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How Is Workers Compensation Insurance Determined?

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A man who would have benefited from workers compensation insurance filling out a workers comp application

Workers compensation is a monolithic area of legal expertise, akin to other specializations like tax law or constitutional interpretation. The Department of Labor has an entire webpage devoted to it, dividing workers compensation into four main categories. Each category is similarly expansive.

The trouble is that not everybody has the time to become a legal expert – especially when there’s a business to run. To make matters even more confusing, each state has its own rules and regulations around workers’ compensation. The good news is that workers compensation insurance will protect you and your employees in the instance of any unforeseen circumstance.

We’re going to delve into the rules and laws around workers compensation to help you calculate workers compensation insurance cost and understand the rules around Massachusetts workers compensation insurance in particular.

What Is Workers Compensation Insurance?

The first part of understanding workers compensation insurance is having a solid grip on workers compensation itself. Investopedia defines workers compensation as “a publicly sponsored system that pays monetary benefits to workers who become injured or disabled in the course of their employment.”

If you pay attention to legal matters, you’ll know that no word or term is chosen arbitrarily. A few terms in this sentence alone help illustrate some of the challenges in calculating Mass workers compensation. What constitutes an employee, for instance? And what does “the course of their employment” entail?

Understanding these issues is important for employers and employees alike. When an employee accepts workers compensation in Ma., they’re giving up their right to sue their employer for negligence.

To clarify our terminology, in Massachusetts an employee is anyone on a company’s payroll that receives a W2 form at the end of the year. Anyone else doing work for the company qualifies as an independent contractor. Independent contractors receive a 1099 form when it’s time to file taxes.

As far as “the course of their employment” is concerned, the legal definition is as follows. Workers compensation law defines the course of employment as which the employee is on the employer’s premises, and preparing to commence or depart from work. Employer-sponsored recreational activities are also covered under this terminology. So are promotional activities.

Understanding these finer points are important for understanding Ma workers compensation. Even in that straightforward definition, there are some gray areas. Like what if an employee is at the workplace when they’re off the clock? Will their workers compensation claims still be considered?

There are laws and legalities around this, too, of course. To be eligible for workers comp, an employee must be doing something that benefits their employer in some way.

Now that you understand the basics let’s dig into how workers compensation is calculated.

How Is Workers Compensation Calculated?

Again, we must remember that workers compensation is important for employers and employees alike. Workers comp doesn’t just cover injuries sustained while on the job. They can also provide for an employee in case of an illness where they’re unable to work. Different circumstances will influence workers compensation prices differently, however.

Calculating Massachusetts workers compensation rates begins with an employee’s weekly pay. The specifics vary by state, as well. The base calculations require calculating an employee’s average weekly pay, which can be more convoluted than it might seem at first glance.

Consider a hypothetical where an employee makes $48,000 a year and works 260 days, which would be 5 days a week, 52 weeks a year. To calculate their weekly pay, first divide $48,000 by 260, which is the number of days they worked. This is their average daily pay.

This comes out to $184.62, roughly.

Next, you multiply their daily average pay by 5. In this example, that comes out to $923.07. This is their average weekly pay.

You may be wondering why you don’t simply divide $48,000 by 52? In this example, you could. In the real world, however, numbers are rarely so straightforward and consistent. This is a simple formula that can be used for calculating any workers compensation insurance rates.

Workers comp insurance rates also depend on the severity of their condition. This is usually broken down into partial and total disability. Total disability means they’re completely unable to work. Partial disability means they’re only somewhat incapacitated.

As a general rule for determining the workers compensation insurance rate, employees who are totally unable to work will receive an average of 60%, or around 2/3, of their average weekly pay. However, each state has its own specific rules, so you’ll need to find out the specifics to figure out how Massachusetts calculates workers compensation.

Employees’ Job Classifications and the Corresponding Rates

Unfortunately, the complexity doesn’t just stop there. Different businesses are ranked differently and have different workers compensation insurance rates. These are known as employee job classifications, and they make a huge impact on someone’s workers comp. It also ensures that those who are the most at risk can get the protection they deserve.

Employee’s job classifications, which are sometimes called class codes, are 3- or 4- digit codes which are used to calculate workers compensation rates. There are guidelines put in place by the National Council of Compensation Insurance (NCCI), but their adoption is not universal. Some states have their own class codes. Massachusetts is one of those states that use its own employee job classification codes.

You can find a complete listing of all of the Massachusetts class codes and their corresponding workers comp rates in this PDF from The Workers Compensation Rating and Inspection Bureau of Massachusetts.

Employee job classifications are used to determine a position’s risk. These codes are also used to help determine a business’s insurance premiums.

How A Business’ Claims History Impact Its Rates

So far, we’ve talked a lot about workers compensation insurance from the employee’s perspective. Now let’s look at some of the things that impact employers. How does someone making a workers compensation claim impact your premium and insurance rate, for instance?

Workers comp insurance begins with a base rate. The cost of past claims impacts your premium as well, however. Past claim costs are used to calculate an experience modification factor (e-mod), which is multiplied against your base rate to calculate your insurance premium.

If your e-mod is lower than other businesses of a similar size and class code, your premium will be lower. If it’s higher, you’re going to pay more in premiums.

Smaller businesses aren’t necessarily given an e-mod, however. Businesses with a premium of less than $3,000 to $7,000, depending on the state, you won’t be given an e-mod score. In that case, the insurance underwriter will look at the history of workers comp claims in your company to calculate your insurance premium.

Eligibility For Workers Compensation Insurance Discounts

Businesses may be eligible for receiving certain discounts on their workers comp insurance premiums, as well. These also vary from state to state. This is quite a convoluted system, as different insurance providers rank this differently. It’s best to consult with an insurance agent to see what kind of discounts you may qualify for.

One example of a common discount is for drug-free workplaces. That’s consistent enough to be nearly universal. Proving that your workplace is entirely drug-free is one way to save on insurance premiums. Depending on the size of your organization, that could potentially mean a lot of money in savings.

How Payroll Affects Workers Compensation Rates

As you should be seeing at this point, many variables go into calculating a workers compensation insurance premium. Payroll is another factor that influences your monthly insurance premiums. For every $100 of your payroll, there is a specific premium rate. Their specific employee classification codes further modify this.

How To Get Workers Compensation Insurance

Every business operating in Massachusetts is required to have workers compensation insurance. This is separate from General Liability Insurance (GLI), which is worth noting. Luckily it’s not difficult to get workers comp insurance when you’ve got a trusted insurance provider working by your side.

You’ll want to have your paperwork together before beginning to shop around for workers comp insurance. Have detailed records of your payroll. If you already have workers compensation insurance and are looking to switch, keep a record of any claims that have been made in the past.

When you know what you’re looking for and understand how the industry works, getting workers comp insurance is easy and painless!

Looking For Workers Compensation Insurance In Massachusetts?

Navigating the world of insurance can be confusing, no matter who you are. Whether you’re looking to understand the ins and outs of workers compensation insurance or are looking to insure your personal vehicle, we’re here to help you get the best rates with the maximal coverage! Contact us today to inquire about a quote!

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