Another Question On Employee Misclassification

I received another question on the pitfalls of misclassifying employees. In California, there was a company that had been advising employers to exploit a loophole in the labor code to avoid their workers comp obligations by classifying workers as shareholders and corporate officers.  

In most states, shareholders and corporate officers are exempted from the remuneration (payroll) figures for employers.  Giving a rank-and-file employee a position title such as Vice President or any executive title does not guarantee an automatic exemption.  If any company gives you advice to try this method, please avoid them at all costs. This is very illegal.  The company in California that was giving this advice is being pursued very heavily by the California Attorney General.  

We would never advise a company to try this method.  The Workers Comp premium auditor will catch this at the end of the policy year, so the advice to try this method is basically worthless.  The only money earned by this method is the advisory company getting paid for useless advice.   

As we have mentioned in the last two posts, there is nothing wrong with questioning or disputing the workers comp classification codes or anything else in an employer's workers compensation policy or premium audit. This is allowed by your Workers Comp policy.                     

Misclassification Confusion

We received a few emails today concerning yesterday's post.   There are two different types of misclassification of employees.  One is a much more serious situation than the other.   

The first involves misclassifying an employee as a subcontractor. If it can be proven the employer purposely misclassified an employee as a subcontractor to avoid paying Worker Comp premiums and taxes, this is a very serious violation of the Workers Comp insurance and tax laws.  Operating a business under these circumstances can result in very serious consequences and should be avoided at all costs. 

The second situation involves an employer disputing or attempting to correct their employees job classification codes.  Please do not let all of the press coverage over misclassifying employees as subcontractors vs. employees discourage you from making sure the employees are properly classified under the Workers Compensation policy.  We have never seen an instance where an insurance carrier implied or accused an employer of doing something illegal by questioning how their Workers Comp policy is constructed.  

However, we do discourage any employer from disputing an insurance policy or premium audit without some basis other than "we paid too much in premiums."  This may possibly ruin a great working relationship with the respective insurance company.        

Two Types of Misclassifications

We have received emails over the last few weeks concerning various Departments of Insurance pursuing employers for misclassifying employees in their Workers Comp policies. This is not to be confused with the misclassifying of employees as subcontractors.

The recent press releases about employers being fined large amounts of money for misclassifying employees are not the same as an employer questioning how their employees are classified. The states are pursuing employers that classify an employee as a subcontractor. The IRS has a list of rules that differentiate an employee from a subcontractor on their website. You may also use the search box in this blog and search for IRS. The link to the IRS article is in one of my prior blogs.

Your company always retains the right to dispute how your employees are classified in your Workers Comp policy. This means your company can dispute the premium audit that the premium auditor has prepared. Once again, disputing the premium audit or questioning the premium auditor's work will never result in the Department of Insurance investigating your business practices. In fact, your Workers Comp policies have included in them the right to dispute anything in the policy or audit. If you read the final pages of your policy it is in there. In fact, all states require the insurance carrier to include in the policy the dispute procedure in detail.

State Departments of Insurance are beginning to heavily pursue the misclassification of employees as subcontractors. Why? The employees are being removed from the Workers Compensation Insurance system and the tax system.

A Huge Concern in Workers Compensation Audits

I had posted about this situation over the last few weeks. This situation is becoming a very urgent one as companies are trying to survive in this terrible economy. We have seen this happen over and over again lately when we conduct premium audits for employers. I wanted to re-post over the concern we have with employers not accurately forecasting their payroll figures. The payroll figures are sometimes called remuneration. This can push a company to the brink of bankruptcy if not done properly.

The very bad economic situation we all are having to bear has caused many employers to layoff a large portion of their staffs. Some employers are just now making cuts to their ranks. Even if your company has not experienced any layoffs, an upcoming reduction may not accurately reflect your payroll figures for Workers Comp policies or audits. Yes, the premium auditor will catch it at the end of the year with a refund or credit to your next policy. Do not let your premium auditor be the one to refund your company money at the time of the premium audit. You can do it on the front end of the polcy.

Overestimating your Workers Comp payroll figures is the same as giving your insurance carrier a free loan of your funds for a year or more. It is recommended that just using last year's payroll figures be avoided completely. We have seen companies harm themselves greatly due to not adjusting their future payroll figures to match their correct forecasted payroll. We are not advocating that any employer intentionally underestimate their payroll. We heavily suggest looking at each future payroll period to see if there will be any changes to those figures. You cannot ask for a refund from your insurance carrier mid-policy.

There are many options at the time of policy renewal that will enable your company to avoid this situation. If you need further info, please feel free to contact us. If you have already renewed your policy or are in the midst of a payroll and premium audit, I recommend that you begin to plan for the next policy renewal.

One thing I wanted to clear up is that we are not agents. We do not have any outside influences on what advice we give out to clients.

Can an Experience Modification Cap Really Work?

The Ohio Bureau of Workers' Compensation's board of directors recently approved a cap on premium increases aimed at preventing unforeseen spikes in workers' comp costs.

This is a case, once again, whether the government has launched an artificial modification to the E-Mod system that is in place in one form or another in every state. I am not sure that this will work as it would seem that the most safe employers would be subsidizing the least safe safe ones. The E-Mod system for Workers Comp is the system that has worked for many years. The NCCI has modified some of the rules, but not the way the E-Mod system works.

Someone will have to pay for the cap and it will be the safer employers. This may even cause a somewhat safe employer to be more lax in their safety. If my company was going to receive a cap and I could cut the safety budget, then would I not try to figure out how to have a minimally safe company? That may be an extreme example. Workers Compensation's rating, audit, and premium system works well for the environment that it exists in for the most part. Why alter what actually works?

I had read where some employers' premiums had swung wildly, but the way the E-Mod system is built, that one bad accident or one bad year is spread over three years. I think where the main fault lies with the Ohio BWC is the way that the Classification Codes are set each year. I would not say that is the reason for sure, as I would have to look at the rates for each classification codes for years to see what the changes were overall.

The bottom line is that while the Experience Mod system is not perfect, it should not be altered as one group of employers will end up subsidizing another if the system is changed.

A Question On Whether Insurance Companies Will Receive Bailouts

I received a question a few days ago in response to my post in reference to insurance companies receiving bailouts.  There was an article a few days ago in the National Underwriter that refuted the concern that insurance companies would be receiving bailouts.   My answer is Yes and No. 

It is true that insurance companies did not receive direct bailout funds.   However, the insurance companies lined up to buy banks or holding companies or to start holding companies.  The Department of the Treasury allowed the insurance companies to acquire or start up holding companies that qualify as a bank for the bailout funds.  Why was this done? 

Holding companies and banks were allowed direct access to the TARP funds.  The insurance companies could then receive TARP funds indirectly.  There are no regulations on how the holding companies or banks are to use the funds.

A Great Call From West Virginia

We received a call today from a West Virginia company that was inquiring about our services.  The caller was having trouble calculating their Workers Comp premium on their own and was confused on the E-Mod calculations and the premium calculations.

One interesting thing the caller said that on this blog that I had written "Stop Just Writing Checks." He was about to write a check for thousands of dollars until he came across that quote.     I had forgotten about that post.  

It was good to know that someone had read many months back into the archives.  If you look down the right side of the blog, there are many months that have been archived.  Feel free to access those or use the search box at the top right part of the blog if there is a certain subject you want to search for without having to read all of the blog posts.  If you cannot find what you are wondering about in the blog, please click on the Contact Us button for our contact info.  

Workers Compensation and the Stimulus Package - Part II

The three other bullets I wanted to cover from a few posts ago are: 

• Having a Federal Insurance Watchdog Agency - in essence to federalize the insurance markets along with Workers Compensation 
• The shrinking employer market as the need for Workers Comp coverage will be reduced in proportion to the employers' reduction in size
• The increase in claims filed as employees lose their jobs - this has been shown to be statistically true. 

I do not think that federalizing the insurance administration and especially Workers Compensation would be a positive development.   As we have seen (Digital TV Conversion, Bank Bailouts, etc.) when anything in federalized the costs increase dramatically and the level of service diminishes.  Would it not be a nightmarish situation if your agent not only had to keep up with state regulation, but also federal.   For instance, if you were renewing your Workers Comp policy, your agent would possibly have an extra set of federal forms to fill out. Of course, there would be a tax on the premiums to keep a watchdog agency in place.  You, as the employer would pay that extra tax.  State regulation is still the way to go because Workers Comp and other lines of insurance vary so much between states. 

The shrinking employer market is a fact.  When more employees are taken off the payroll, then the amount of risk with that employer would decrease.  However, there is another side to this discussion.  The larger the payroll, the more an employer can spread the risk of a few bad claims.   There are ratios in your E-Mod calculation that try to act as a balancing act between payroll,  class codes and claims.  As with most costs, the smaller employer pays a higher per dollar premium for the same Workers Comp coverage.  It is not that fair, but it is the system put in place by NCCI and the State Rating Boards. 

For many years, there have been numerous studies that show when employers lay off a large number of their staff, the number of  Workers Comp claims spikes.  Is this due to the employees worrying about future benefits and want to make sure they will receive an income after unemployment runs out or is it that employees may have been working with injuries that were tolerated as a part of work and now they want to file a claim now that they are unemployed?  I think it is a combination of both.  As I said in the previous paragraph, if an employer has lower payroll with many claims being filed, the E-Mod will increase dramatically costing an employer more for their Workers Comp in the coming years.  

Overall,  I think the only very negative development coming out of the current stimulus package is the federal watchdog agency possibly being created to administer insurance.      

            

Workers Compensation and the Stimulus Package - Part I

I wanted to cover the bullet points from my previous blog post.

 

In looking at the bullet points, some of these have been covered by me in detail over the past few weeks. 

The continued bailouts of the insurance companies will distort the market as this will allow them to be more competitive than they should be in quite a few areas.  Some insurance carriers have already been accused of low-balling on bids to win the business.  There are numerous articles on this point.  The GAO has launched an investigation into one specific insurance company's practices on bidding.

I had totally disagreed with the federal government allowing insurance companies to become quasi-banks/holding companies as this will distort the insurance markets even further.  This is just another method to obtain more bailout funds. 

  
I will cover the other three bullet points in my next blog post. 

Will The Current Stimulus Package Affect Workers Compensation?

Quite a few of our blog and email blog readers have posed this question to me over the last few weeks.  The answer is as complicated as the Stimulus Package itself. 

There are a few areas that could influence the Workers Comp and all insurance markets in the coming weeks and months. The five major areas that could wreck or help the insurance markets are: 

• Continued bailouts of insurance companies
  
• Allowing insurance companies to acquire holding companies to receive bailouts
• Having a Federal Insurance Watchdog Agency - in essence to federalize the insurance markets along with Workers Compensation 
• The shrinking employer market as the need for Workers Comp coverage will be reduced in proportion to the employers' reduction in size
• The increase in claims filed as employees lose their jobs - this has been shown to be statistically true. 

I will go over these topics over the  next week.  If I missed any topics, please let me know.  This blog does very well when I respond to the readers' questions.                

Subrogation - The Mystery Premium Refund

I have posted on subrogation in the past.  I would re-post the standard definition for subrogation, but it is one of the most confusing definitions in all of Workers Compensation.   

My definition of subrogation is when there is another party besides the employer that was partially or fully responsible for the incident occurring to the employee.  Workers Comp adjusters sometimes overlook the possibilities for recovering part of the claim payouts using subrogation.   

Why would this occur?  A Workers Compensation adjuster is not a liability adjuster and may only be trained to handle Workers Compensation.  General or auto  liability is a totally different segment of the insurance world and the Workers Comp adjuster may not be trained in the intricacies of liability other than Workers Compensation.         

If the subrogation recoveries occur within three years after the accident, the money should be credited back against the file.  The correction should require recalculation of the E-Mod and a refund of premiums.  Sometimes, the money will be recovered by the insurance carrier and credited against the file.  However, there a few steps that are required to result in a premium refund.  This is a somewhat complicated set of steps that will likely recover some of the overpaid premiums on that specific file. 

What should your company do if there is a possibility of recovering some of the funds paid out on one or many Workers Comp files?  Your company should inform the adjuster when the claim is reported.  Some type of diary system should be instituted to track the subrogation claim.  One of the main things to look for at the start of the process is a letter from the adjuster to the third party putting them on notice.  Without this letter, your subrogation claim will be deemed worthless. 

Subrogation takes a large amount of patience.  Your company's  efforts will pay off in the long run. If you feel that the subrogation claim is becoming too complicated or the carrier is not pursuing the third party enough to recover funds, it may be in your company's best interests to bring in a consultant to help with the subrogation claim.         

A Few Housekeeping Items For The Blog

This is a blog specifically dedicated to educating and informing the general public on Workers Compensation.  You may notice that we do not have ads or links to click on to make $ from the blog. That way when anyone reads the blog, they can be assured that there are no outside influences on the blog posts. 

You may use the search box to find any specific info.  You may also want to try the Workers Comp and Risk Management definitions under the Definitions tab.  If you have a question on something, please email or call us.  Due to a recent change in our liability carrier, I will be much more limited in giving free advice over the phone about a certain Workers Compensation insurance situation.

I have received many calls and emails about the Monopolistic State Funds and my original post that there were six states that were still monopolistic.  I was incorrect at the time as Nevada had converted to a free market system.  A few weeks later I received a question on the post and corrected it in another post.   If you use the Search Box and search for monopolistic, you will see the correction.  I am totally against changing the posts once I upload them to the blog.  That is why I did not change the erroneous original post. 

If you would like to use any of the posts as part of your research for a college class, presentation, or any other situation that is fine as long as the blog is given a tag line or a reference.  In NO WAY  would I ever agree for any parts of this blog to be used to make money or as a part of a publication that charges a fee.  If I use a quote, I will at least name the source of the quote. I believe in keeping the Internet free.  This blog is copyrighted.         

My email is jmoore@cutcompcosts.com and my direct phone line is (800) 813-1386.             

Bidding Against The Giants That Have Taxpayer Backing Part II

One of the interesting things that I have noticed about the current insurance market is any of the financial institutions or insurance companies that received any part of the bailouts have become much more competitive, almost too competitive. 

I am talking about financial institutions or banks as they have offshoot companies that are my company's direct competitors.   We used to be able to underbid the large companies on Workers Compensation projects by sometimes up to 70% due to our much lower overhead expenses.  Ever since the bailouts started,  these companies have been able to bid much lower on projects than early in 2008.  

There are two concerns with this development.  One is that the bailout of insurance companies and financial institutions have distorted the insurance markets, including Workers Compensation. The second is that small businesses will now have a much tougher time competing against the larger companies with their marketing machines and now loads of cash to prop up their lower bids just to get the business. 

Have the bailouts harmed the insurance markets?  As I mentioned in my last post,  the GAO is investigating the AIG  bailouts to see if there was an effect of distorting the markets.  From what I have seen, this is a forgone conclusion.                    

Bidding Against The Giants That Have Taxpayer Backing Part I

The GAO (Government Accountability Office) is now investigating to see if AIG has a distinct advantage due to the government bailout.  I pointed this out in a blog months ago that the government is functioning like a bid rigging scheme.  By letting AIG have an incredible amount of funds, one has to question if AIG has upset the insurance market further by underbidding so severely to just obtain the business and then use taxpayers funds as a safety net. 

One of the other insurance carrier manipulations that I have seen is insurance companies acquiring banks or becoming bank holding companies in order to receive a bailout under the TARP program. The only property and casualty company that has used this manipulation to get their hands on the free money is The Hartford. 

Blain Rethmeier, a spokesman for the American Insurance Association, said in a National Underwriter article, “It is essential for Congress to exercise its oversight responsibility to ensure that the government's intervention does not result in any outcomes that distort private markets and create conflicts with the government’s role as market regulator.”

Mr. Rethmeier added, “In circumstances, like the AIG situation, where the government takes a controlling stake in the company and provides it with capital, it is particularly important to ensure that the capital is used for well-defined and tightly controlled purposes.”

If the government does not ensure that the provision of capital tracks with these purposes, Mr. Rethmeier said, “this capital could be used for other unintended purposes such as gaining market share of financial institutions that are accessing private capital at market rates, presenting a substantial risk of market distortion and competitive advantage.”

That was a great quote by Mr. Rethmeier that encapsulates the problem in its purest form.  The Federal Government has allowed a situation that is very close to the bid rigging problem of a few years ago. 

Check back with me tomorrow to see how my company made out trying to bid against companies that are receiving the bailouts.           

What Can Your Company Do To Immediately Lower Your Workers Comp Premiums?

This is probably the question that I am asked most often at presentations, conferences, and meetings. 

There is no "quick fix" for your Workers Comp premiums.  Reducing your companies premiums takes at least three years of constant effort.  As Workers Comp is on more of a delayed system, anything that reduces the reserves will not show up in your premiums until two policy years  later.  

One of the best ways to reduce your premiums is to institute a new safety program or enhance one that is already in place.  Preventing accidents is the best way to reduce your premiums and will have a long term effect on premiums.  Almost all states offer assistance in Loss Prevention from educating employees to safety DVD's.  Check with your local department of insurance or industrial commission.  You may be surprised what is offered for free. 

Another way to quickly reduce premiums is to heavily review your Workers Comp premium audits.  We have seen companies just write checks without questioning the premium audits.  If there is something that does not look or feel right, you have the right to have the audit explained to you in detail by the auditor including classification codes, payroll (remuneration), and any other areas of the audit.  

One area that most companies do not attempt to question is their Workers Comp loss runs.  If you are not receiving your loss runs monthly, call your agent, or insurance carrier and ask to receive them monthly.  Most insurance carriers will offer to send them quarterly, but you need to review them monthly for changes in reserves.  Having online access to your claims info is critical.  When shopping for a carrier to renew with, ask that your agent inquire to see if the company she/he recommends has online access to your claims.  

Even with all the technology that is in place, there are a few carriers that do not allow access to your claims info.  Having this access may be worth paying a little extra over the lowest-priced carrier.  This will also save your company a large amount of $ if you decide to have a company such as ours to review your claims.  Most companies that allow online access will have a place for status updates.  Those are golden as you can review those quickly to have an idea of how the claim is progressing.  If you do not agree with or have questions on the loss runs, you should email (not call) the adjusters that are on the files. 

Questioning everything that comes across your desk in relation to your Workers Comp policies is always the best thing for reducing your Workers Compensation premiums.