Why Buying Workers Compensation Insurance Through Your Payroll Provider is a Bad Idea

 

We have all seen the solicitations from ADP, PayChex and the like relating to linking your workers compensation insurance to your payroll system. While I do not dispute the immediate benefit of such an arrangement, in most instances the cost / benefit analysis reveals that the costs are significantly higher for most businesses.

 

Stop Workers Compensation Claims Before They Start!
Here’s the quick skinny:

Administration Costs:

Linking payroll processing cuts down on admin expenses in terms of managing, preparing and executing workers compensation audits. This is the big benefit here.. Every time you process payroll the workers compensation premium is charged based upon your actual payroll figures, thus no more workers compensation audits as the numbers are known, verified, and substantiated every processing period. 

While this is certainly true for larger organizations the workers compensation audit process can actually be beneficial.

1. It allows your company to hold on to and deploy cash internally to get a rate of return rather than give it to the insurance carrier. Manage your cash flow, budget properly for the audit so you have cash on hand down the road.
2. It allows you to watch for, exclude, and allocate payroll to lower insurance premium classifications rather than have all your payroll allocated to the higher rated classes. The audit process allows you to at least once a year take a deep dive into your organization’s job descriptions, payroll classes, and work load distribution to create better cost efficiencies. If you simply run payroll and pay workers compensation premiums you lose the benefit of this analysis.

Rates:
The payroll companies tell you that they are so huge they have negotiated preferential rates with companies like the Hartford where you can leverage their buying power. This may be true in certain instances in the FIRST year. The reality is they have really negotiated better commission structures for themselves since they are leveraging their marketing and payroll platform, delivering clients to their preferred insurance carrier in droves.

What both the insurance carriers and the payroll companies don’t tell you is that rate creep sets in soon thereafter. The renewal rates for workers compensation policies done through payroll companies are almost double the national average. Knowing this, insurance rates rise incrementally over a period of months and years beyond what you might pay through your agent or broker who manages the purchase each year. The payroll companies and the insurance carriers are taking your customer malaise right to the bank.

Claims:

This is the biggest cost differentiator for me. If you’re a small mom and pop with less than ten employees who never puts in a claim, perhaps the simplicity of linking workers compensation insurance and payroll is worth the additional costs noted above, as time is money.

If you are a larger organization greater than ten employees who does have one or more workers compensation claims every year or two then this is a very bad deal for you.  Workers compensation insurance is essentially a very expensive credit line. When you have a workers compensation claim it’s your checkbook, but it’s the carrier who writes the check as most of the claim is charged back to you the customer. Sometimes with small comp claims under $15k, you will pay more back in premiums than the claim is worth. Thus over 3 years that $15k claim cost your company $17,400 in additional premium charges as workers compensation premiums use claims experience as one of their significant pricing variables. There needs to be a workers compensation claims process in place that can help manage the additional costs which are substantial. In absence of this process your company’s cost structure becomes imperiled which hurts your competitive position.

In short there is no workers compensation claims process in place with the payroll companies. They are experts at processing and passing the costs and fees down to you.

Bottom Line:

We believe that for organizations that have higher labor costs, higher injury rates, or have more than three labor oriented job classifications linking payroll to workers compensation insurance has a much higher cost structure long term. It’s critical that when it comes to workers compensation insurance you need to have an advocate or risk advisor on your behalf that knows the system, the rules, and can help manage the claims process to an effective outcome. To simply ignore these critical functions, and sign on the dotted line with the likes of ADP or Paychex is essentially doing your strongest competitor a huge favor as your fixed costs just took a large increase.