occupations.
Of course, in addition to the classification numbers, descriptions and rules, each state can and does add their own additional classifications and makes modifications to the established descriptions, usually under the influence of some special interest group or organization. Again, us regular people have no control over this process, it's simply up to us to research the subject and try to comply.
NCCI has a great website in which they sell a number of publications and online services intended to supply the industry and outsiders alike (at a higher price) with information about the classification system and all it's myrid rules. Your insurance agent is probably an NCCI member and can gain access to the site, or if you are so motivated, you can subscribe to one or more of their services. I can suggest that you might want to consider what they call the Scopes Manual, which is their basic manual of the classification numbers and descriptions.
Traditional vs Division of Payroll
There are a number of possible strategies you can employ to reduce you Workers Compensation costs, including some items we've discussed above like safety programs, drug programs, and juat having a good safety record. However, there is one additional strategy that is available only to the construction industry, but that is seldom discussed by insurance agents or auditors, and until TimeTrax, rarely utilized because of the record keeping requirements.
Most employers are familiar with what we call the traditional method of calculating Workers Compensation, which is to classify each employee by one classification based upon their job title, and thereby pay the same rate for that employee for the entire duration of the insurance year. However, there is another completely legitimate method known as "Division of Payroll", wherein you may have your Workers Compensation premium calculated according to the types of work actually being performed by the individual employee.
The Division of Payroll method for calculating your Workers Comp premium essentially entails paying different rates for the different classifications of work being performed by the employee, as opposed to paying one rate for all the employee's time. For example, using the traditional method, if you classify a carpenter as classification 5645 (for framing carpenters), which is Florida is approximately 32.5%, then your WC premium is 32.5% or his earnings, regardless of wither or not he also does any interior trim, sets any doors and windows, installs any cabinets, performs any demolition or cleans up the projects. He's rate is always 32.5%
However, if you are using the Division of Payroll method, then you would still pay the 32.5% rate for when the carpenter is framing, but (in Florida) you would pay 19.8% when he is doing finish carpentry, 8.6% when he is doing demolition, 14.5% when he is installing cabinets, etc. I think you get the idea.
Ok, so if the Division of Payroll can result in lower WC premiums, why doesn't every body use it? The primary reason is that it's incumbent upon you as the employer to keep the records to justify the distributions. This isn't easy to do, and you can damn well bet that neither your insurance agent or your WC auditor is going to do it for you. Until TimeTrax, there wasn't a software program on the market that could calculate WC by cost code linked to separate WC Classifications.
Not every employer will benefit from a lower WC premium by using Division of Payroll, it's not automatically the cheapest method. However, before I discuss the pros and cons, don't start sweating bullets about making the decision in advance because TimeTrax automatically calculates your WC costs by both methods simultaneously, and you can do a comparison report to decide later which method produces the lowest premium. TimeTrax also allows you to print any of it's reports with just your chosen method for the auditor.
Comparing the Options
So what are the pros and cons of Traditional vs Division of Payroll, and why doesn't everybody benefit? Let me illustrate some examples:
- Your WC premium could be lower if you have employees who perform a variety of tasks, and for whom you have to pay the rate for the most risky work all the time. BTW, that's the rule: With the traditional method, you are expected to classify each employee according to the highest classification of work they perform in a year, even if they only performed that classification for just one hour. In any event, General Contractors and Remodeling Contractors with payroll employees who perform a wide variety of tasks should look forward to the most savings.
- Your WC premium will be the same if all your employees work only one classification. For example, if you're a masonry contractor, and all your employees are either full time laborers, full time masons, or full time supervisors, then the WC premium calculations would be identical by either method.
- Your WC premium could be higher if you've deliberately underclassified your employees. For example, if you've got several employees classified as #5437 (finish carpentry) and they routinely perform rough carpentry, it's going to show up on the reports, and you will be paying the rough carpentry rate for those hours that you were otherwise paying the finish carpentry rate. Of course we all know that deliberately mis-classifying employees is criminal fraud, and we all know that it's done all the time.
REMEMBER: TimeTrax does not require you to determine which method you will use in advance. The program keeps both sets of calculations simultaneously, and you can do a side-by-side comparison report at any time to see the difference, and you can print any report using the calculations from only one method for presentation to your auditor.
The TimeTrax Demo has a WC Comparison Report that quickly illustrates the potential savings from using the Division of Payroll method. In this report, you can make several observations:
- The rates for Billy Williams, a laborer, were somewhat lower under the Division of Payroll method because he performed some Demolition, which has a lower classification than the cleanup.
- The rates and cost for Cary Smithers, a supervisor, is the same under either method because he is classified under the Executive Supervisor rate by the Traditional method.
- The rates and cost for George Randall, the owner of the company, are all at zero because in this state the owners of construction companies are permitted to exempt themselves from the WC system, and TimeTrax has a setting in each employee's setup wherein you can make this designation which will result in the WC cost for the employee to always be zero regardless of what cost code is being used.
Moving further down the screen to view the remainder of the report, we can make some additional observations.
- The rates and subsequent costs for Jason Crew, a carpenter, is $152.45 under the Traditional method, but only $102.54 under the Division of Payroll method. The reason is obviously because in addition to some Rough Carpentry, Mr. Crew also performed some Demolition, Metal Stud, Drywall and Suspended Ceiling work in the same week, all of which have classifications with substantially lower WC rates.
- The rates and WC costs for Johnny Kimball, another carpenter, is $196.80 under the Traditional Method but only $122.35 under the Division of Payroll method. The reason is identical to Jason Crew because Mr. Kimball also performed the same Demolition, Metal Stud, Drywall and Suspended Ceiling work wit the lower classifications.
- The last employee on the report is Sandy Westfield, the company office manager, who's rate of .56% remains the same under both methods.
The total WC cost for the entire week's payroll is $482.10 under the traditional method and $347.63 under the Division of Payroll Method, a difference of $134.47 representing a reduction of nearly 28%. Now, we're not suggesting that every TimeTrax user will experience the same level or difference in their WC premiums, but it does illustrate the point that the situation bears monitoring.
Remember, TimeTrax performs both set of calculations, and you can review the WC Comparison Report at any time to determine what, if any, difference there is between the two methods for your company.
Now, before you get too excited figuring out your potential WC savings, I need to advise you of some rules cooked up by the insurance industry regarding Division or Payroll.
- You can't use the Finish Carpentry Classification on any project that you've used the Rough Carpentry Classification. What this means in English is that if any of your employees performed even a few minutes of rough carpentry on a project, then you have to classify all the other work they may do (such as the finish carpentry) at the rough carpentry classification. I can't figure the rational behind this rule, but I'll tell you how some TimeTrax users get around it in the next section.
- You can't use the Executive Supervisor #5606 for any employee who also performs any other Classification of work. What this means is that your construction supervisors can only supervise, they cannot also perform any work. It also means that if you have a carpentry supervisor, his time is at the same classification as the carpenters he supervises.
- You also can't use the Executive Supervisor #5606 for any employee who directly supervisors any field workers. What this means is that, theoretically, any employee who is an "Executive Supervisor" is expected to sit in an office and never actually go to a job site and give instructions to any field workers. I've often wondered why, if an Executive Supervisor can only work in an office, then why isn't the appropriate classification #8810 Office-Clerical and Drafting like all the other office workers?
What's cool about TimeTrax is that you don't need to decide which WC method you wish to use in advance and then hope you've picked the right one. Instead, TimeTrax automatically calculates your WC premium by both methods and allows you to do a WC Comparison Report at any time, and certainly at the end of the insurance year. The procedure is simple, run the WC Comparison Report, pick the method that results in the lowest premium, then run a standard Workers Comp Audit Report set for the desired method, which you then print and give to the WC auditor.
I cannot specifically advocate that you use the following strategies, but I can tell you that I have been advised about them from some TimeTrax users. These strategies are specifically designed to mitigate some of the Notable Exceptions described in the previous section.
- To avoid the problem with not being able to use the finish carpentry classification on any project where you may have performed some rough carpentry, it has been suggested to me that you might add a second cost code for finish carpentry (like one code called "Finish Carpentry" and another code called "Trim Carpentry") and use the second code for any rough carpentry you may do on the project. This way, when you read your job cost reports, you know what the second code means, but the auditor doesn't have a clue.
- Because you can't use the Executive Supervisors classification with any other classification (the classification is not available for Division of Payroll), instruct your field supervisors to code the time they spend talking on the phone, sitting in their office, etc. as classification #8810 Office - Clerical and Billing. This will at least reduce the time they are actually supervising employees at the higher rate for the employees.
- Reserve the classification #5606 Executive Supervisors only for the owner of the company, who won't keep a timesheet on himself anyway. Have the owner use a cost code like MasterCode #805 "Project Manager" or the QuickBooks Template Chart of Accounts #6010 "Owner's Salary" something else that doesn't sound like a guy in the field. If the Owner will keep a timesheet on himself, he can still assign his time to projects or business overhead.