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Oct 26, 2022 Matt Venuto

Workers' Comp Non-Compliance: Penalties and Challenges

Workers' Comp Non-Compliance: Penalties and Challenges

Employee classifications, insurance payments, and deadlines: Oh, my! Dealing with Workers’ Comp is notoriously finicky and a frequent source of stress for payroll managers and professionals everywhere.

You want to maintain compliance regarding Workers’ Comp for your organization. However, it can be challenging to understand how to accomplish that—and what is at stake if you don’t. 

What are the consequences of Workers’ Comp non-compliance, anyways?

This post will explore the challenges of maintaining Workers’ Comp compliance and the penalties associated with non-compliance. 


Workers’ Comp Non-Compliance: How To Remain Compliant

Workers’ Comp is a government-mandated program. It ensures workers who injure themselves or become ill on the job (or as a result of the job) receive benefits. Each state handles workers’ compensation differently, and benefits vary.

Employers provide the insurance coverage–you can think of it like a disability insurance program-and the employee waives their right to sue their employer if they accept Workers’ Comp benefits. Typically, benefits include partial salary repayment and coverage of medical costs.

To stay compliant, you’ll need to understand the laws in your own state. Each state sets premiums based on its economy and the types of business. In Alaska, for example, premiums are high because of the number of high-risk jobs and businesses.

Your state also dictates who sells and handles workers’ comp policies. It might be the state themselves, but often, individual employers pay a premium to private insurers.

Another option is to go through a local insurance agent. An agent sells worker’s comp policies to business owners and helps them understand the coverage they need. The benefits of a local agent include:

  • Understanding the rules and regulations for your local area.
  • You can work directly with someone who can walk you through any issues instead of phoning a helpline.
  • An agent can help you with fraud prevention, claims management, carrier negotiations, surcharge reductions, and misclassification solutions.

ConnectPay gets you in touch you with an agent you can trust. We have a vast network of qualified workers’ compensation agents with knowledge of local regulations and coding systems, and advise you on the best way to manage workers’ compensation.


Challenges of Remaining Compliant

Again, remaining compliant is a challenge because every state is different and has different laws and regulations. In most states, employers are required by law to post, in a prominent place, a notice that has the name and contact details of who to address regarding workers’ Comp.

Some states don’t require this but might have different rules and regulations to abide by. In other words, ensure you’re up to date with your state’s current laws.

That said, there are common challenges many employers face.


Workers’ Comp Classification

The Department of Labor determines worker’s compensation rates based on job types. Insurance companies identify the risk associated with a given worker’s job duties.

Most states use the National Council on Compensation Insurance coding system, but without sounding like a broken record, check your state for the correct classification codes.

If you don’t classify employees correctly, you might end up overpaying for coverage. You’ll pay more in workers’ Comp if your employees are in a high-risk category. If you organize your employees by department based on their job duties, you’ll be able to classify workers with the correct coding.

Pro tip: When you partner with a local broker, they can take care of employee classification.


Experience Modification Rate (Mod Rate)

A mod rate is a calculation determined by your industry classification and your company’s workers’ Comp claims history.

If you want a low premium, you need a low mod rate.

Let’s say your company has a mod rate of 1.05 or higher. Unfortunately, you’re now a high-risk employer and have multiple serious claims against you. A more expensive premium means you’ll be paying over the industry rate. For example, if your mod rate is 1.3, you’ll pay 30 percent more for a premium.

If you have a high mod rate, you can try a couple of things to reduce it:

  • Verify that you should be in the high bracket by providing up-to-date data.
  • Track every incident to ensure employees aren’t taking shortcuts before injuries happen.
  • Create a long-term safety program to reduce injury frequency and severity.

Related: How Workers’ Compensation Insurance is Calculated


Lump Sum Payments

When you pay your premium in one lump sum, you might end up overpaying. Most workers’ comp premiums are based on estimates. If you’ve tightened your ship and have a much safer workplace, you might improve your mod rate and be eligible for a lower premium.

To remedy this, consider pay-as-you-go and spread your workers’ comp premium over a year. It helps manage cash flow, limits audit surprises, and you’ll pay your premiums more accurately since it’s based on the payroll you run each week.

Many payroll software solutions integrate with pay-as-you-go workers’ comp processes.


Penalties for Non-Compliance

If you’re non-compliant, you’ll incur fines. Fines vary in amount and severity based on:

  • State of operation
  • Number of offenses
  • Severity of offense

In some states, penalties are more severe and can include massive fines and even jail time. In New York, uninsured employers could be charged with a misdemeanor or a felony, and fines range from $1,000 to $50,000 and a $2,000 penalty for every ten days without coverage.

Related: How Much is Workers' Compensation Insurance in NY?

Not only do you risk fines, but you also risk losing revenue from forced closures; penalties include stop-work orders for your business and forced hiring freezes.


Avoiding Workers’ Comp Non-Compliance

The information in this post should give you all the baseline knowledge you need to understand the importance of Workers’ Compensation compliance. 

If your organization falls out of compliance regarding Workers’ Comp, your business may face fines or procedural blocks. Additionally, senior leadership could face imprisonment. All your penalties will depend on your state of operation and the severity and number of offenses.

To avoid challenges associated with workers’ compensation, you may want to review our Workers’ Comp section of the Connected Guide to Small Business Payroll.

Additionally, partnering with a payroll service provider schooled in Workers’ Comp can help you avoid these challenges easily, giving you access to experts capable of managing your Workers’ Compensation efforts on your behalf.

Explore how ConnectPay can assist with your Workers’ Comp challenges by reviewing our Workers’ Comp resources today.

pay-as-you-go workers compensation insurance

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Published by Matt Venuto October 26, 2022