How to Lower Your Insurance Costs as a Small Business Owner

No matter what type of business you own, worker’s compensation insurance is required by law. Worker’s compensation insurance is an insurance that covers medical and rehabilitation costs, plus lost wages for employees injured at work. As a small business owner, this not only safe guards the employee, but you as well. It’s not a matter of “if” but “when” an accident will happen. So how do you know you have the right insurance coverage for each employee?

During our annual visit with our landscape company’s insurance agent, we reviewed two things: classification codes and experience modification rates (EMR). These two areas can save you the most money when it comes to worker’s compensation insurance.

Classification Codes:
What is a workers compensation classification code? A classification code is a numerical code assigned by the NCCI (or a State Rating Bureau). These codes are assigned to differentiate between the various job duties and/or “scope of work performed” by an employee. For example, a landscaping business has classification codes for mowing, landscape, street cleaning, clerical, etc. By classifying an employee correctly (aka, using the right codes per hour), you can save the company a lot of money. What exactly does that mean?

Let’s say that you have an employee that mows 2 days a week and landscapes 3 days a week, by calculating the amount of time per job and classifying them under 2 different classification codes, you are saving money per hour on that employee. The rate of pay for worker’s compensation insurance is based on the number of hours an employee does a certain type of job. As with any industry, one employee will do more than one job, so it’s imperative that you classify them correctly.

So where does experience modification rates (EMR’s) come into play?

Experience Modification Rates
An Experience Modification Rate (EMR) is used in conjunction with classification codes to calculate a companies worker’s compensation insurance premium. This rate takes into account the number of claims and/or injuries a company has had in the past (and their corresponding costs). EMR can have a significant impact on a companies worker’s compensation insurance premium, because it’s the rate which the insurer uses to calculate a businesses risk factor. How do you know if you have a good experience modification rate?

When a company first starts out they are given an EMR of 1.0. If that company stays at a 1.0, during the first 3 years of business, then they are considered no less risky than any other 1.0 company. Now if they drop below a 1.0, they are considered safer than most and could receive a lower premium. Premiums are calculated by multiplying the rate times each $100 of employee payroll. For example, let’s say your payroll is $100,000 and the rate is $1. Your premium will be (100,000/100) X 1.00 or $1000. Can an experience modification rate affect job opportunities?

Since EMR’s are recorded values sent to OSHA, it could affect job opportunities. Corporations that are looking to contract out certain jobs are going to pick companies that have lower EMR’s. If you are above a 1.0, it could potential hurt your chances.

All of this (classification codes and EMR’s) is WHY it’s so important to have an annual review with your companies insurance agent. If you don’t have an employee classified correctly, you could be wasting money. Plus, if you don’t know or understand your EMR, then you could loose out on job opportunities. Having everything in line and up-to-date will only ensure that you are properly covered and make your premium payments more accurate…and perhaps even save you some money. Meet with your agent regularly and don’t be afraid to shop rates every few years!

Do you have more questions about classification codes and EMR’s? These are the types of things that The Green Executive® coves during their 1:1 Consulting Services. Feel free to contact us and see how we can help you better understand insurance policies in your business.

Illinois Business Owner Disclaimer: If you are an owner/operator you can exempt yourself (sometimes) from worker’s compensation insurance. However, if you have employee’s (even part-time employee’s), you have to have worker’s compensation insurance on all the employee’s. In reference to the owner/operator, it may be cheaper (and advisable) for them to have short-term liability insurance instead of worker’s compensation insurance.