How Can I Lower My Workers’ Compensation Costs?

A Guide for Business Owners

If you’re wondering how to lower your workers’ compensation costs, you may have more options than you realize.

Workers’ compensation pricing is affected by several factors, including your industry, employee classifications, payroll, claims history, experience modification factor (MOD), and the insurance program you use.

For some employers, reducing costs may mean improving safety or correcting classification issues. For others, it may mean shopping the traditional workers’ compensation market or considering an alternative such as a Professional Employer Organization (PEO).

The important thing is not to assume that your current workers’ compensation program is your only option.

What Determines the Cost of Workers’ Compensation Insurance?

Workers’ compensation premiums are generally influenced by:

• Employee payroll

• Workers’ compensation classification codes

• Rates associated with those classifications

• Claims and loss history

• Experience modification factor (MOD), when applicable

• State requirements

• Carrier underwriting

• Industry and job duties

• Safety practices and risk management

Because several variables affect the final cost, two businesses with similar payroll can sometimes pay very different amounts for workers’ compensation coverage.

Understanding what is driving your cost is the first step toward finding opportunities to reduce it.

1. Make Sure Your Employees Are Classified Correctly

Workers’ compensation rates vary significantly by classification code.

An office employee generally presents far less workplace injury exposure than a roofer, electrician, landscaper, or construction worker. As a result, the workers’ compensation rate assigned to each classification can be dramatically different.

Incorrect classifications can therefore have a significant impact on premium.

Business owners should periodically review their workers’ compensation classifications and make sure employees are being classified according to their actual job duties and applicable workers’ compensation rules.

2. Understand Your Experience MOD

For employers who qualify for experience rating, the experience modification factor, commonly called an experience MOD or EMR, can have a significant impact on workers’ compensation costs.

In simple terms, the MOD compares an employer’s historical workers’ compensation loss experience with what would generally be expected for similar businesses.

A higher MOD can increase workers’ compensation costs, while a favorable MOD may help reduce them.

But there is another important question employers should ask:

When was the last time someone explained what was driving your MOD—and, more importantly, gave you a strategy to improve it?

Employers with an unfavorable MOD should review their loss history, open claims, safety practices, return-to-work procedures, and claims-management strategy.

Past losses cannot simply be erased, but improving current practices can help create better results going forward.

3. Focus on Preventing Claims Before They Happen

One of the most effective long-term ways to control workers’ compensation costs is also one of the simplest: prevent injuries.

Depending on the business, that may include:

• Regular safety meetings

• Employee safety training

• Proper personal protective equipment

• Documented safety procedures

• Supervisor accountability

• Accident investigation

• Identifying hazards and near misses before an injury occurs

A strong safety culture can do more than reduce insurance costs. It can reduce downtime, improve productivity, protect employees, and demonstrate to insurance carriers and PEOs that the business takes risk management seriously.

4. Manage Workers’ Compensation Claims Proactively

Preventing claims is important, but how an employer handles a claim after an injury occurs can also affect the ultimate cost.

Claims should generally be reported promptly and managed actively.

When medically appropriate, a return-to-work program may allow an injured employee to return in a modified or light-duty capacity rather than remaining completely out of work.

Employers should also regularly review open claims rather than assuming the insurance company is handling everything behind the scenes.

The goal is not to interfere with legitimate employee benefits. It is to make sure claims are being managed efficiently and employees receive the support they need to return to work safely.

5. Don’t Automatically Renew Without Reviewing Your Options

Workers’ compensation should not necessarily be treated as a “set it and forget it” expense.

Businesses change.

Payroll changes. Employees change. Operations change. Claims fall off the loss history. Safety practices improve. Insurance carrier appetites change.

The program that made sense three years ago may not be the best program today.

Before renewal, employers should consider reviewing their current rates, classifications, payroll, claims history, MOD, fees, and available alternatives.

6. Consider Whether a PEO Could Reduce Your Workers’ Compensation Costs

A Professional Employer Organization (PEO) can provide an alternative way for businesses to obtain workers’ compensation coverage while also receiving services such as payroll administration, human resources support, compliance assistance, and employee benefits.

For some employers, a PEO can be particularly valuable when:

• Traditional workers’ compensation premiums are expensive

• The business has an unfavorable loss history

• The company has a challenging workers’ compensation classification

• The employer has a high MOD

• Traditional carriers have declined the business

• The employer wants additional HR and compliance support

• The company wants to explore more competitive employee benefit options

A PEO does not automatically mean lower costs, and every PEO evaluates risk differently.

That last point is important.

One PEO may decline a business that another PEO is comfortable writing. One may be particularly competitive for construction while another specializes in hospitality, healthcare, manufacturing, professional services, or another industry.

That is why having access to multiple markets matters.

7. A High MOD or Difficult Industry Doesn’t Necessarily Mean You’re Out of Options

This is especially important for employers who have been told:

“Nobody else will write your workers’ comp.”

That may not necessarily be true.

Traditional insurance carriers generally operate within specific underwriting guidelines. PEOs also have underwriting requirements, but their approach to evaluating a business can differ from the traditional market.

Depending on the circumstances, a PEO may be able to consider factors such as the employer’s current operations, recent loss performance, management practices, safety procedures, and future risk-management strategy.

For a business that has made significant improvements but is still dealing with the financial impact of older losses, exploring the PEO marketplace may be worthwhile.

8. Compare the Total Cost — Not Just the Workers’ Comp Rate

A lower workers’ compensation rate does not always mean a lower overall cost.

When comparing traditional insurance and PEO programs, employers should look at the complete picture.

That can include:

• Workers’ compensation costs

• Payroll processing fees

• Administrative fees

• HR services

• Risk-management support

• Employee benefits

• Technology

• EPLI or other included services

• Setup or implementation costs

• Contract terms

The objective should be to find the best overall value and fit for the business, not simply the lowest number on one line of a proposal.

Why Work With a Broker Who Has Access to Multiple PEOs?

Many employers are introduced to one PEO and assume that is their only PEO option.

It isn’t.

Just as businesses compare insurance carriers, they can compare PEOs.

A broker with access to multiple PEO markets can evaluate the business and determine which providers may be the best fit based on industry, payroll, workers’ compensation exposure, claims history, employee benefits, HR needs, and other factors.

Instead of asking:

“Is a PEO right for my business?”

A better question may be:

“Which workers’ compensation and PEO options are right for my business?”

The Bottom Line

If your workers’ compensation costs are increasing, your MOD is hurting your rates, you’ve experienced claims, or you’ve been told your business is difficult to insure, don’t assume you’re out of options.

Start by understanding what is driving your costs.

Then compare the available solutions.

Sometimes the answer is improving your existing workers’ compensation program. Sometimes it is finding another insurance carrier. And sometimes a PEO provides a better solution.

The key is having access to choices.

Need Help Reviewing Your Workers’ Compensation Options?

At PEO Depot, we help business owners compare workers’ compensation and PEO solutions to find the program that fits their individual needs.

We work with multiple markets because no single PEO or insurance solution is right for every business.

Whether you’re trying to lower workers’ compensation costs, dealing with a difficult MOD or claims history, looking for better employee benefits, or simply wondering whether there is a better option available, we can help you evaluate the marketplace.

We work for the client—not the PEO.

Our goal is simple: help you understand your options and find the solution that makes the most sense for your business.