Archives for June 2008

North Dakota – Workers Compensation Mutual Insurance Company?

June 23, 2008 By JL Risk Management Consultants

Is North Dakota Headed Towards A Commercial Insurance Market?

North Dakota may soon turn into a mutual Workers Comp Insurance company such as Nevada did with Employers Holdings Inc., and West Virginia did with Brickstreet.

Both of those companies are having somewhat of a success in being a private insurance carrier, and they both have a full market with West Virginia opening their market July 1, 2008.

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North Dakota lawmakers will explore the potential for converting the state’s monopoly workers compensation insurer into a competitive mutual insurer.

A North Dakota legislative committee is scheduled July 10 to hear from insurers in West Virginia and Nevada, where state workers compensation insurers have converted to private insurers. North Dakota Workforce Safety & Insurance is now the only insurer allowed to provide workers comp coverage in the state. If lawmakers press ahead with legislation, other workers comp insurers would be allowed to operate in the state.

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The most fair way to price Workers Compensation insurance is with a free and open market. Time and time again, removing the government from an operation almost always makes the economy for that product or service become more profitable, and provides a higher level of service. A recent example is the removal of tobacco subsidies by the federal government.

I applaud North Dakota for their efforts, just as I have for the tremendous effort by the West Virginia Department of Insurance.

Update 6/27/2017 – This situation never occurred with WSI. The state still remains monopolistic. The oil boom over the last 7 – 8 years affected the decision to change to an open market system. Nevada and West Virginia employers now enjoy much-reduced workers compensation rates.

Hopefully, North Dakota will reconsider going to a private market soon.

Workers Comp Coverage Opportunity

The state of North Dakota is one of the last bastions in old school work comp insurance.

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As I have said in many previous posts, a monopolistic Workers Comp carrier is not the best choice for a Workers Comp system in any state. North Dakota seems to have agreed to keep their current government-run monopolistic carrier.

Officials from Nevada and West Virginia say that taking their state’s workers` compensation operations private has helped lower insurance rates and provide better service, but the officials say the moves were prompted by severe money problems. The Peace Garden state’s Workers Compensation system is financially healthy.

State legislators say there may not be much support for taking it private. Right now, businesses that must have workers` compensation coverage have to buy it from North Dakotas Workforce Safety and Insurance agency.

While North Dakota may be solvent and healthy, that may be at the expense of businesses paying out more Workers Comp premiums than in an open market such as Nevada or West Virginia have begun in the last few years/months.

Update – Both Nevada and West Virginia have reduced their advisory loss costs many times over the last ten years. The voluntary market carriers have provided a much healthier WC environment.

Update – as of 2018, the Roughrider State provides Workers Compensation coverage for employers through its monopolistic state fund – WSI.

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Top 10 Workers Comp Questions We Are Asked Most Often

The top 10 workers comp questions received by us since we opened for business in 1996 cover many topics.

1. I just had a payroll audit on my Workers Comp. My insurance carrier sent me a huge bill. Do I have to pay the bill? What can I do about it if I think the bill is too high?

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Yes, you do have to pay the audit bill unless you dispute it. Your insurance carrier must give you instructions on how to dispute the bill and where to mail/fax the dispute. We very often see an insurance carrier send out a bill without informing the employer that they may dispute the bill, and without providing the correct process to dispute it. Sometimes the insurance carrier will tell you that you only have 10 days to dispute the bill or pay it. You usually have longer than that to dispute the bill depending on the insurance laws of your state.

You must have a reason to dispute the bill. The reason of the bill being too high will only result in damaging the relationship between you, your agent, and your insurance carrier.

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One of the main ways for your payroll audit bill being large is that your company and payroll have grown very rapidly. However, do not just think that because you have rapid growth, you should owe a huge payroll audit bill. Never just write a check. Ask questions. Always read your policy after renewal.

Most of the time we receive a phone call or email is when you have a “gut feeling” there is something wrong with your Workers Comp program. We have found many overcharges when the employer has a gut feeling.

2. – No We Are Not Agents

The top 10 question #2 that we receive on Workers Comp.

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2. Are you a Workers Comp insurance agency? Do you sell Workers Comp insurance policies? How do you get paid?

We are not agents. We consider it a conflict of interest to advise you on the structure of your policy and then sell you what we just advised you on how to place.

An agent fee has never been our goal in providing services to employers, insurance carriers, or other companies or organizations. As we operate nationwide, we can recommend certain insurance agencies in your area. Our services are at arms-length except with our clients.

We get paid one of three ways for our services:

We usually examine Workers Comp policies or audits on a contingency basis. That way we do not get paid unless you receive a credit or a check. We used to do hourly-only, but then we felt disappointed when we billed a company that we could not help.
We can also work on an hourly basis. Some companies prefer this to the contingency. We usually ask for a number of hours as a retainer to begin our services.
Flat fee – we work on a fixed cost basis which helps you to budget for the price of our services. We prefer not to do a flat fee as future Workers Compensation Consulting hours worked is a difficult task.

Either one of the three ways, once we make a correction to your Workers Compensation policy or audit, it becomes permanent and you will benefit from the changes from that day forward – unless your company changes its structure or business model.

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3. What is the fastest way to reduce my Workers Comp premiums?

We receive this Top 10 Workers Comp Question at least weekly.

Unfortunately, there is no quick-fix to your Workers Comp policies. There are ways to reduce your premiums over time. We have found that asking “why?” whenever you are asked to write a check for premiums is a great way to start the cost-cutting process. We never advocate just being a “squeaky wheel” looking for oil. If you are reading this post, you have likely taken the first step, as this blog will tell you how to ask “why?”. One of our sayings to employers is “Quit just writing checks.”

There are 140+ posts here that all talk about reducing Workers Comp premiums. There is one that covers this issue exactly. You can get a ton of freebies under Definitions Tab The easiest way to reduce your Workers Comp is to become involved in every step of the process in purchasing Workers Comp insurance. I used to say there were “Four Keys/Secrets to Workers Comp Cost Reduction” then I added a fifth that involved an acceptance by management to reduce Workers Comp costs.

There are three areas where we see the most errors occur in Workers Compensation:

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Claim Reserves – feed into your Workers Comp E-Mod
Classification Codes – can be a very expensive mistake
Year-End Payroll Audits – we receive the most calls and emails on this one.

Why are these the top three? They are all actually opinions in one form or another. There is nothing really “stamped in stone” as you may have been lead to believe. It is all negotiable. Reviewing your workers compensation policy, endorsements, and premium audits is a great idea.

4. – Self Insured Services

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I see that a large portion of your website does not pertain to Workers Comp self insured companies. What can we do to reduce our Workers Comp premium costs? What services do you offer self-insureds? This comes in as one of our most popular Top 10 workers comp Questions.

You are correct that most of this website does not pertain to self insureds. That is mainly due to our customer base not being self insured employers. However, that part of our market is expanding rapidly. In fact, we are presently performing a claims Third Party Administrator (TPA) performance audit for one of the largest self-insured employers in North Carolina and the nation.

Our self-insured services include:

File Performance reviews – how is the insurance carrier doing on your self insured files?
Loss Development Factors (LDF’s) – similar to an Experience Mod, but pertains more to long term future budgeting for Workers Comp expenditures.
TPA RFP’s – assist your company in bidding our your Workers Comp file handling.
Medical Cost Containment Networks – this is the largest cost-cutter for Workers Comp expenditures.
Assist in tracking your claims and reserves with the TPA.

We will go more into how to cut costs if you are a self-insured after we have finished the Top 10 questions. The main thing to remember is that you should be doing the services that we provide, as they are your main ways to cut your Workers Comp costs.

Remember, when you are a self insured, someone is spending the $ directly out of your bank account.

One mistake that many self insured employer make is saying they are outside of the workers compensation premium paying system. Actually, a self insured is more in the system than ever before due to the requirement of monitoring every budget dollar spent directly on claims.

5. Where do you see the most money being wasted in the Workers Compensation system?

What part of the Workers Comp system causes employers to pay more $?

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That is not necessarily an easy question to answer. Many facets to workers comp increase the payouts on a WC claim.

I think it is the reserves that are set by the Workers Comp insurance adjuster. The reserves/total incurred is what the E-Mod is calculated from in all cases. The reserving of a file is unregulated. There are no laws or regulations that limit what a Workers Comp adjuster can put up on a file.

Loss runs enable any Risk Manager or employer to make sure the workers comp reserves justify the current status of the file.

There are numerous posts on this page that explain how to counteract the reserving of the files. The first step is to obtain a Loss Run from your Workers Comp carrier. Review the loss runs. What to look for in a Loss Run to reduce your premiums is somewhat complicated.

PS – Do not just call up your Workers Comp adjuster and complain that your reserves are just too high and that you are paying too much premium. Do your homework beforehand. It may not be their fault. The aforementioned loss run may solve your questions on certain files. Online reserve access is crucial to controlling workers comp costs.

6. Workers Comp fraud

One of our employees is out of work with a back injury and drawing Workers Comp payments. We saw him lifting something very heavy over and over again. Should we try to pursue fraud against the employee?

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Believe or not, but no – as using your Workers Comp dollars/premiums to try to prosecute fraud is not a good idea. Yes, you should assign a Private Investigator; and yes, you should use the evidence you will gather to reduce the cost of your claim. You should also report the fraud to the State Industrial Commission or Accident Board.

Why do I say this? Almost no employees that commit Workers Comp fraud are prosecuted, but as I said before, the evidence gathered by using a Private Investigator can be used to reduce the payouts on a claim. Many claims have been settled quickly with a PI tape pending.

Certain states created Fraud Bureaus inside their respective Department of Insurance.

Bottom Line- do not use your Workers Comp premiums or dollars to prosecute fraud. That is for the authorities to pursue.

7. Difference in Quotes

As the Loss Costs or Advisory Codes are the same for each classification code in each state, is there really much of a difference between quotes for my Workers Compensation coverage? Can I just pick an agent and go with whatever she/he says?

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Yes, there can be a difference of up to 600%. This is because the Workers Comp insurance carriers can file deviations to as many of the Loss Cost codes as they wish to in any given state. Most insurance companies file one single deviation for all of the codes in a certain state.

I have seen the deviation in one state differ from .75 to 2.75 between Workers Comp carriers.

To add even more of a difference on your Workers Comp premiums, there are Scheduled Debits or Credits that can influence your policy. The deviations are from a 25% debit (additional premiums) to a 25% credit (reduction in premiums). That is a 50% difference in your Workers Comp premiums that is totally left up to the individual carrier. There are techniques to increase your Scheduled Credits.

Let’s use an example to show how much of a difference there can be between carriers. We are not counting in your E-Mod.

Your company pays $100,000 in premiums.
Using the rate deviations from above, the lowest would be $75,000 and the highest would be $275,000.
Taking that one step further, adding in your Scheduled Debit/Credit would make the range of premiums start at $56,250 to $343,750.
That is over a 600% difference, actually 611%.

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Wikimedia Commons – U.S. Department of the Treasury

When you pick an agent, keep the 600% difference in mind. Is your insurance agent getting you the best deal? How do you know if it is the best deal? Are you in the State Risk Pool where you are charged 400% more for coverage? There is much more that should be considered beyond just picking a Workers Comp insurance agent. Where are you paying on the scale from $56,250 to $343,750?

8. West Virginia Recent Changes

I am a West Virginia employer. The open market is here on 7/1/08. Will the open market in West Virginia make any changes to my current policy?

No, everything will actually be the same, except you will have 161 choices for your West Virginia Workers Comp coverage. You no longer have a monopolistic state fund and Brickstreet will not be the sole provider of Workers Comp policies.

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One of the areas that you may need a Workers Comp expert is in the area of how your policy is structured. West Virginia changed its Classification Code system from 90 Classification Codes to approximately 600 when the West Virginia Department of Insurance adopted the NCCI Classification Code system on 1/1/06.

The system had to be modified, as the prior monopolistic state fund did not have the proper values for NCCI to download. The 100% Classification Code System will be in place for West Virginia employers beginning 1/1/10.

One suggestion is to check your classification codes in your policies and workers compensation premium audits. Do those codes describe what you do in your business? They may not be exactly what your company does due to Classification by Analogy. Sometimes the class codes come as close as possible but not exactly when describing your business functions. No one knows your business better than you.

Make sure that you have the proper classification codes for your policies. We assist employers and agents in West Virginia in being properly classified.

If you feel your class codes are not correct, then read over the procedures of how to begin an audit dispute.

Overall, this will be a positive change for WV in the coming months. Check back to this blog often for updates on the West Virginia conversion.

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9. Unexpected Experience Mod Increase

I had a great year with Workers Comp accidents this last year. Why did my E-Mod go up? That does not make sense.

We receive most of our most upset emails and calls on this question, except for Question #1 that was previously posted.

The E-Mod system is built on sustaining no or low loss years for at least three to four years. In other words, the risk window is longer than just one policy year.

Your E-Mod will never reflect the policy year that you just finished. The insurance system is just not built that way. Let’s say that you finished your policy year on 1/1/08. Your Experience Mod will be figured from January 1, 2004, through December 31, 2006, which is three years of time.

If you had a great year with little or no accidents in 2007, there is still a very positive effect. The 2007 policy year will affect your 2009, 2010, and 2011 E-Mods. If you have a great year this year in 2008, there is an additive effect, and the 2007 and 2008 policy years will show up in your 2010 and 2011 E-Mods.

The Total Incurred (see my many previous posts) is calculated for the 2009 E-Mod on 7/1/08, which lags six months behind the policy years. This timing allows the Workers Comp insurance company to have enough time to set the proper reserves on the newest claims.

Once again, I agree with you that this is odd, but that is the Workers Comp insurance structure that is now in place in most states. That will not likely change in the near future. Other theories have been issued over the years. However, the Mod systems across the US are going to be around for many years to come.

There are ways to not be in the Experience Mod systems by using alternative risk financing.

10. Who is the NCCI and how do they affect my Workers Comp insurance premiums?

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This ranking the last of the Top 10 Workers Comp Questions should not reduce its importance.

The National Council on Compensation Insurance is based in Boca Raton, FL. They are the main rate-making Workers Comp organization in the US.

The NCCI does not actually directly set the Workers Comp rates for the Classification Codes. They will make recommendations for increases or decreases to rates that must be approved by each individual state. Most states do approve their advisory rates without question.

Some states actually hold a Department of Insurance hearing that NCCI attends and testifies as to its recommended rates.

The main function of the NCCI is to calculate your Experience Modification Factor or E-Mod. The E-Mod individualizes the Workers Comp rates to your company. Usually, even if your company is in a non-NCCI rated state, your company will be rated by the NCCI if you have risks in multiple states.

The NCCI is sometimes criticized for how they operate, but it is the best system in place to rate your company and provide your E-Mod. Other rating systems have been attempted with little success.

Let us know who we did answering the Top 10 Workers Comp Questions.

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Your E-Mod Is 10 Times More Difficult to Correct Than Your Credit Score

June 16, 2008 By JL Risk Management Consultants

Correction To Your E-Mod Can Be Difficult and Delayed

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Your E-Mod can be corrected. The deck is stacked against you when you want to correct your company’s Workers Compensation Experience Mod.

The reasons:

You can correct what has happened with your credit experience far into the past. You cannot, and this is an important point, correct your Workers Comp reserves except for the current year. No insurance carrier will allow a correction of the reserves into prior policy periods.
If you decide to correct your credit score, what you do today counts for today. In Workers Compensation, your current efforts will not show up for approximately three years. Patience is an important virtue with Workers Comp.
You have a credit bureau that will assist you if you have a problem, even if the creditor is not cooperating. You must deal with your carrier to report the proper information to your State Rating Bureau or NCCI. Do not expect your State Rating Bureau or the NCCI to correct your information. They will only report what the insurance carrier reports.
Due to federal regulations, your credit report is easier to read than in the past. Your Experience Mod rating sheets can be very confusing when trying to decipher them. 2018 update – The WCIRB California Rating Bureau has allegedly simplified the Experience Rating Sheets. Check out their new simplified EMR rating sheets.
2018 Update – there have been a few times where the reserves on prior loss runs or policies were adjusted by the carrier and reported to the rating bureau with corrections. Many of them involved some type of litigation status.

There are others, but these are the major concerns/complaints that we receive from employers. I may add in more examples over the next few days.

Next Up – The Top 10 Questions We Receive

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You Have Another Business Credit Score That Needs Your Attention II

June 15, 2008 By JL Risk Management Consultants

Business Credit Score Part II

What is The Secret Business Credit Score?
It is your Experience Modification Factor (E-Mod, Mod, X-Mod, etc). During all of my Workers Comp presentations, I point this out. If it is a longer presentation, I usually go through how E-Mods are calculated.

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If you think about it, even your personal credit has a score. I usually equate a score of 692 with an E-Mod of 1.0. That means you are average, or you have had an average amount of Workers Comp claim results compared to others in your industry if your company has been classified properly with the correct classification codes.

Anything below a 1.0 is the same as having a credit score of above 692. That means a score of 750 is similar to an E-Mod of .70. If you have an E-Mod that low, you will have more insurance carriers bidding for your business, just as you would have more banks interested in you with a credit score of 750. Your company will pay lower Workers Comp premiums just as you would pay lower credit terms on a loan.

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An E-Mod of 1.0 though, if compared to your grades in school, would be a “C“. Is a C acceptable to you? How do you get to an “A“?

Does that all sound easy and direct? Well, it is just not that easy.

Check with me on the next post and I will tell you how Workers Comp E-Mods are 10 times more difficult to improve or have errors corrected than with your D&B report or your personal credit score.

By the way, if you are reading this post, you have taken the first step to improving what you pay for Workers Comp services including your Workers Comp Credit Score better known as an Experience Modification Factor.

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Misclassifying Employees Not Same As Work Comp Classification Codes

June 12, 2008 By JL Risk Management Consultants

Crackdown on Misclassifying Employees

We have received a few emails asking whether or not our services will be affected by the new laws in PA, NH, and other states. We do not try misclassifying employees purposely to save an employer on Workers Comp premiums. We feel that employers should pay for their fair share but not one penny more.

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The two articles below deal with misclassifying employees as subcontractors. This is being looked at more closely by all states. If you are unsure about how to classify employees, get in contact with us ASAP.

This does not mean that you cannot question your current employee Classification Codes for Workers Comp along with other parts of your Workers Comp policy.

Pennsylvania bill to make misclassifying workers a felony progresses
Pittsburgh Business Times

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A Pennsylvania bill that would make it a third-degree felony to intentionally misclassify an employee as an independent contractor passed the House Monday and is headed to the Senate for consideration.

The legislation, sponsored by Rep. Bryan R. Lentz, a Delaware County Democrat, would establish the presumption that workers in construction are employees and place the burden on employers to prove otherwise to the Department of Labor and Industry.

“Not only are these workers being shortchanged in pay and benefits, they are being put in legal jeopardy,” Lentz said. “Other workers unknowingly sign away their benefits and workers’ compensation when they are told they must sign or risk losing their job.”

To classify a worker as an independent contractor, an employer would have to show the worker is free from control or direction to perform the service, the service is outside the usual course of the business and the person is customarily engaged in an independently established trade, occupation, profession or business. In addition to a felony charge, employers that intentionally misclassify workers would also face fines. Misclassification because of negligence would be a summary offense with fines.

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“It simply is a fairness issue,” Lentz said. “Employers should not be able to do business in Pennsylvania without paying the taxes that everyone else pays, and without providing the protections and benefits to their workers that Pennsylvania law requires.”

While the financial toll hasn’t been quantified in Pennsylvania, misclassification of workers results in Illinois losing $34.8 million annually in workers’ comp premiums in its construction industry alone, according to estimates. New York loses as much as $176 million annually in unemployment insurance premiums. Massachusetts is estimated to lose between $12.6 million and $25 million annually in unemployment insurance premiums and between $91 million and $152 million in income taxes.

N.H. targeting firms that misclassify employees as contract workers

Fosters

Article Date: Wednesday, June 11, 2008

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CONCORD – Four state agencies will be working cooperatively to help ensure that the rights of all workers are protected from the illegal practice of misclassification. The New Hampshire Department of Labor, New Hampshire Employment Security, the New Hampshire Insurance Department and the New Hampshire Department of Revenue Administration have met as part of a task force that will address complaints regarding companies circumventing state laws by misclassifying employees as independent contractors.

This illegal practice denies workers basic rights as employees and hurts the competitiveness of law-abiding businesses. Department of Labor Commissioner George Copadis said, “Each year the State of New Hampshire loses valuable employment taxes and unemployment revenues due to the misclassification of workers. The time has come for our agencies to join together to crack down on these illegal practices for the betterment of workers and all those businesses which operate honestly in our state.”Businesses and individuals that knowingly defraud any insurance carrier relative to workers’ compensation insurance policy may face criminal prosecution.

In addition, companies that don’t provide proper workers’ compensation coverage for their employees may be assessed a civil penalty of up to $2,500 along with up to $100 per employee for each day of noncompliance, and may also face criminal prosecution. New Hampshire Employment Security may fine businesses up to $25 per day per misclassified employee and a possible additional discretionary $1,000 flat fine. The New Hampshire Department of Revenue Administration would require repayment of understated revenue plus up to 25 percent additional tax plus interest.

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Safety Council Conference Presentation For Mid State

June 11, 2008 By JL Risk Management Consultants

North Carolina Mid State Safety Council

I presented yesterday at the North Carolina Mid State Safety Council’s conference on Ways to Cut Workers Compensation Costs. When I brought up the subject of how $25,000 = $100,000, I received a few questions after the conference. I thought it would be good to share it with the blog readers.

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We do have potential clients call and ask why did their E-Mod increased when they have had no large claims. This post may explain some of the reasons.

The easiest way for me to explain this one is for everyone to look at their Workers Compensation Experience Mod sheets from the NCCI or your state rating bureau.

The Workers Compensation system is designed to penalize employers that have many small claims versus an employer that has one very large claim. Why? Because the likelihood of a group of small claims having one or more of those claims turn into a big claim is very likely from a larger group of small claims.

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How this works is that the Primary Loss portion of a claim is capped at $5,000. The Excess Portion (anything above $5,000) of the claim has no cap, but has a discount factor. Look at the bottom of column A on the NCCI sheet. There should be a number there such as 020, which is actually 20%. The Excess Portion of the claim is multiplied by this factor, which in essence gives you an 80% discount on the Excess Portion of all claims. It is much more complicated than that, but we are just keeping it simple here.

OK, hang with me on this one.

$100,000 claim = $5,000 Primary + ($95,000 *.2) = 24,000 applied to Mod Calculation
Five $5,000 claims = 25,000 Primary = 25,000 applied to Mod Calculation

The conclusion to draw from this is that there are NO SMALL claims. The first $5,000 is being applied at a rate of FIVE TIMES the rate of everything after the first $5,000.

Please note this does not count the Medical Only claims.

What should an employer do to combat the NO SMALL CLAIM costs? I will cover that in my next post.

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Subcontractors Section From Manual I Authored Eight Years Ago

June 9, 2008 By JL Risk Management Consultants

Subcontractors Section From Manual I Wrote

The subcontractors section was covered in a manual I wrote a few years ago. The section was titled, Subcontractors. The last part of today’s blog has a few tips on how to protect your company when working with subs.

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One of the facets of doing business in today’s economy is subcontracting out part of your work product. We have seen so many employers having to pay a claim for a worker they never knew even existed and was never on their payroll. Most State WC Boards will climb the ladder of insurance. If a subcontractor does not have proper WC coverage, the State WC Boards will look to the contractors up the ladder to provide WC coverage for an injured employee. Most states have a sub-section of the WC laws that apply just to subcontractors.

If subcontractors your company is using has subcontracted out some of their work, you may easily have three of four layers of employees that you never knew existed on your WC policy.

Your WC carrier can technically deny coverage on a claim where the subcontractor did not cover their employee. We have seen a main/primary contractor have to pay or share in a WC payment right out of company funds in this type of situation.

Most states require employers to have WC coverage beginning with a minimum number of employees. The minimum number of employees in a company that has subcontractors may be an unknown factor.

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Companies have been fined for not having WC insurance when they thought they had only one or two employees! If your company has less than the minimum required by the State, and you do not have WC insurance, once again you may be sharing in a subcontractor’s WC claim right out of company funds.

When you work with subcontractors always:

Obtain certificates of insurance from all subcontractors who have their own WC policy. Look over the certificates very closely. Make sure the policies do not expire before the end of the subcontract.

Avoid using uninsured subcontractors?? We have been asked at conferences, presentations, and during consultations with our clients if their company should avoid using uninsured subcontractors. We usually advise an employer to go over all of the costs and benefits and then make a business decision.

Remember to factor in the cost of covering an uninsured contractor into your company’s contract with the subcontractor. The cost may be very hard to quantify. The avoidance of paying a claim for an uninsured subcontractor’s employee will be well worth the time spent.

When you have any type of payroll audit, make sure the auditor knows these people are subs with their own WC insurance. Your company could be paying for a subcontractor’s WC coverage when the subcontractors already have coverage in place.

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Independent Contractor and Employee – IRS Definitions

June 7, 2008 By JL Risk Management Consultants

Independent Contractor And Employee IRS Guide

As so many states are cracking down on how employees are classified under Workers Compensation, I thought the best way to help would be to use the IRS’s definitions and interpretations of the differences between an independent contractor and an employee.

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Independent Contractor (Self-Employed) or Employee?

It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be –

An independent contractor
An employee (common-law employee)
A statutory employee
A statutory non-employee

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In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Common Law Rules

Facts that provide evidence of the degree of control and independence fall into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or an independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination.
Form SS-8
After reviewing the three categories of evidence, if you are still unsure if a worker is an employee or an independent contractor, the business can file Form SS-8 with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status.
Be aware that it can take up to six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form Form SS-8.

Employment Tax Obligations

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Once a determination is made (whether by the business or by the IRS), the next step is filing the appropriate forms and paying the associated taxes.

Misclassification of Employees
Consequences of Treating an Employee as an Independent Contractor

If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker (the relief provisions, discussed below, will not apply). See Internal Revenue Code section 3509 for more information.
Relief Provisions

If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. To get this relief, you must file all required federal information returns on a basis consistent with your treatment of the worker. You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. See IRS Publication 1976, Section 530 Employment Tax Relief Requirements for more information.

Misclassified Workers Can File Social Security Tax Form

Workers who believe they have been improperly classified as independent contractors by an employer can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.
References/Related Topics – Search these terms on the IRS Website
Worker Classification Webcast – A critical issue for all businesses is properly classifying workers as employees or independent contractors. The IRS’s archived Tax Talk Today Webcast, “What’s Hot in Employment Taxes: Independent Contractor or Employee?,” focuses exclusively on worker classification issues.
IRS Internal Training: Employee/Independent Contractor – This manual provides you with the tools to make correct determinations of worker classifications. It discusses facts that may indicate the existence of an independent contractor or an employer-employee relationship. This training manual is a guide and is not legally binding.

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Form SS-8 – Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding

Publication 15-A – The Employer’s Supplemental Tax Guide has detailed guidance including information for specific industries.

Publication 15-B – The Employer’s Tax Guide to Fringe Benefits supplements Circular E (Pub. 15), Employer’s Tax Guide, and Publication 15-A, Employer’s Supplemental Tax Guide. It contains specialized and detailed information on the employment tax treatment of fringe benefits.

Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulation, and Official Guidance Page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.

Misclassified Employees – Crackdown on Independent Contractors

June 7, 2008 By JL Risk Management Consultants

Independent Contractors – Are They Misclassified Employees

The misclassified employees of an independent contractor can be fixed if necessary. Who is an independent contractor under the Workers Comp rules? Several states including California, New Jersey, New York, and quite a few other states have begun a heavy investigation into whether an Independent Contractor is an employee or not.

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We have helped numerous companies correct their Workers Comp classification codes. I thought that it would be best to use the IRS rules on how to classify employees.

Independent Contractor

People such as lawyers, contractors, subcontractors and auctioneers who follow an independent trade, business, or profession in which they offer their services to the public, are generally not employees. However, whether such people are employees or independent contractors depends on the facts in each case.

The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result.

Control is the key here. If a contractor has total control over the work including work hours per day, the contractor/sub-contractor “arms-length” agreement becomes rather thin for tax and Workers Compensation purposes.

Example: Vera Elm, an electrician, submitted a job estimate to a housing complex for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Vera Elm will receive $6,400. She also performs additional electrical installations under contracts with other companies that she obtained through advertisements. Vera is an independent contractor.

Check back tomorrow for more on how the IRS classifies independent contractors.

Article By George Hohmann on Brickstreet Future Outlook

June 5, 2008 By JL Risk Management Consultants

New Brickstreet Strategies By George Hohmann

This article is by George Hohmann.

Picture of Workers George Hohmann and Insurance Graphic

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Check back tomorrow for my opinion on how a Workers Compensation insurance carrier cannot and should not try to insure out of state workers when they are domiciled in a single state.

BrickStreet looks forward to flexibility
by George Hohmann
Daily Mail Business Editor

BrickStreet Mutual Insurance Co. hopes to offer workers’ compensation insurance for all employees of West Virginia-based companies next year, even when some of the employees work out of state, BrickStreet President and Chief Executive Officer Greg Burton said.

Now BrickStreet can only insure a company’s West Virginia employees. It is a problem when a West Virginia firm like a coal company has operations in several states.

The restriction is one of several rules that BrickStreet must follow to receive a federal tax exemption. The restriction — and the tax exemption — end on Jan. 1, 2009.

In a keynote address to the Charleston Rotary Club on Monday, Burton said BrickStreet plans to enter into a contractual relationship with a so-called “fronting company” — an insurance company that already has operations in other states — so it can insure employees of West Virginia-based companies, no matter where they work.

Picture of Woman George Hohmann Holding Insurance Paper

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Burton also said that within the next three or four years, BrickStreet wants to offer workers’ compensation insurance in other states. However, the company has no plans to offer other lines of coverage like auto or homeowners insurance, he said.

In addition, Burton said BrickStreet has no intention of “de-mutualizing” — switching from a mutual company owned by its policyholders to a stock company owned by stockholders.

The West Virginia Legislature created BrickStreet on Jan. 1, 2006, to succeed the state-owned Workers’ Compensation Commission. BrickStreet is the sole provider of workers’ comp insurance in West Virginia until July 1, when the market opens to competition.

BrickStreet must now offer workers’ comp insurance to any employer who will pay the premiums. When competition comes, “We’d love to give our competitors the bad ones and we’d love to keep the good ones,” Burton said.

BrickStreet is expecting competition from some of the biggest names in insurance, including Chubb, Erie, Travelers, Hartford and Liberty Mutual, Burton said.

Now BrickStreet can only insure a company’s West Virginia employees. It is a problem when a West Virginia firm like a coal company has operations in several states.

The restriction is one of several rules that BrickStreet must follow to receive a federal tax exemption. The restriction — and the tax exemption — end on Jan. 1, 2009.

In addition, Burton said BrickStreet has no intention of “de-mutualizing” — switching from a mutual company

owned by its policyholders to a stock company owned by stockholders.

Picture of two business man shaking hand George Hohmann showing mutual company

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BrickStreet is expecting competition from some of the biggest names in insurance, including Chubb, Erie, Travelers, Hartford and Liberty Mutual, Burton said.

“We want competition,” he said. “Shame on us if we’ve not been able to provide the service to keep you with us after July 1.”

Burton said BrickStreet’s customer service management – trademarked “BrickStreet 360” – means “everyone at BrickStreet who is going to touch your policy is on one team. We think this makes us unique in the marketplace.”

Wikimedia Commons – Whoisjohngalt

He said Liberty Mutual might write workers’ comp insurance direct but other companies are expected to offer insurance through agents, like BrickStreet does.

Burton said 18,000 of BrickStreet’s 36,000 policyholders do not yet have an agent.
“If you only remember one thing from this speech, it is this: We encourage you all to get an agent,” he said. Without an agent, employers won’t be able to access all of the offerings in the marketplace, he said.
In response to questions, Burton said all carriers:

* Will start with the same loss costs and must add the same surcharges.
* Must pay the same benefits, which are set by state law.

Used with permission from George Hohmann

Workers Comp Policy Rules For Changing Classification Codes

June 3, 2008 By JL Risk Management Consultants

Your Workers Comp Policy Rules For Changing Classification Codes

Your Workers Comp policy rules have an interesting yet unknown rule in them. All states have this rule in one form or another. The main rule here is the 120 day rule. The rule is applicable in almost all states with very few exceptions.

Vector of Judge Holding Workers Comp Policy Rules Gavel and Law Book

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If the Workers Comp insurance carrier changes your classification during the first 120 days, this is allowed.
If your carrier does this after 120 days, but before 9 months, then any increase is on a pro-rata %, not 100% of the classification code change.
If there is a change in classification codes after nine months, then THERE CAN BE NO RETROACTIVE CHANGE to the current workers compensation policy. The classification codes can only be changed on the renewal policy.

This rule was instituted due to insurance carriers going back and changing the classification codes on policies to generate more funds. Before the 120 day rule, carriers could change policies at will. If you have had a retroactive or current classification code change, it may be best to contact a Workers Comp premium and Experience Mod expert .

Next Up – Ownership Changes and The Effect on a Workers Comp Policy

Loss Control By Workers Comp Insurance Carriers

June 2, 2008 By JL Risk Management Consultants

Insurance Carrier Loss Control – Another Premium Audit?

Loss Control efforts by insurance carriers sound like such a good idea.

Vector Graphic of Hand Carrying Loss Control Insurance

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We have had two clients recently (one in California and one in Kansas) where the insurance carrier sent out what was really another auditor that was called loss control. According to the rules, insurance carriers are only supposed to audit employers one time per year, after the expiration of a policy.

Your insurance policy will have all the rules on whether or not you have to allow a loss control representative to do an audit of your operations. This person is not usually seen as a loss prevention representative.

However, there are rules that prevent the auditor from doing certain things to increase the premium for the expired policy. That is where a person that is supposedly there for a safety inspection is actually looking for ways to charge more Workers Comp premium.

One cannot forget and should always remember the 120 day rule for this type of premium audit.

However, your company should not forego these risk audits as they are often very helpful in controlling risks specific to your company.

I will cover the rules that I just mentioned in the next post.