California has some of the highest workers’ compensation rates in the country. The state’s high cost of living translates to higher medical, legal and administrative costs.
So if you’re running a business in California, you may be wondering how you can save money on workers’ comp insurance. How can you cut costs while still making sure your workers are protected in the case of an accident? Let’s get into the details in this blog from WorkCompOne.
California Workers’ Compensation Rates
First, let’s start by discussing workers’ compensation rates in California. As of 2020, California had an index rate of $2.16, the fourth-highest in the entire United States – and 150% of the median price in the U.S., which has a median index rate of $1.44.
An index rate of $2.16 means that, on average, businesses will pay $2.16 per $100 in payroll. If an employer has $100,000 in payroll, they’ll pay about $2,160 for workers’ compensation insurance.
That said, annual spending on commercial insurance premiums varies widely from one small business to another. The biggest factors impacting cost are:
- Industry: Each industry is assigned its own class code (e.g. 8810 - Clerical work) and rate, based on the relative risk for injury.
- Payroll: The base cost is the rate per $100 in payroll, so the higher employee payroll, the higher workers’ comp costs.
- Claims history: The business’s personal history of workers’ comp claims could raise or lower the final price.
What Will I Pay For Workers’ Comp In California?
According to Risk & Insurance Magazine, California has high workers’ comp costs for a few reasons:
- The highest number of permanent partial disability claims in the U.S.
- High medical costs
- Excessive litigation on claims
- A very high frequency of independent medical reviews
When combined, these factors add significant cost to the state workers’ compensation system.
With that said, there are a few ways to save money on workers’ comp insurance in California. Here are some of our top strategies for stretching your dollar and getting affordable, accurate coverage for your company.
Cheap Workers’ Comp Insurance: Insider Tips for Small Businesses
California requires all businesses with employees to carry workers’ compensation insurance, and roofers are always required to carry coverage. To get affordable coverage, follow these tips.
- Shop Around And Ask Multiple Companies For Quotes
- Double-Check Classification Codes
- Consider How Payroll Affects Your Workers’ Comp Costs
- Look at Non-Employee Coverage Requirements
- Calculate Payroll Accurately
- Consider Alternative Payment Options, Like “Pay-As-You-Go” Insurance
- Work With Your Agent (& Ask For Discounts)
- Maintain Good Workplace Safety Practices To Prevent Injuries & Claims
1. Shop Around for Work Comp Quotes
In California, business owners can buy workers’ comp insurance from any licensed insurance company, or through the State Compensation Insurance Fund (State Fund).
Workers’ compensation quotes can vary from one carrier to the next. Different rates, underwriting (assessing your business’s risk of a claim), and available credits and debits can all factor into the premium quote.
Like any other type of insurance, it doesn't hurt to get workers’ comp quotes from multiple providers. Chances are that you’ll find a lower rate if you shop around, and it never hurts to ask!
Tip: Use independent agencies like WorkCompOne to get quotes from multiple insurance carriers simultaneously.
Employers also have the option of self-insuring in California. That means the employer doesn’t have to pay a workers’ comp insurance premium, but it requires a net worth of $5 million, net income of $500,000 per year, and a security deposit. And if a worker is injured, the company is fully liable for their claims, rather than an insurance company – so this is not a realistic option for most small businesses.
2. Double-Check Classification Codes
Classification codes are numeric codes used nationwide to categorize employees and set insurance rates. The class code labels employees based on the relative risk for injury — which means it can be a major factor in your rate, and therefore your premium.
There is a classification code associated with every industry. For example, clerical workers have the code 8810. Carpenters have the code 5403, and electrical workers have the code 5190. California is also one of a few states that use their own rating bureau to assign classification codes.
Class codes are one of the ways that insurers calculate the risk of injury at your business: The costs of insuring a construction worker are much higher than insuring an accountant. And that makes sense. Construction workers are much more likely to be injured on the job, and are much more likely to be seriously injured.
So before you buy a workers’ comp policy, it’s important to make sure all of your employees are classified correctly. Double-check and make sure everyone is accurately categorized – or you may end up overpaying for work comp insurance in California.
- Confirm the description for the assigned class code accurately explains what employees do. If not, ask the insurer for an explanation or request that they re-evaluate the class code assignment.
- Make sure any other employees, like salespeople or clerical workers, are treated separately — not lumped in with other employees.
An insurance agent experienced with workers’ comp can help you navigate this.
3. Consider How Payroll Affects Your Workers’ Comp Costs
Workers’ comp rates are multiplied by total payroll. The higher your payroll, the higher your workers’ comp costs will be. So when you’re thinking about expanding or operating your business, you can keep this in mind.
For example, if you hire an in-house IT specialist for your business, you will have to pay for their workers’ comp coverage – as well as health insurance and other costs. But if you choose to work with a contractor or a managed services IT company, you won’t have to worry about workers’ comp and other such costs.
So you may want to consider your approach to hiring new workers. There are some cases where hiring contractors and subcontractors may make more sense for your finances.
Just beware of misclassifying full-time employees as independent contractors. California law has steep penalties in place for employers who misuse employee classifications to avoid taxes and other costs.
AB5 and Gig Economy Workers
In September 2019, California passed AB5, a new labor law extending wage and benefit protections to "gig economy" workers. Under the new law, some workers previously considered independent contractors — such as those at app-based tech companies Uber, Lyft and Doordash — are reclassified as employees, and therefore eligible for employee benefits like workers' compensation coverage.
Under AB5, the burden of proof is on the employer to demonstrate that the worker is an independent contractor, and a three-prong test is used to determine proper classification.
If you have questions about who needs to be covered by the policy and other questions about work comp, California’s Information and Assistance (I&A) Unit helps employers and employees understand their rights and responsibilities.
4. Look at Non-Employee Coverage Requirements
Owners and officers often have higher salaries, which can inflate workers’ comp cost. According to California law:
- Sole proprietors are excluded by default, and may choose to include themselves by clearly stating this on the policy, or adding a coverage endorsement.
- Directors and officers must be included in coverage. There are some limited exceptions where they may exclude themselves, and the director or officer must still be covered by a health insurance policy or health care service plan.
Keep in mind that by excluding yourself on the policy, you are forfeiting coverage and may need to pay for medical bills out of pocket, in the event of a work-related accident.
5. Calculate Payroll Accurately
Once employees are grouped into class codes, payroll (annual gross wages) should be totaled for each assigned class code. Underestimating payroll can result in a hefty bill after your annual audit.
A few things to keep in mind when pulling wages for workers' compensation insurance:
- Report total employee pay anticipated for the upcoming year.
- Add up payroll separately for each classification code.
- Round wages to the nearest $1,000.
- Include wages of all workers to be covered by the insurance policy.
6. Consider Alternative Payment Options, Like “Pay-As-You-Go” Insurance
Some insurance companies now offer “Pay-As-You-Go” insurance, which means that the employer pays for workers’ comp based on the actual payroll each pay period. This is often the best option for small business owners in California.
Usually, workers’ comp premiums are calculated once per year. The employer estimates annual payroll, gets a quote from a workers’ comp company, then pays for the entire policy up-front or in installments. That means you have to pay more money right away — and for an estimated amount.
But if the payroll estimate is wrong, the business could end up underpaying and owing more money when it’s time to renew the policy. If they overpay, they’ll get a credit for the overpayment, but that’s money that could be put to use elsewhere in the business.
With pay-as-you-go insurance, you pay less up-front, and you pay based on your actual payroll – which means you won’t have to worry about overpayments or underpayments. This frees up some cash for small business owners, which is always a good thing.
Even if pay-as-you-go isn’t an option, paying for the policy upfront or in larger installments may reduce billing fees tacked onto each payment, which can add up.
7. Work With Your Agent (& Ask For Discounts)
Ask your insurance agency for other discounts and ways to save, like:
- Adjusted payment terms
- Claims-free discounts
- Workplace safety and loss-prevention programs
- Group rates
- Owner exceptions
- Payroll reporting
Many carriers also offer discounts for formal safety programs or training, multiple years without claims, and more.
8. Maintain Good Workplace Safety Practices To Prevent Injuries & Claims
Your workplace safety record has a huge effect on how much you’ll pay for workers’ comp. And that makes sense. If you run a safe workplace and you don’t have many injuries or claims, that means insurance companies will see you as a low-risk customer – and they won’t charge as much for coverage.
The opposite is true, too. If you’re not maintaining a good safety record, your workers’ comp insurance provider will have to issue more payouts, and your workers’ comp costs will rise. For this reason – along with many others – workplace safety should always be a top priority at your business.
One of the biggest controllable factors in workers’ compensation cost is to avoid claims.
- Make a safety manual for employees.
- Require the appropriate safety equipment, whether protective headgear, eyewear or non-slip shoes.
- Have a safety training program to onboard new employees.
- Ask your insurance agent for safety and training resources.
Need Workers Comp Insurance In California? WorkCompOne Is Here To Help
At WorkCompOne, we make it easy for small business owners in California to get the workers’ comp coverage they need. We work with tons of top insurers to provide great coverage at reasonable prices.
And if you need more information before you get started, just contact us online. We’re always here to help! See our full library of resources on workers' compensation insurance cost here: Workers’ Compensation Cost: Resources to Keep You Compliant for Less.Kevin Schneider from Pixabay