Tackling 2 of the most persistent misconceptions so you can get the support you need
By Daniel Barnes, Account Executive, IGO Insurance
Every so often, IGO will encounter a small businesses owner seeking help after they are notified with costly news: They’ve received a pricey “enhanced premium” workers’ compensation bill that’s due in 30 days or it goes into collections—no if’s, and’s or but’s about it.
Unfortunately, this can and does happen because business owners—with a small operation and a few employees—will rationalize incorrectly that one can maintain a “ghost” workers’ compensation program paying very little in premiums and still be properly covered. That “bad news bill” comes about from their misconceptions about independent contractor/1099-status workers, how payroll is counted and what that all means for one’s workers’ compensation obligations.
Additionally, IGO encounters those who already have workers’ compensation but aren’t happy. “Premiums don’t vary. There’s not much I can do to lower my premiums,” they assume and stay resigned to that policy. What they don’t realize is that with an expertly prepared presentation of your business to several possible carriers, you might be able to get a better rate.
Let me walk you through some common misconceptions and explain how you can help your small business get on the right side of a workers’ compensation program.
Go cheap now, pay dearly later
Let’s use a general, small business example.* Jim runs a three-truck operation with two employees plus himself. “I have two employees, plus me, the owner. That makes just two employees so I don’t need workers’ compensation,” Jim wrongly assumes. In the state of North Carolina (and others) workers’ compensation insurance is mandatory for any company that has three or more employees. The number of employees that are counted in the three include the company officers and owners even if the officers and owners may be excluded from the policy itself.
Jim further incorrectly assumes that because he hires his employees as independent contractors he has the equivalent of “zero payroll” for workers’ compensation consideration and accordingly, can get by on what’s known as a ghost policy: A workers’ compensation plan that has no assigned payroll, is based on a premium $1,500-$1,600 a year and is written through state.
Jim’s insurance company then audits his business at the end of the policy’s 12-month term—not a surprise audit; insurance companies routinely ask questions about payroll and classification of workers at the end of a term. Accordingly, the auditor asks to see his payroll figures but Jim responds with his incorrect assumption, “I hire independent contractors, I have zero payroll.”
The auditor replies with the facts to a mistaken Jim: Just because your employees are independent contractors/1099 for IRS purposes this does not mean that they would be considered as such under the North Carolina Workers’ Compensation Act. Using Jim’s trucking business as an example, if his independent contractors are driving his trucks and using his equipment, then for workers’ compensation payroll purposes they need to be counted. (This is unless the independent contractor has their own, individual workers’ compensation policy.)
We can work it out: Shopping your workers’ compensation policy for better rates
There are those who misunderstand whether they need workers’ compensation, and then there are those who already have a policy, wish they could do better, but aren’t sure if they have options. Now comes the good news. If your current workers’ compensation policy is coming up for renewal, you could be in a great position to shop around. Here’s why:
The state of North Carolina awards your business what’s known as a modification number (MOD #) once a year on the anniversary of when your policy is set to renew. That MOD # is determined by:
1) Actual payroll
2) Number of years in business
3) Claims history
The lower your MOD #, the better your rate. MOD#’s lower than “1” are a magic number for workers’ compensation purposes. Generally speaking, when you have premium of over $5,000 for more than 3 years, have been running a clean business and accurately reporting payroll during that time, you can be moving toward a MOD factor of less than one.
“Resume help” for your business to get the best possible price
If you’re considering a new workers’ compensation policy, you need to prepare just like you would a job interview. Your operation is going to be scrutinized by the insurance carriers before they make a decision to offer you a better rate. Your “resume” (i.e. your business, your experience running a clean shop, your payroll, your claims, etc.) need to be cleaned up and punched up so you can present your business to insurance companies in the best possible light.
This is where your independent insurance agent can be of tremendous help.
- Meet up: I wouldn’t recommend waiting until right before the renewal date to look at other workers’ compensation plans. Sixty days in advance of the policy’s renewal date, meet with an independent insurance agent so he or she can get to know your business.
- Clean up: Are there claim issues or payroll issues? Share them with the agent so they can help you take care of those issues.
- Shine on: The job of the independent insurance agent is to sell your business and experience to as many insurance carriers as we have. Unlike the captive agents (you know the ones; the big names with their funny TV ads) independent agents like IGO are not limited to presenting your business to only one insurance company.
We are advocates for our customers and will shop your business to several possible insurance carriers to find the absolute best possible price.
*This story, while a generalized example, is also fiction. Names, characters, businesses, places, events and incidents are either the products of the author’s imagination or used in a fictitious manner. Any resemblance to actual persons, living or dead, or actual events is purely coincidental.
Daniel Barnes is an Account Executive with IGO Insurance Agency, Inc. In this role, Daniel is a servant to his clients by going above the call of duty to make sure their financial dreams and legacies are protected. Read more about Daniel