Workers' Comp: Shattering the Myths
by Peter Schlactus, CIC, AAI [ Back To Table of Contents ]Like some huge creature straight out of a Homeric saga, Workers' Compensation looms ominously in the background for most
No other form of insurance
elicits as much fear, loathing and misunderstanding as Workers' Compensation.
And for good reason:
Except for couriers with large fleets, no other form of insurance can lay claim to so large a piece of your revenues.
A lot is at stake.
Before venturing to tackle so hefty a subject within a brief article, a few words of caution are in order.
Compensation is a state-by-state affair. General principles may apply to the
majority of jurisdictions, but each state's
particular statutes and regulations ultimately govern. Indeed, your insurance policy says little other than promising that the carrier
will comply with the terms of your state's laws.
Second, even laws and
regulations cannot anticipate every situation. When disputes or ambiguities
arise, administrative hearings
must resolve differing interpretations. The results are inherently unpredictable ... and not always consistent. By staying well within
the bounds of established practice, you can minimize -- although never eliminate --the chance of finding yourself at the mercy of
this quasi-judicial system.
Myths that circulate about
Workers' Compensation are legion. Below are just some of the more common notions
we run across in
our consultations with couriers.
I. Workers' Compensation is nothing more than another unjustifiable tax.
Many business owners see
how much money goes to pay their Workers' Compensation premiums each year and
the system is robbing them blind. While it is true that most businesses do not have claims in excess of their premiums during any
given year, the evils of Workers' Compensation can be over exaggerated.
Since Wisconsin passed the
first Workers' Compensation law in 1911, business and labor have agreed that the
both groups. Workers benefit by gaining access to guaranteed benefits to pay for medical expenses, lost wages and so on.
Businesses profit from virtual immunity from worker lawsuits for injuries sustained on the job. It was judged far better to budget
for the known costs of compensation premiums than to reserve unknown funds for the defense and payment of worker suits.
Given the size of jury
awards today, Workers' Compensation may be more an ally than enemy. As with many
types of insurance,
its undeniable costs are balanced by the fact that, without it, many could never shoulder the risks of going into business at all.
II. Independent contractors are not covered for Workers' Compensation.
Just because you are not
currently paying Workers' Compensation premiums on your contractors does not
mean they are not
covered ... or that premiums are not due. The fact is that, in a large majority of states, a business will be held responsible for
Workers' Compensation benefits on its subcontractors ... unless those subcontractors have their own insurance and can prove
it with certificates of insurance.
This is true for the over
thirty states where NCCI (National Council on Compensation Insurance) rules
apply, and we recently
have reviewed the regulations in New York, Illinois, Pennsylvania, New Jersey, Georgia, Kansas, and Louisiana as well.
Consult your state
Workers' Compensation Board or Insurance Department -- the rules are there in
black and white. Illinois
puts it succinctly: "If you employ uninsured subcontractors, the Workers' Compensation Act holds YOU responsible for
injuries to their employees. The conditions of this policy provide that the premium is to be paid by YOU, based on total payroll ...
including the payrolls of all such uninsured subcontractors."
The only ambiguity
surrounds the case where the subcontractor has no employees and no payroll.
judges are close to unanimous in ruling that the subcontractor, himself, is treated as an employee of himself and entitled to benefits.
Regulations, therefore, provide that premiums are to be based on "the full subcontract price of the work performed" (NCCI).
IlI. We don't need Workers' Compensation.
We hear a couple of
variations on this theme. The first is that a courier has only one or two
employees -- all the rest are independents.
Of course, all the arguments for the previous myth then apply.
The second rationale is
that your state allows companies to "opt out" of Workers'
Compensation. Only a very few states permit
this: New Jersey, South Carolina, and Texas. Only in Texas is the practice common. Yet, before anyone reading this relocates to
one of the three states mentioned, consider all of the consequences.
Texas publishes a pamphlet
entitled "The Dangers of Going Bare," covering the reasons why
employers might want to think twice
before foregoing Workers' Compensation. It applies equally well to the other states. Among the chief perils of "going bare" are:
1. Employers face unlimited
liability if an injured worker can prove any negligence. And the
burden of proof is on you. Try convincing
a jury of your peers that you had nothing whatsoever to do with putting the worker in a dangerous situation.
2. Employers lose their
most potent defenses, such as citing the "worker's own negligence, his
acceptance of the risk, and the
negligence of other employees."
3. No protection against awards for pain, suffering and punitive damages.
4. Full responsibility for your own attorneys fees and other defense-related legal expenses.
5. Risk of having a
federal bankruptcy judge "order the immediate sale of [your]
business." That means you lose not only your
business -- but rights to your customer lists, etc.
You cannot count on simply
being able to reincorporate and start over. Weigh all of these serious and
costly risks against the
real -- but limited -- savings associated with not carrying Workers' Compensation at all.
IV. If we pay for Workers' Compensation on our lCs, we're admitting that they are employees.
Not so. Workers'
Compensation laws operate independently of state and federal tax and
unemployment laws. Treatment of your
workers with respect to Workers' Compensation has no bearing on those other areas. Take the IRS's exhaustive list of criteria
for judging contractor status. No mention is made of Workers' Compensation.
In addition, Workers'
Compensation specifically calls for coverage and payment to be made on uninsured
the NCCI Manual states, "Most workers' compensation laws provide that a contractor [you, the courier firm] is responsible for
the payment of compensation benefits to ... its uninsured subcontractors [and] additional premium shall be charged."
Far from being a Trojan
Horse for employee status, proper treatment of ICs under the Workers'
Compensation system can
support your defense of contractor status.
V. We haven't had a serious claim in three years, so our rates should be lower.
Sounds logical, doesn't
it? Welcome to the wonderful world of Experience Rating, where a couple of
strained backs can affect
your costs as much as having one of your drivers knocked into a coma.
If your company generates
more than a couple of thousand dollars in Workers' Compensation premiums, you
are subject to
this plan and assigned a "modifier," or multiplier, that is applied against your premiums. For example, if your premium is $10,000
and your "experience modifier" is 1.5, your final cost is $15,000. Conversely, if your modifier is .75, then you get away with a
$7,500 bill. This modifier describes how your losses have compared over time to the average in your class of business. The time
period considered is three years -- not counting the year immediately prior. Again an example: Suppose your policy dates 1/1/98.
Your experience modifier would reflect your losses for the years 1996 (we skip 1997 as the most recent year), 1995 and 1994.
So far so good. But what
about the fact that your last big loss was in 1994? Our friends at NCCI,
in their infinite wisdom, have
designed the system to give greater weight to accident frequency than to accident severity. This is because the seriousness
of a given loss is subject to so many unpredictable circumstances, while the number of losses over time is more predictable
and controllable. If you were an insurance company, which would you put your money on: a company with one $50,000 loss
over three years, or one with fifteen $3,000 losses? Most people would choose the first, even though the previous carrier paid
$5,000 more on it.
In conclusion, only the
first $5,000 of a claim counts fully against you. The rest has an effect, but
only incidentally. Your experience
modifier -- and therefore your ultimate rate -- depends much more on how many "moderate" losses you have had.
VI. Our auditor came and went --everything is OK.
Not quite. Some
"lucky" couriers are lulled into a false sense of security because
they have survived an audit unscathed. You
are not paying for your ICs but, hey, that's water under the bridge now, right?
Actually, the law gives
carriers three years to discover and adjust premiums for undeclared or new
risks. Any time a new auditor
decides to ask the dreaded question, -- "May I take a look at your 1099's?" -- you can be held responsible for three years of back
premiums on your contractors.
Furthermore, if a carrier
"discovers" your contractors in this way, it will be far less amenable
to arguments about contractor
discounts, what constitutes earnings, etc. It may be better, in the long run, to negotiate a favorable deal on contractors upfront
with your carrier to avoid the costs of a nightmare audit.
must resign ourselves --there's no real alternative.
If, by an "alternative," people mean a way to stop paying for Workers' Compensation without incurring any other costs or risks,
then the statement is true. There are, however, potentially advantageous alternatives to standard Workers' Compensation policies.
Dividend plans and
retroactive plans allow you to recover some --even most -- of your costs when
losses are low. Couriers with
contractors can sometimes obtain a carrier agreement to charge less, utilizing the fine print of the ratings manuals.
Finally, it appears that
at least one carrier may agree not to charge or audit your contractors,
so long as the contractors obtain
less expensive Occupational Accident coverage from the carrier. This would be a new innovation in the Workers' Compensation
marketplace, and would offer couriers -- for the first time -- a permanent and completely legitimate way of avoiding all compensation
costs for contractors.
As a result, we can talk about shattering another widely-held myth: that the insurance industry never responds creatively to real-world business problems.
Peter Schlactus, a Certified Insurance Counselor and Accredited Advisor in Insurance, is Co-President of KBS International Corp., which provides specialized insurance programs, benefits, and risk management services to courier companies and executives nationwide. Mr. Schlactus is available to answer inquiries at 1-888-KBS-4321 or via e-mail at email@example.com.
COURIER MAGAZINE - October/December 1997 [ Back To Table of Contents ]
(c) copyright, 1999 by KBS International Corp. All Rights Reserved.