Illinois Workers Compensation rating and why does it matter?

What Is a Workers Compensation Rating and Why Does It Matter? 

Most business owners and executives understand the value of workers compensation insurance not just to protect the worker, but to protect the company as well. Fewer, however, are aware of the mechanics of how premiums are arrived at, and how their own company's safety track record figures into their rating.  Understanding the process, however, may well enable you to qualify for lower premiums down the road, saving your business money and making you more competitive.

Industry underwriters set workers compensation premiums using a process similar to how most companies price group health insurance: They look at the actual claims experience for similar workers in your area, and if there is a history of claims, at your company specifically. Where there is insufficient local claims experience to look at, underwriters turn to the National Council on Compensation Insurance, a clearing house of workers injury and compensation data.

Generally, underwriters will take your payroll and multiply it by an average claim factor for that type of worker. This produces a baseline average of the total number of expected claims, which they subdivide as claims per $100,000 of payroll, claims per year, or claims per time unit. The frequency of claims is considered to be a close proxy for the safety culture of the individual business. They then account for the average severity of claims for that type of worker in your industry and combine the two to arrive at a baseline prediction for expected losses.

Underwriters must then try to assess your business and answer the following question: Given the policies and procedures in place at your business and your claims history, is your company likely to produce losses that are higher than the industry baseline or lower?

Over time, underwriters have discovered that the most likely future claims predictor is a past history of claims at your company. Therefore, to save money on workers compensation premiums, it behooves the company to invest aggressively in preserving the safety of the work environment, both in terms of resources and management focus.

Your workers compensation agent and underwriting team will assign your company an insurance rating, with 1 deemed equal to the average claims experience in your industry for the area.

Any rating higher than 1 indicates a worse-than-average risk for workers compensation claims. If your rating comes out higher than 1, you may be able to qualify for lower rates in future years by reviewing your safety program and the types of losses your company has incurred. Identify any patterns and refcurring themes. You may benefit from bringing in a risk management consultant for an outside set of eyeballs. Some investment in equipment or improved training may be needed, or you may need to be more vigilant for workers compensation fraud in a few cases.

Best Practices

In the long run, your safety record is a reflection of your overall safety culture. That's not something limited to the rank and file worker and shop foremen, though. The most important link in the safety culture chain is at the top.


  • Invest in training your workers in all aspects of safety relevant for their jobs.
  • Appoint a senior manager with clout to monitor your safety and OSHA compliance, and empower him or her to enforce it throughout the company.
  • Empower any worker to halt work activities if he or she becomes aware of an unsafe work condition, until that condition can be corrected.


Everyone is part of your workplace safety culture - but senior management is the most important link in the chain, because management sets the tone throughout the organization.


Illinois Workers Compensatipon - How to Prepare for a Workers' Compensation Audit

How to Prepare for a Workers' Compensation Audit

The mere mention of a workers' compensation audit is enough to strike fear in nearly any business owner. For anyone who is scheduled for an audit, there is no need to worry or be fearful. With a little bit of common sense and preparation, much money and aggravation can be spared.

It is important to devote a few hours to setting up preparations. This small step can prevent days and weeks of hassles in the future. Business owners should plan to give their full attention to the auditor throughout the process, which can take several hours from start to finish. For this reason, it is important to make sure the time and date are both convenient. If the audit has been rescheduled or was not set for an appropriate time, call to reschedule it.

Start collecting and organizing and records that show payroll reports and overtime. Make sure insurance certificates and classification divisions are also available. Write up a summary of each one to make explanations easier and to more effectively communicate with the auditor during the process. If information is organized well, this will help expedite the process. The auditor may feel more comfortable in trusting a business owner's data if all calculations can be reconciled to payroll records.

Prior to the meeting with the auditor, it is also important to make any necessary adjustments to payroll. For example, a business owner might need to subtract bonus pay from overtime pay. Minimum and maximum payrolls will need to be applied to the calculations when applicable. This may take some research, and the amounts will vary from one state to the next. They also vary between types of careers, partners, executive officers and sole proprietors.

Business owners should make sure they understand all employee job classifications and can explain them clearly to the auditor. They should also ensure employees are properly classified for the work they perform. If the auditor has questions or concerns, this can slow the process down considerably. Auditors usually ask about duties and classifications for multiple employees, so being prepared is essential. For help classifying them, discuss the details and any concerns with an agent.

When working with subcontractors, keep in mind that payments made to them will go against workers' compensation if they did not have certificates. Ask for copies of their certificates, and check them carefully to ensure they are updated and show coverage for the entire time span when the subcontractor was working. After the auditor arrives, all of these preparations will be well worth the time spent. Most business owners are also pleasantly surprised to find that auditors are not the mean individuals they picture them to be. Most auditors are pleasant and fair, and this is especially true when all of the details are in order.

After the audit is finished, politely ask the auditor for a copy of the worksheet. We can review it for accuracy. Every person has a legal right to request a corrected audit if any errors are suspected or confirmed. Business owners also have the right to recover any over-payments that were made under the previous three audits.


Understanding How Illinois Workers Compensation Experience Rating Works

Understanding How Illinois Workers Compensation Experience Rating Works  

Many people wonder why it is necessary to use experience rating to predict future losses if workers' compensation rates are designed for this purpose. Experience rating can benefit employers. The prospects of both bad credits and debits are implicit in the majority of risk-specific programs dealing with experience rating. Since it gives an employer some influence in how much the final premium will be, this gives an incentive for them to develop their loss prevention strategies. It is also good for them to form incentives that encourage injured employees to return to work as soon as they are able. When this happens, experience rating can be beneficial to employers by increasing occupational safety and health.

Experience rating shows a refinement in processes of premium determination. It creates a net premium cost for employers, which means their costs will be appropriate for the provided coverage. Experience rating shares or spreads the cost of a loss with all group members who are likely to go through similar losses. Although the probability and cost of injuries for an entire group as a whole may not be accurately predictable, it is not possible to decide which member of the group will ultimately be responsible for costs.

This is why there is insurance. If it were possible or easy to predict, group members who do not experience loss would not have any incentive to purchase coverage. Meanwhile, the premium charge for members experiencing losses would need to include the loss costs. Serious injuries to individuals are usually rare, but the totals can be minor amounts or reach well into the millions. For workers' compensation, the easiest rating method is manual rating. With this system, employers are categorized according to business classifications or operations. Group losses are estimated and then added as an average.

Employers are assigned to specific classifications to make sure the rates they receive are reflective of the costs all similar employers have. While each classification comes with similar risks, individual ones are different in some ways. However, experience rating is designed to reflect individual differences. Insurance providers would be able to look for employers with lower costs and avoid ones with higher costs if the rating system were only manual. The system needs to be refined to avoid such a scenario, and experience rating falls under that category.

With workers' compensation experience rating, individual employers' loss and payroll data are analyzed over time. The most recent three years of data is reviewed against similar groups' risks to determine the experience modification. An employer that has better experience ratings will be given credits, but those with less will be given debit ratings.


Questionable Illinois Workers' Compensation Claims are on the Rise

Questionable IL Work Comp Claims are on the Rise  

Researchers analyzed past workers' compensation claims that were considered questionable by referrals, and the reports were submitted over the span of about six months. Although the total number of workers' compensation claims submitted had dropped, the number of claims considered questionable had risen. Questionable claims are ones that experts at insurance companies refer to the National Insurance Crime Bureau for review. When the reports are submitted for review, they are closely analyzed for indications of fraud. In some cases, one report may have several red flags that put it in the questionable category.

The state with the highest number of questionable workers' compensation claims was California, which had more than 2,250. Illinois followed with almost 700, and New York was close behind with nearly 690. In 2011, there were more than 3.3 million workers' compensation claims in a major database. The number decreased to about 3.2 million within the span of one year, and it decreased again in 2013. There were about 3,475 questionable workers' compensation claims reported to the NICB in 2011, and that number increased to more than 4,450 in 2012. This means that claims increased by more than 25 percent. During the first half of 2013, there were about 2,325 questionable claims submitted.

When it came to further describing questionable workers' compensation claims, there were several reasons experts said they referred them. The main reasons were claimant fraud, prior injuries not related to work and malingering. There were more than 6,100 claimant fraud cases, more than 2,300 non-work-related prior injury cases and more than 1,375 malingering cases. Non-work-related injuries pertain to people who claim injuries during days off or recreational days but do not report the incident until they return to work. When they return, they claim the injury happened while they were on the clock. Malingering occurs when a claimant sustained a legitimate injury but kept pretending to experience symptoms in order to collect benefits much longer than necessary after recovering.

Insurance fraud is a growing issue for both consumers and insurers. Many companies are taking steps to prevent it from happening and are also working on ways to improve identification of signs of fraud. If fraud can be prevented before claims are paid, this helps keep premiums more affordable for consumers. When consumers suspect or know of someone committing insurance fraud, it is important to report it.





Illinois Contractors - New Ladder Safety App

New Ladder Safety App Helps Construction Workers Avoid Falls  

The National Institute for Occupational Safety and Health promoted a new ladder safety phone application recently. The app is available for all smartphone users, and it uses audio and visual signals to aid workers who must use extension ladders. The app checks the ladder's angle when it is positioned and also provides several helpful tips for proper ladder use. It is free to download for Android and iPhone devices.

Every year, there are many injuries resulting from ladders falling on construction sites. Whether a person is on the ladder or standing under it when it is knocked over, injuries are usually severe enough they require emergency medical attention. Falls are one of the biggest concerns, and many people fall while they are on an extension ladder if safety precautions are not followed. One major risk is misjudging the angle of the ladder. It may look secure from one point, but it may actually be far from a safe angle for climbing. When it is set too steep, it often falls backward. However, ladders where the bottoms are set too shallow may fall out from below.

Experts say that the new phone app is a good way to keep workers safer in two useful ways. They also believe it will help prevent injuries if construction workers are encouraged to download it. They point out that the app is proof of how experts are constantly looking for easier ways for workers to protect themselves. This app provides feedback for setting up ladders at certain angles. In addition to this, there are references users will find helpful. There is also a guide for inspecting, using, accessorizing and selecting extension ladders.

In addition to downloading this app, it is helpful for construction workers to brush up on their extension ladder safety basics frequently.

The following are some useful points to remember:

- Never stand above the ladder's highest safe standing level, which is outlined by the manufacturer and is usually above three rungs.

- Always keep three or more points of contact during a project.

- Avoid extending the center of the body beyond the sides of the ladder.

- Do not carry tools while using a ladder. Instead, wear a window cleaner's belt or similar product designed to meet the purpose.

- Always face the ladder when descending or ascending.

- Do not leave an erected ladder unattended for any length of time.

- Always wear non-slip footwear when climbing a ladder.


Good News for Illinois Contractors

For the 11th time in the past 12 months, design firms have reported an overall increase in billings. After a brief drop in April, the Architecture Billings Index (ABI) has indicated 3 consecutive months of growth, most recently recording a 52.7 score for July. All regions and industry sectors reported growth in July, with the Northeast (54.3) and South (54.2) sectors reporting the strongest growth rates and the Midwest (50.8) and West (51.1) regions reporting modest growth.

Architecture Billings Index

The commercial sector (54.2) reported the strongest growth rate of all industry segments, but the residential sector (53.3) also continues to show positive signs, recording its 13th consecutive month of growth in billings. The institutional sector (50.6) continues its small but persistent growth, with a 12th consecutive ABI over 50.

As a leading economic indicator of construction activity, the ABI reflects the approximate 9-12-month lag time between architecture billings and construction spending


Illinois employer lacking workers comp coverage convicted of felony

Illinois said it has won its first felony conviction of an employer for failing to obtain workers compensation insurance as mandated by state law.

The state raised the penalty in 2005 for failure to obtain workers comp insurance from a misdemeanor to a felony.

On Thursday, the Illinois Workers' Compensation Commission announced the conviction of Ahmed Ghosien, who operates a large auto repair shop, Ghosien European Auto Werks, in Hometown.

He never obtained the insurance for his mechanics despite the state's attempts since 2010 to bring him into compliance, the IWCC said in a statement. Mr. Ghosien purchased coverage in February this year after learning of a criminal indictment against him, IWCC said.

Mr. Ghosien pleaded guilty to the felony charge July 25 in Cook County Circuit Court. He faces sentencing in October and is to pay a $25,000 fine.

“Employers who refuse to obtain workers compensation insurance put their employees at risk, gain an unfair advantage over law-abiding competitors and ultimately shift the cost of their business to Illinois taxpayers,” IWCC Chairman Michael P. Latz said in the statement


source:   Business Insurance .com



Illinois Workers Compensation and Subcontractors

A bill addressing the missclassification of construction workers as independent contractors has been signed into law by Governor Pat Quinn.   

House Bill 2649 is meant to fight employers who missclassify their workers in an attempt to avoid paying state employment taxes, unemployment insurance, worker's compensation, and overtime. The practice turns the tax burden over to workers and costs the state up to $700 million a year in lost payments and taxes.

Under the new law, the Employee Classification Act will be clarified and it will be easier to pursue violators.

In addition, the signing of House Bill 923 also amends the Employee Classification Act to require all contractors report all payments to people not classified as company employees to the Illinois Department of Labor. The goal is to prevent tax evasion and ease tax liability for those workers.

The two laws go into effect on January 1.


Illinois Workers Compensation and Nail Gun Safety

The National Institute for Occupational Safety and Health (NIOSH) has announced the release of an innovative new publication titled Straight Talk About Nail Gun Safety[DHHS (NIOSH)

Publication No. 2013-149].

Straight Talk About Nail Gun Safety uses a comic format to illustrate the potential risks of traumatic injury using nail guns and how these risks can be reduced. Real-life examples from residential building construction are used to explain nail gun traumatic injury risks related to the two different nail gun triggering systems and a variety of residential framing nailing tasks. The information in this publication is based on NIOSH focus group discussions with residential building subcontractors, safety specialists and workers; NIOSH supported research; and Nail Gun Safety, A Guide for Construction Contractors (NIOSH Publication No. 2011-202/OSHA Publication No. 3459-8-11).

Here is a link to the booklet:



Illinois Workers Compensation and Employee Drug Policies

Why Every Workplace Should Use Drug Tests and Have Strict Policies

Millions of people use illegal drugs every year, and experts estimate that about 60 percent of the world's illegal drugs are consumed by Americans. A survey showed that almost 23 million Americans reported using marijuana more than three times per week. In addition to this, more than 15 million Americans abuse alcohol. Almost 75 percent of illegal drug users and alcohol abusers are actively employed today. Studies have shown that drug use causes both physical and mental impairments, which can be disastrous in the workplace. In dangerous industries such as construction and mining, studies conducted by experts found that drug use was even more common.

In addition to putting their businesses at risk for fatal or serious accidents, employers who hire drug users may wind up paying for their mistakes. The following are some disadvantages about hiring drug users:

- They perform their work poorly.
- They usually change jobs frequently.
- They often file workers' compensation claims and collect benefits for longer periods.
- They are not very productive.
- They usually arrive late or call in sick.
- Their negligence often results in lawsuits.

By forming a solid plan against drugs and alcohol abuse, employers can help reduce their own risks. Every employer should require drug testing for new hires as a condition of employment. Random drug testing during employment is another way to discourage drug users from applying in the first place. This is especially important for larger businesses, and about 70 percent of big businesses already have these plans in place. Some small businesses may not be able to afford extensive testing and screening plans. However, some businesses may be able to find solutions by searching and using outside resources. Since drug users are starting to target small businesses they know do not have such plans in place, it is in these business owners' best interest to form screening programs. The benefits of having such a plan include the following:

- Employees have better attitudes about work.
- There is not as much theft in the workplace.
- There are less accidents in the workplace.
- Employers have lower staff turnover rates.
- Drug-free workplaces are more productive.
- Employers have less insurance costs.
- Employees enjoy a safer workplace.

Overall, drug programs can save money, so they are worth the time and money to implement. To create an effective program, employers should outline their expectations for employees. A plan should also outline how offenses and infractions will be handled. Some states have specific laws regarding employees and drug addiction, so it is important to keep applicable laws in mind. Whenever possible, an ideal program should include a no-tolerance policy. Employers should also outline what they consider to be illegal and intolerable drugs. Some policies may include designated smoking areas for cigarette users, and employers should always make it clear that alcohol use shortly before or during work is strictly prohibited.

With so many people struggling to fight their own personal battles today, it is important for employers to also show that they care about employees. While it is still good to have a zero-tolerance policy for drugs or alcohol, employers should make provisions in their programs for assistance to struggling workers. For example, a worker who comes to his boss to admit a drinking problem at home may not be violating any rules but may be in danger of violating them. If an employee honestly expresses concern, it is important for employers to provide information about alcohol treatment programs. Some workplaces may also do the same for people who have struggled with addiction in the past. Many workers do not know there are assistance programs available, so this information should be repeated frequently in the workplace.

Employers should also know how to identify possible signs of drug and alcohol abuse. Workers who seem depressed, angry or withdrawn should be monitored. If a worker is late frequently or calls in sick, these may also be signs to consider. Employees who seem anxious, distracted or paranoid may be using drugs. The key idea employers should remember is to look for noticeable changes in all workers. Employers can also offer incentives for employees maintaining a drug-free workplace.


Illinois Workers Compensation and College Interns

It’s that time of year…. Chicago area businesses will be adding college interns to their summer workforce. Whether they are paid interns or not - the questions is “are interns covered on workers compensation in Illinois?”.

99% of the time the answer is YES – interns are covered… even if unpaid. The question falls back to the definition of an employee and for this you can refer to the IRS website for the definition. The IRS sites Common Law Rules. If the intern is deemed an employee then under the Illinois Workers Compensation Act they would be covered on your Workers Compensation policy. From the IRS website:

Common Law Rules

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

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. 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.)
  3. 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 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.


Illinois Contractors - Outlook Still Looking Good

ABI Trend Signals Growth in Construction Spending

For the seventh consecutive month, the Architecture Billings Index (ABI) indicates growth in demand for design. The February ABI of 54.9 represents the highest index value since 2008, before the recession began. Growth has been pervasive across all industry sectors and all regions of the country. The residential sector is setting the pace, with ABI of 60.9. The commercial and industrial sector (53.3) has been consistently above 52 for the past 4 months after several months of modest decline last summer and into the early months of fall. For the seventh month in a row, the institutional sector (50.7) continues to hover just above the break-even point.

Architecture Billings Index

On a regional basis, the Northeast sector (56.7) leads the pack, followed by the West and Midwest regions (54.7). Although the South region (52.7) reports the slowest rate of growth for February, it also has the longest sustained growth streak, 8 months, of all regions.

As a leading economic indicator of construction activity, the ABI reflects the approximate 9-12-month lag time between architecture billings and construction spending.


Illinois Bucks Trend in Other States; Looks to Establish Competitive Workers' Comp State Fund

Illinois Bucks Trend in Other States; Looks to Establish Competitive Workers' Comp State Fund

Provided by: Property Casualty 360

Illinois state legislators are running counter to a national trend by proposing creation of a state workers’ compensation insurance fund that would compete with the private system.

The development is generating deep angst amongst Illinois insurers and industry trade groups.

The bill, H.B. 2919, cleared the Illinois State House’s Committee on State Government Administration late Wednesday.

According to Kevin Martin, executive director of the Illinois Insurance Association, the legislation was prompted by worker- and plaintiff- lawyer concerns that reforms to the system enacted in 2011 aimed at reducing the cost of workers’ comp aren’t working fast enough.

He said the bill has strong Democratic support in the House, and noted that Democrats control both the state House and Senate.

The legislature is in session until May 31, Martin said.

Rep. Laura Fine, D, who is sponsoring the legislation, didn’t respond to requests for comment.

The decision is counter to the current trend by the states to allow the private market to drive workers’ compensation systems.

For example, New York is moving to increase premiums charged by its state fund to the level charged by private insurers.

The Texas legislature is considering legislation that would end its last ties with Texas Mutual Insurance Co. TMIC, like the New York state fund, is the state’s largest workers’ compensation insurer.

And, the Oklahoma legislature is considering legislation that would privatize its nonprofit workers’ compensation insurance fund and turn it into a private domestic mutual insurance company.

According to data from the National Council on Compensation Insurance, Inc. cited by Martin, workers’ comp premiums in Illinois have dropped 9.2 percent since the reforms went into effect in September 2001.

That isn’t fast enough for supporters of creating a state-insurance fund, which includes most Democrats in the state legislature, he said.

The reason costs haven’t dropped are the usual -- the long-tail nature of workers’ comp claims plus increases in healthcare costs, Martin said.

Martin and Deirdre Manna, vice president of industry, regulatory and political affairs for the Property Casualty Insurers Association of America, say creating a state fund is not a good move.

“Illinois public policy must encourage private enterprise and free markets,” Manna says. “The best way to address escalating costs is to attack the cost drivers.”

She adds there “is no credible evidence that creating a state fund will lower the cost of coverage, and there are other ways to lower costs that do work.”

She notes that a state’s relative workers’ compensation costs are completely unrelated to the nature of the insurance mechanism, and proponents’ attempts to sell legislators and employers on the merits of a state fund based on these assertions are wrong.

“Moreover, self-insured employers have the same cost drivers in Illinois as private insurers,” Manna says.

Martin says one concern is that the state is already deeply in debt and doesn’t have the wherewithal to properly capitalize and staff a fund that would compete with the private market.

For example, he says that the proposed fund would be administered by the state insurance department. But he notes a decision by the state to encourage long-term state employees to retire in 2008 resulted in the loss of many experienced people at the department.

“It is going to be difficult for the state insurance department to ramp up to administer a new department given that a number of its most experienced people have decided to retire,” Martin says


Illinois Works Compensation - Misclassification of Employees

Misclassification of Employees is Payroll Fraud. Here's How To Stay Out of Trouble

The Internal Revenue Service and Department of Labor have been going after employers who misclassify employees as independent subcontractors - and the construction industry is squarely in their crosshairs.

In late 2011, the DOL and IRS entered into a formal agreement of cooperation in sharing information and data in order to enforce employment laws. If you have been improperly failing to withhold income taxes and contribute the employer portion of the Social Security and Medicare taxes, and failing to pay unemployment insurance premiums and workers compensation premiums for people functioning as employees, and one of them complains to the Department of Labor, you can expect the IRS to get wind of it, too.

Additionally, if you are using an unlicensed contractor, and closely directing their work, the Department of Labor and IRS will consider this individual to be an employee, not a contractor. If that person is injured while functioning as an employee, the employer is liable… and you had better have workers compensation insurance in place.

The distinction is especially critical in the construction industry, because of the innately hazardous nature of the workplace. Independent contractors are generally expected to provide their own insurance. Employees are not, but are covered under their employers' plan. Failure to comply with employee classification laws risks employees falling through the cracks - and severe consequences for employers.

A Pervasive Form of Fraud

The deliberate misclassification of employees as independent contractors is an epidemic form of payroll fraud in the construction industry - and law enforcement at both the federal and state level nationwide are focusing resources on eradicating it.

Some studies indicate that as many as one worker in twenty is misclassified as a contractor when he should be considered an employee - and that companies that do misclassify workers as independent contractors do so routinely. Among employers that have been caught conducting this kind of fraud, they do so for an average of 40 percent of their workers.

This creates a substantial pricing advantage for dishonest contractors - and makes it that much more difficult for legitimate construction contractors to compete on a level playing field.

The practice also severely undercuts the industry as a whole, according to some observers and market participants. Marek Brothers Construction CEO Stan Marek maintains that as long as dishonest contractors circumvent wage and hour laws, there there is no viable career path for young people who might otherwise consider going into the construction industry. "We will never attract young men and women into the construction industry until there is a career path," he told a panel of Texas legislators and regulators. "There's a tremendous need for skilled workers. A lot of kids don't want to go to college. But if the construction industry is dominated by businesses that exploit workers, Texas kids aren't going to sign up… It is a cancer that is eating the industry. It is killing us."

 Penalties for Payroll Fraud

It's not just federal officials cracking down on employee misclassification and payroll fraud - state governments are also going after employers practicing this form of fraud, and a number of states have actually increased penalties in recent years.

Companies caught committing payroll fraud are typically charged back taxes and interest by both the IRS and state revenue officials. Companies are also fined up to hundreds of dollars per day per worker not covered by workers compensation insurance. Construction firms have also been hit with on-the-spot 'stop work' orders when state inspectors discover workers on site who aren't covered by workers compensation. This can lead to cost overruns, time delays and uncomfortable conversations with customers and prime contractors upstream.

In egregious cases, people have been sentenced to prison time.  For example:

On September 6, 2012, in Richmond, Va., Mark S. Holpe, of Midlothian, Va., was sentenced to 18 months in prison and fined $40,000 for evading the payment of employment taxes on unreported cash wages he paid employees of Nature's Way Landscaping, Inc. Holpe pleaded guilty to evading the assessment of $326,196 of employment taxes. Holpe worked for Nature's Way, a business that did residential and commercial landscaping in the Richmond metro area. He was originally the president, but became the treasurer in 2007 when he sold a portion of the business. In entering his plea, Holpe acknowledged that the company had two groups of employees during tax years 2006 through 2009. Holpe admitted that he paid one group of approximately 30 employees $2,132,000 in cash wages during that period, without withholding social security taxes.



Staying out of Trouble

It is true that there is substantial gray area in defining who is an employee vs. who is an independent contractor. The IRS has published a 20-point series of tests to help determine how a worker should be properly categorized. In the construction industry, a lot of it comes back to who is holding the license: If you hire an unlicensed contractor, and you are directing their work and telling them what to do on a daily basis, and they are operating under your license, this is clearly an employee.

If that worker is injured, the employer is liable, and if workers compensation insurance is not in place, the medical costs could potentially push an employer into bankruptcy - even before back taxes, penalties and possible criminal prosecution is taken into account.

By way of further examples, your independent contractor may legally be an employee if any of the following factors apply:

  1. You provide tools, training and/or materials for the job.
  2. You are closely directing what time the worker or workers must show up on the job.
  3. You are 'counseling' workers in writing about tardiness or other disciplinary issues.
  4. You are dictating methods. Contractors don't tell subcontractors how a job is to be done - they just define the scope of work and leave it to the subcontractor how best to complete it. If you tell someone how to do a job, rather than just describing the end state, chances are you could be turning them into a legal employee.
  5. You expect any kind of exclusivity.
  6. Do you require any kind of company-provided training?
  7. Do you pay transportation expenses or provide transportation for these workers?
  8. Do you reserve the right to terminate the worker at will?

The complete IRS 20-factor test can be viewed here.

Note that not all 20 factors need apply for the IRS, Department of Labor or state officials to determine that an employment relationship exists. Officials can and have determined that an employment relationship exists even when just a few of the 20 factors apply.

Meanwhile, if there is any doubt or gray area, it's important to address it immediately - and maintain legally required workers compensation, medical and other coverage until you are certain you are engaged in a bona fide contractor-to-contractor relationship, rather than an employer/employee relationship.


Illinois Workers Compensation - OSHA Reminder

OSHA reminds employers to post injury and illness summaries

WASHINGTON - The Occupational Safety and Health Administration is reminding employers to post OSHA Form 300A, which lists a summary of the total number of job-related injuries and illnesses that occurred during 2012. The form must be posted between Feb. 1 and April 30, 2013.

The summary must include the total number of job-related injuries and illnesses that occurred in 2012 and were logged on OSHA Form 300, Log of Work-Related Injuries and Illnesses. To assist in calculating incidence rates, information about the annual average number of employees and total hours worked during the calendar year is also required. If a company recorded no injuries or illnesses in 2012, the employer must enter "zero" on the total line. The form must be signed and certified by a company executive. Form 300A should be displayed in a common area where notices to employees are usually posted.

Employers with 10 or fewer employees and employers in certain industries are normally exempt from federal OSHA injury and illness recordkeeping and posting requirements. A complete list of exempt industries in the retail, services, finance, insurance and real estate sectors can be found at .   


An overview of the current status of Workers Compensation in the US

Topic provided by the Insurance Information Institute

Workers compensation insurance covers the cost of medical care and rehabilitation for workers injured on the job. It also compensates them for lost wages and provides death benefits for their dependents if they are killed in work-related accidents, including terrorist attacks. The workers compensation system is the “exclusive remedy” for on-the-job injuries suffered by employees. As part of the social contract embedded in each state’s law, in all states except Texas, where employers may opt out of the state’s workers compensation system, the employee gives up the right to sue the employer for injuries caused by the employer’s negligence and in return receives workers compensation benefits regardless of who or what caused the accident, as long as it happened in the workplace as a result of and in the course of workplace activities. There were 114,000 employers in Texas that did not participate in the workers compensation program, according to Best’s News Service, April 10, 2012, see also Background section of this report.

Workers compensation systems vary from state to state. State statutes and court decisions control many aspects, including the handling of claims, the evaluation of impairment and settlement of disputes, the amount of benefits injured workers receive and the strategies used to control costs. From 2010 to 2011 maximum income benefits for total disability increased an average 3.09 percent. The average maximum weekly benefit in 2011 was $806.62 according to the U.S. Chamber of Commerce 2011 Analysis of Workers Compensation Laws.

Workers compensation costs are one of the many factors that influence businesses to expand or relocate in a state, generating jobs. When premiums rise sharply, legislators often call for reforms. The last round of widespread reform legislation started in the late 1980s. In general, the reforms enabled employers and insurers to better control medical care costs through coordination and oversight of the treatment plan and return-to-work process and to improve workplace safety. Some states are now approaching a crisis once again as new problems arise.


  • National: According to NCCI’s State of the Line analysis, in 2011 workers compensation premiums for private carriers and state funds increased to $36.3 billion in 2011, a 7.4 percent jump from 2010 and the first since 2005. (For private carriers alone, premiums were $32.2 billion, compared with $29.9 billion in 2010.) Because its premiums are directly linked to employment levels and wages, workers compensation insurance is the line most significantly affected by the economic slowdown and nascent recovery. Premiums dropped 27 percent from 2006 to 2010.
  • The combined ratio, the percentage of each premium dollar spent on claims and expenses, was unsustainably high at 115, NCCI says, the same as in 2010, and the highest combined ratio for any of the major lines of commercial insurance for the third straight year. A combined ratio of 100 or higher means that the industry is paying out more in claims than it is collecting in premiums.
  • Faced with the worst results in the past 10 years, according to Fitch Ratings, insurers are raising rates. Industry observers attribute the poor financial results largely to rising medical expenses and recession-related conditions: sluggish premium growth and injured workers’ inability to find work or return to their former workplace, which can increase the duration of claims.
  • Obesity has an impact on the cost of claims, according to a study by the NCCI. The duration of lost income claims was five times greater for the most severely obese workers than for workers who were not obese but filed comparable claims. The data came for insurers operating in 40 states. The study’s findings are similar to those of a 2007 Duke University Medical School report on its own employees.
  • Prescription drug costs now represent about 19 percent of workers compensation medical costs nationwide, according to the NCCI. One cost driver is doctor-dispensed repackaged drugs. The Illinois Workers Compensation Commission has been studying the issue in order to address the significant mark-ups on doctor-dispensed repackaged drugs over pharmacy-dispensed drugs. The commission found that drug repackaging firms often obtain a new National Drug Code number with a much higher unit price. One workers compensation group found that the average repackaged drug costs $115, a 236 percent increase over the average price of $48.65 for the same drugs not repackaged. The commission proposed that drugs dispensed outside of a licensed pharmacy be billed at the average wholesale price plus a dispensing fee of $4.18. The change was adopted by the state’s Joint Committee on Administrative Rules in November 2012. Currently, three states, Massachusetts, New York and Texas, do not allow physicians to dispense repackaged drugs and other states are considering such a move.
  • The Workers Compensation Research Institute (WCRI) recently published a study of the impact of a change in the law in California in 2007. Critics of proposed regulations on doctor-dispensed repackaged drugs feared that injured workers would not receive needed medications if doctors stopped dispensing them when it was less profitable to do so. Data from California show very few doctors stopped prescribing (55 percent before the law passed as compared with 53 percent three years later) so injured workers had similar access to medications but at a lower cost.
  • Another cost driver is the growing long-term use of narcotic painkillers. A new study by WCRI, Longer-Term Use of Opioids, found that nearly one in 12 injured workers who were prescribed opioids were still on the drugs three to six months later, highlighting a problem that contributes to overuse: failure of doctors to implement recommendations for drug testing and psychological evaluation, two steps that might help reduce the abuse of such drugs. A report from the insurance broker Lockton notes that opioids account for about 25 percent of workers compensation prescription costs and 35 percent for claims over three years old. Indirect costs to society include workers’ failure to return to work because they are addicted to the drugs. The Lockton study says there should be an evaluation of the validity of continuing to prescribe opioids when medical reports do not indicate progress in work and life skill functions and a reduction in pain.
  • State activities
  • California: At the end of August on the last day of the 2012 session, legislators passed SB 863, a bill developed by labor groups and some large self-insured employers that have been meeting since last fall to put together a legislative plan. Supporters claim that the measure will produce savings of $880 million, more than enough to offset the $610 million in increased payments to workers receiving permanent disability benefits. However, while praising the reforms, industry observers said it is too early to say whether the savings projected will actually occur. In the past, reform legislation has sometimes produced unintended results such the reduction in benefits for permanently injured workers that came about as a result of the 2004 reforms pushed by former Gov. Arnold Schwarzenegger. The California Workers Compensation Bureau said in October that it expected savings of 4.4 percent on 2013 policies, somewhat less than its earlier estimate of 4.9 percent.
  • At the end of November, State Insurance Commissioner Dave Jones approved a 2013 advisory rate increase of $2.56 per $100 of payroll for policies renewing or starting on or after January1, 20132. The commissioner explained his action by acknowledging the “steady and dramatic” increase in the cost of the state’s workers compensation system. He noted that insurers are currently paying out more in claims than they are collecting in premium and that the state cannot afford to overestimate the potential savings the new law will produce.
  • New York: Data from the Workers Compensation Research Institute (WCRI) shows that the reforms enacted in 2007 are beginning to achieve some of their goals, particularly bringing maximum disability benefit levels for injured workers more in line with national averages. The 2007 law also reduced the time injured workers receive permanent partial benefits, established medical treatment guidelines and required limits on prices for pharmaceutical products. The WCRI notes that the cost of pills covered by the pharmaceutical fee schedule has decreased by 10 to 20 percent.
  • Oklahoma: Business groups and regulators are again pressing lawmakers to consider ways of lowering the cost of workers compensation, which in some cases is as much as five times higher than in neighboring states, according to the state’s Chamber of Commerce. Insurance Commissioner John Doak has said that the high costs are pushing employers to think about relocating. The high costs are attributed by some legislators to the adversarial nature of the system, which provides lawyers with incentives to drive a workers disability rating higher to increase lost income benefits. Oklahoma’s level of attorney involvement is 50 percent higher than the national average.
  • In 2012, a bill that would have allowed employers with more than 50 workers that met certain criteria to opt out of the state’s workers compensation system failed because small businesses feared that the thresholds would exclude them, see also State Funds, below.
  • Insurance industry observers said that under the earlier opt-out plan, employee benefits would have been reduced substantially. Disputed claims would have been subject to mandatory arbitration or mediation and employers would have been able to avoid the Workers Compensation Court and state insurance and workers compensation regulation.
  • Oklahoma is one of a handful of states where the courts run the workers compensation system. Legislation modifying the court system and instituting other cost saving measures was passed in 2010 and 2011 but critics, including those promoting the current opt-out plan, say the system is still too expensive. Among the options being considered for the 2013 legislative session are an opt-out system with essentially no thresholds and an administrative system with a three-member Workers Compensation Commission to replace the current court-based system. The commission would be made up of a doctor, an attorney and an insurance professional with five years of experience in dealing with workers compensation issues. Gov. Fallin has called the system’s high costs an obstacle to job creation.
  • Under the 2012 proposal, employers that opted out would have had to provide an alternative benefits plan that included medical, disability and death benefits for injured workers and that would comply with ERISA, the Employee Retirement Income Security Act of 1974, the federal law that sets minimum standards for most pension, welfare and health plans offered by private industry. The legislation would have made the ERISA-compliant plans the exclusive remedy for opt-out companies, preventing workers from suing their employers in state court. The exclusive remedy is at the heart of the workers compensation social compact, see the introduction to this report. In Texas, the only state to allow employers to opt out of the workers compensation system, nonsubscribers, employers that elect not to participate, are fully liable under the tort system for workplace accidents and can be sued for negligence.
  • Texas: Major reforms were enacted in 2005 that transferred responsibility for workers compensation from a commission to the Texas Insurance Department, improved access to healthcare and advice for injured workers, promoted return-to-work programs, created medical treatment guidelines and raised injured workers’ benefits.
  • The department publishes a biennial report on system improvements. Highlights of the 2012 report indicate that since 2003 to the end of 2011 rates have decreased almost 50 percent; the number of days lost from work due to work-related injuries fell from an average 97 days (median 26 days) in 2004 to 6.0 weeks (median 21 days); and the amount of time needed in 2011 to resolve medical disputes dropped significantly, with fee disputes taking 197 days instead of 335 days as they did in 2005, pre-authorization disputes 20 days instead of 59 and retrospective medical necessity disputes 31 days instead of123. The percentage of employers that participate in the program (i.e., became subscribers, see Background section) rose from 62 percent in 2004 to 67 percent in 2012. Only an estimated 19 percent of Texas employees (about 1.7 million workers) were employed by non-subscribing employers.
  • State Funds, Competitive Funds: Following the successful change over in West Virginia from a state-controlled workers compensation system to a private competitive market, several states, including Arizona, Colorado and Oklahoma, all of which have workers compensation entities with some degree of state oversight that compete with the private market, have been looking into some form of privatization. Some impetus for the sale of these entities is the poor local economy and the resulting budget deficits.
  • Other states, such as Maryland, have been raiding the policyholder surplus of their state workers compensation funds to add to their states’ general funds. In May 2012, to end this practice, Maryland lawmakers agreed to privatize the State Fund, the largest workers compensation insurer in the state, converting it into a private company, Chesapeake Employers’ Insurance Co., effective October 2013.
  • In Arizona, the legislature has agreed to privatize the State Compensation Fund, requiring the transaction to be completed by 2013. The fund had a market share of 31.5 percent in 2009, according to the state’s department of insurance.
  • In Colorado, Pinnacol Assurance, a quasi-mutual company with almost 60 percent of the market, is also exempt from premiums taxes. A proposal to turn it into a mutual insurer that would also be the insurer of last resort was submitted to the governor in November 2011. The governor set up a task force composed of various stakeholders to review the proposal and make recommendations. Negotiations are continuing. An earlier recommendation from a legislative committee failed to gain support.
  • In Oklahoma CompSource, which insures about 35 percent of the market, has a 5 percent advantage over private insurers because it does not pay premium taxes. A legislative task force studying the options voted 5 to 4 in favor of creating a mutual company, but the idea was dropped when opponents said that it would result in higher premiums for small businesses. Most of the businesses in the state are small, with 98 percent having fewer than 100 workers and 75 percent having fewer than 10, according to the State Chamber of Oklahoma.
  • In Washington State, which has a monopolistic state fund, a ballot initiative that would have led to opening the market to private competition was defeated in the November 2010 elections. Voters rejected the initiative, I-1082, by a wide margin. The initiative was spearheaded by the Building Industry Association of Washington and endorsed by the National Federal of Independent Business. It would have created a task force on private competition to draw up legislation and make recommendations.
  • In Ohio, which also has a monopolistic state fund, there has also been interest in allowing some form of competition from private insurers. In November 2009 the Senate voted to create a task force to evaluate the current system, compare it with competitive systems in other states and review the options. At a hearing held in August 2010, the president of the Insurance Information Institute, Robert Hartwig, suggested that the state’s monopolistic system is out of keeping with economic reality. There is no other type of liability insurance in the United States where the state is the sole provider of coverage although states have had ample opportunity to create such a system. Ohio voters rejected a ballot initiative on privatization in 1981. Ohio has the largest monopolistic state fund in the nation. It would require a constitutional amendment to totally privatize Ohio’s system.
  • Meanwhile, in November 2011, the state introduced a new rating plan under which employers who adopt “best practices” aimed at reducing workplace injuries and getting workers back on the job faster can save money. Studies show that injured workers in Ohio take longer to get back to work than in other states, with the percentage who return within a year dropping from 75 percent to less than 69 percent over the past four years.
  • The move to privatize comes at a time when state funds are growing. According to a new Conning Research & Consulting study, Workers Compensation State Funds: Evolution of a Competitive Force, state-backed workers compensation funds operate in 25 states and account for one-quarter ($11.3 billion in premiums) of the workers compensation market. While they generally have higher losses than private insurers (they are often the market of last resort, insuring high risk businesses that cannot find coverage in the private marketplace) these are offset by higher investment income and operating results comparable to private insurers, the study found. State funds also work closely with other government agencies, such as state occupational and health and safety associations, to reduce injuries.
  • The Residual Market: Market share of the residual market pools serviced by NCCI, which had been dropping, increased from 4.6 percent in 2010 to 5 percent in 2011. Premiums grew by 13 percent, reversing a trend of declining residual market premiums that began in 2005, according to NCCI. However, the pools remain small.
  • Workplace Deaths and Injuries: Bureau of Labor Statistics (BLS) preliminary data show that 4,609 workers were killed on the job in 2011, slightly fewer than in 2010 (4,690) but far fewer than in 2008, when there were 5,071 workplace fatalities. The death rate for 2011 per 100,000 workers was 3.5, the same as in 2010 and 2009. Many experts attribute the significant drop over the last few years to the poor economy. Fewer people were working last year in jobs where many of the fatalities typically occur such as construction. Fatal accidents declined to 770, the lowest level since 2003. Fatal injuries for this group declined 48 percent from the high reported in 2006.
  • Workplace injuries requiring days off work have declined significantly each year since 2002 when the BLS first started using current reporting requirements. BLS data show the rate per 10,000 full time employees was 117 in 2011, statistically unchanged from 2010. The median number of days off work was eight, the same as last year.


Competitive with Private Insurers Exclusive
Arizona* Maine Oklahoma North Dakota
California Maryland Oregon Ohio
Colorado Minnesota Pennsylvania Washington
Hawaii Missouri Rhode Island Wyoming**
Idaho Montana Texas  
Kentucky New Mexico Utah  
Louisiana New York    

*Scheduled to be privatized by 2013.
**Compulsory for extra hazardous operations only. Employers with nonhazardous operations may insure with the state fund or opt to go without coverage.



As of September 2012
  Type of Law Threshold for Compulsory Coverage
State Excluded (b) Voluntary (c) Compulsory Time Worked Earnings Other
AL   X        
AK     (d)      
AZ   X        
AR   X        
CA     X 52 hours during 90 days prior to injury or exposure to disease Or $100 during 90 days prior to injury or exposure to disease Excludes a household worker employed by the worker's parent, spouse or child
CO     X 40 hours per week or 5 days per week    
CT     X 26 hours per week    
DE     X   $750 per 3 months  
DC     X 240 hours during quarter    
FL   X        
GA   X        
HI     X   $225 per every quarter during preceding 12 months  
ID   X        
IL     X 40 hours per every week for 13 weeks during year    
IN   X        
IO     X   $1,500 during 12 weeks prior to injury  
KS     X     Employer payroll over $20,000 in prior year for all workers
KY     X     2 employees, 40 hours per week
LA X          
ME   X        
MD     X   $750 per quarter  
MA     X 16 hours per week    
MI     X 35 hours per every week for 13 weeks during preceding 52 weeks    
MN     X   $1,000 in any 3 month period of current or previous year  
MS   X        
MO   X(e)        
MT   X        
NE   X        
NV   X        
NH     X      
NJ     X(f)      
NM   X        
NY     X 40 hours per week, non-farm    
NC   X        
ND   X        
OH     X   $160 per quarter  
OK     X     Employer payroll in preceding year of $10,000 per worker
OR   X        
PA   X        
RI   X        
SC     X     4 employees per employer; payroll more than $3,000 in previous year
SD     X 20 hours per week for more than 6 weeks in 13 weeks    
TN   X        
TX   X(e)        
UT     X 40 hours per week    
VT   X        
VA X          
WA     X     2 employees; 40 hours per week each
WV   X        
WI   X        
WY X          

(a) Domestic workers include household workers such as babysitters, housecleaners, gardeners, etc.; in some states excludes family members.
(b) Domestic workers are specifically excluded from the workers compensation system.
(c) Employers are permitted to provide workers compensation coverage voluntarily.
(d) Except for part-time babysitters and noncommercial cleaning persons.
(e) Elective or optional.
(f) Coverage is voluntary for domestic workers but on an elective basis, i.e., an employer may elect, in writing, prior to an accident, not to be subject to the law. However, this requirement renders the law compulsory in practice. In New Jersey, homeowners insurance policies must contain provisions covering domestic workers.

Source: "Workers Compensation: Exposure, Coverages, Claims,"
ISBN #0-923240-12-8. Standard Publishing Corp., Boston, MA. All rights reserved; PCI.



The Workers Compensation Social Contract: The industrial expansion that took place in the United States during the 19th century was accompanied by a significant increase in workplace accidents. At that time, the only way injured workers could obtain compensation was to sue their employers for negligence. Proving negligence was a costly, time-consuming effort, and often the court ruled in favor of the employer. But by the early 1900s, a state-by-state pattern of legislative proposals designed to compensate injured workers had begun to emerge.

Wisconsin enacted the first permanent workers compensation insurance law in 1911 (New York had enacted a law a year earlier but it was found unconstitutional), and by 1920 all but eight states had enacted similar laws. By 1949 all states had a workers compensation system that provided compensation to workers hurt on the job, regardless of who was at fault. The costs of medical treatment and wage loss benefits were the responsibility of the employer which were paid through the workers compensation system. As part of the compromise that made the employer liable for work-related injury and disease costs regardless of fault, the employee gave up the right to sue the employer for injuries caused by the employer's negligence.

The scope of workers compensation coverage has broadened considerably since its early beginnings. In 1972, states amended their laws to meet performance standards recommended by the National Commission on State Workmen's Compensation Laws. Many states took action not only to expand benefits but also to make the coverage applicable to classifications of employees not previously covered.

However, compensation levels are not uniform. In some states benefits are still inadequate, while in others, they are overly generous. Some states were slow in adopting the National Commission's guidelines and have still not embraced the entire package of 19 recommendations published in 1972. Many states exempt employers with only a few workers (fewer than five, four or three, depending on the state) from mandatory coverage laws. A major benefits issue still to be resolved in some states is the imbalance between levels of compensation for various degrees of impairment; permanent partial disabilities tend to be overcompensated and permanent total disability undercompensated.

Some coverage is provided by federal programs. For example, the Longshoremen's and Harbor Workers Compensation Act, passed in 1927 and substantially amended in 1984, provides coverage for certain maritime employees and the Federal Employees' Compensation Act protects workers hired by the U.S. government.

Employers can purchase workers compensation coverage from private insurance companies or state-run workers agencies, known as state funds. In 20 states, according to a Conning study, “Workers Compensation State funds, Evolution of a Competitive Force,” state funds compete with private insurers and in four states, the state is the sole provider of workers compensation insurance. (See list at the end of Recent Development section of this report.) Along with residual market pools, many state funds also function as the insurer of last resort for businesses that have difficulty getting coverage in the open market.

The only state in which workers compensation coverage is truly optional is Texas, where about one-third of the state’s employers are so-called nonsubscribers. In the event of a serious accident, those that opt out of the system can be sued by employees for failure to provide a safe workplace. The nonsubscribers tend to be smaller companies, but the percentage of larger companies opting out is growing. Some 25 percent of the state’s workers were employed by nonsubscribers in 2008, compared with 23 percent in 2006.

Some businesses finance their own workplace injury benefits through a system known as self-insurance. Large organizations with many employees can often estimate the cost of routine types of injuries. Self-insurance, along with large deductibles, which are in effect self-insurance, now account for more than one-third of traditional market premium. Put another way, workers compensation accounts for more than 40 percent of the alternative market, see also Captives report. Businesses that self-insure their workers compensation losses must prove that they are financially able to do so. They usually protect their assets by purchasing insurance coverage for catastrophic losses or losses in excess of a specific threshold.

About nine out of 10 people in the nation’s workforce are protected by workers compensation insurance. Laws vary by state for domestic workers, see chart, and at least 15 states do not require employers to provide workers compensation coverage to migrant and seasonal farm workers.

How the System Works: Workers compensation systems are administered by the individual states, generally by commissions or boards whose responsibility it is to ensure compliance with the laws, investigate and decide disputed cases, and collect data. In most states employers are required to keep records of accidents. Accidents must be reported to the workers compensation board and to the company’s insurer within a specified number of days.

Workers compensation covers an injured worker’s medical care and attempts to cover his or her economic loss. This includes loss of earnings and the extra expenses associated with the injury. Injured workers receive all medically necessary and appropriate treatment from the first day of injury or illness and rehabilitation when the disability is severe.

To rein in expenditures and improve cost effectiveness, many states have adopted cost control measures, including treatment guidelines that spell out acceptable treatments and diagnostic tests for specific injuries such as lower back injuries and fee schedules that set maximum payment amounts to doctors for certain types of care.

Most claims are medical only, but lost-time claims, those with both medical and lost income payments, though few, consume most resources. Claims are categorized according to the degree of impairment—partial or total disability—and whether the impairment is permanent or temporary. Cash benefits can include impairment benefits and, when the impairment causes a loss of income, disability or wage loss benefits.

Impairment can be defined in several ways. Payments may be based on a schedule or list of body parts covered and the benefits paid for a loss of that part. For injuries not on the schedule, benefit payments may be calculated according to the degree of impairment or the loss of future or current earnings capacity, often using the American Medical Association’s definitions.

Most states pay benefits for the duration of the injury. But some specify a maximum number of weeks, particularly for temporary disabilities. For workers with a total disability, the benefit amount is some percentage of the worker’s weekly wage (actual or state average). Cash benefits may not be paid until after a waiting period of several days.

Costs to Employers: Costs to employers include premiums, payments made under deductibles and the benefits and administrative costs incurred by employers that self-insure or fund their own benefit program. The percentage of total compensation costs that workers compensation premiums represent fluctuates. In the mid-1950s, private sector employers paid an average 0.5 percent of payroll for workers compensation. By 1970 this figure was 1 percent, escalating steeply in the 1980s and 1990s to a record high in 1994 of 2.99 percent. However, there is a wide variation in costs among states and industries, so that the highest rated (the inherently riskiest) groups could pay several hundred times that of the lowest rated (safest) groups, as a percentage of payroll. Also taken into account is the firm’s own safety record.

Insurance, particularly commercial insurance, is a cyclical industry marked by hard and soft markets. In 2000 as the economy expanded, premiums started rising, ushering in the hard market, when demand outstrips supply. In 2007, with a generally soft market for most types of commercial insurance and a weakening economy, premiums began dropping again. From December 2007 to mid-2009, as the recession caused payroll, the basis for computing workers compensation premiums, to drop significantly (3.6 percent) workers compensation insurers saw premiums contract. In fact, the recent recession had the most serious impact on workers compensation in terms of payroll in 60 years. In the recessions of the 1970s and 1980s, the impact was less severe because of continuous wage inflation. Inflation was not a factor in the 2007-2009 recession.

Claim Costs: As mentioned earlier, there are two components to workers compensation claims costs: payments for lost income, which are usually linked to a state’s average weekly wage, known as indemnity costs, and payments for medical care. Two decades ago, indemnity costs made up the greater part of total losses. In 1986 indemnity costs represented 55 percent of the total. By 1996 indemnity and medical had changed places, with indemnity at only 48 percent of losses. In 2008, as medical care costs continued to rise, indemnity accounted for 42 percent.

Growth in workers compensation medical costs for the most part has been much steeper than in the healthcare industry as a whole. The annual average rate of increase in workers compensation medical care costs was 3.9 percent from 1991 to 1995. Since then the rate of increase has more than doubled and, in most years, was more than twice the rate of increase in the medical Consumer Price Index (CPI). Between 2002 and 2007, the medical cost per lost-time claim -- where the employee was forced to take time off work because of the injury as opposed to just seeking treatment for the injury—increased by 6.7 percent compared with an increase of 4.0 percent in the medical CPI. However, in 2009 workers compensation medical care costs increased by only 2 percent, compared with a rise in the medical care CPI of 3.4 percent.

NCCI Holdings suggests that much of the difference between the cost of a healthcare claim and a workers compensation claim is due to the volume, duration and mix of services used by injured workers and group health claimants.

But while the size of claims (dollar amount) has been climbing due to the increasing cost of medical treatment, the number of claims filed (frequency) has been dropping steadily as insurers and their policyholders focus on safety. The frequency of lost-time claims dropped by 54.9 percent from 1991 to 2008. NCCI also attributes recent declines in the frequency of accidents to the use of robots, which reduce workers' exposure to hazardous activities; power-assisted devices that reduce physical stress, lighter and stronger materials; ergonomic designs that reduce strains; and cordless tools, which reduce the incidence of tripping over cords. Frequency declines, which first showed up among small employers are now evident also in large firms.

Insurance company financial results often report profitability in terms the combined ratio (the percentage of each premium dollar spent on claims and expenses). The combined ratio for workers compensation is reported in two different ways: by calendar year and by accident year. In 2008 the calendar year combined ratio started to deteriorate, moving from 99 in 2007 to 100 in 2008. The accident year combined ratio deteriorated more sharply going from 92 in 2007 to 101 in 2008, according to the NCCI. The accident year combined ratio hit a peak of 140 in 1999.

Calendar year results reflect claim payments and changes in reserves for accidents that happened that year or earlier. Insurance companies have to set aside reserves for accidents that have happened but where claims have not been settled. Workers compensation claims may not be settled for many years, if the accident victim needs increasingly more treatment, for example. Accident year results, in that they include only losses from a specific single year, may present a better picture of the industry's performance at a given point in time.

Reducing Costs: Workers compensation system costs are rarely static. Reforms are implemented and then, over time, one or more element in these multifaceted systems get out of balance. Soon employers and legislators complain that the cost of coverage is hurting the state’s economy by reducing its ability to compete with other states for new job-producing opportunities.

In the 1980s, with a view to increasing competition within the insurance industry in order to bring down rates, legislation was introduced in more than a dozen states to change the method of establishing rates from administered pricing, where rating organizations recommended rates that included expenses and a margin for profit, to open competition. Now insurers base their rate filings on more of their own company's specific data, rather than using industrywide figures in such areas as expenses and profit and contingency allowances. Rating organizations still provide industrywide data on "losses"—the costs associated with work-related accidents, which help small companies that lack access to large amounts of data.

More recently, states have begun to disband Second Injury Funds. Set up mostly after World War II, these funds were designed to protect employers that hire disabled workers from having to bear the full cost of the first disability when an injury that further disabled the worker occurred in their workplace. Many believe that these funds are now unnecessary in that passage of the Americans with Disabilities Act has made the protection they afford to disabled workers redundant. The Act protects injured workers from discrimination by employers. At least 10 states have repealed laws covering Second Injury Funds.

The aim of the workers compensation system is to help workers recover from work-related accidents and illnesses and to return to the workplace. A fast return to work is desirable from the employer and insurer’s viewpoint, lowering claim costs for the insurer but benefiting the worker too.

Research shows that the faster the insurer receives notice of an injury and can initiate medical treatment, the faster the injured worker recuperates and returns to work and the less likely he or she is to seek out an attorney for help in dealing with a claim. Studies also suggest that most people want to return to productive employment as soon as possible. Electronic communication has enhanced procedures to speed up the "first notice of claim" filing process to the workers compensation administrative office.

There are two important aspects to facilitating the return-to-work process. One involves getting the most effective medical care as soon as possible and reducing the emotional stress that may follow an accident. To help get medical treatment to the injured worker faster, some insurers help employers file promptly a "first notice of injury" with the state agency responsible for overseeing the workers compensation system, a step which triggers the claim process.

The other is to encourage employers to improve communications, first about the workers compensation system in advance of accidents—people who know what to expect and who receive medical attention promptly will recuperate faster and are less likely to turn to an attorney for help—and second when injured workers are off work, so that they feel that they are still part of the workplace team and are anxious to return. Insurers have also strengthened communications among all the parties involved in the case so that each knows how treatment is progressing.

Another aspect of the return-to-work process is successful reintegration into the workplace. Insurers help employers assess the injured workers’ needs and capabilities and encourage them to let workers know, in advance of any injury, that they will try to modify work activities to accommodate those who are permanently disabled.

Long absences from work can have a lasting negative impact on workers’ future employment opportunities and thus on their economic well-being. A study of injured workers in Wisconsin by the Workers Compensation Research Institute found that the duration of time off work and periods of subsequent unemployment are lower for injured workers who return to their pre-injury employer than for those who change employers.

Another factor pushing up costs in some states is the amount of attorney involvement. Workers compensation programs were originally intended to be "no-fault" systems and therefore litigation-free. Attorney fees are either set by law or subject to approval of the courts or regulator. Computations may be based on an hourly rate, a percentage of the total award, a specific percentage according to the level of the hearing on the case, or a sliding scale with percentages decreasing with the size of the award. Many states have caps on attorney fees.

Although attorney involvement boosts claim costs by 12 to 15 percent, because claimants must pay attorneys' fees there is generally no net gain in the actual benefits received. Overall, attorneys are involved in 5 to 10 percent of all workers compensation claims in most states—but in as much as 20 percent in systems where the number of disputes is high and in roughly a third of claims where the worker was injured seriously.

The involvement of an attorney does not necessarily indicate formal litigation proceedings. Sometimes, injured workers turn to attorneys to help them negotiate what they believe is a confusing and complex system. Increasingly, states are trying to make the system easier to understand and to use.

The workers compensation system plays a major role in improving workplace safety. An employer's workers compensation premium reflects the relative hazards to which workers are exposed and the employer's claim record. About one-half of states allow what is known as "schedule rating," a discount or rate credit for superior workplace safety programs.

In addition, a majority of states now provide for optional medical deductibles in workers compensation insurance policies as a cost-saving measure and, in some states, allowable deductible amounts were raised. (Deductibles reduce premiums because they lower an insurer's administrative expenses, which, for small claims, make up a disproportionately large portion of the cost of settlement.) Deductibles also encourage greater safety-consciousness on the part of the employer who must pay the deductible amount.

In some states, insurers must provide accident prevention services to employers. In others, employers are required by law to set up safety committees and other programs to deal with unsafe conditions in the workplace and assign specific responsibility for creating, monitoring or overseeing workplace safety to a governmental agency.

Some businesses are taking a more radical approach to bringing costs under control through coordination of workers compensation, healthcare and disability benefit plans. The integration of workers compensation and other employee benefit programs is a broad concept that ranges from a simple marketing approach that promises savings from using the same insurer for both coverages to programs that offer a managed care approach to the management of all types of disability, regardless of whether they are work-related.

Besides limiting overlapping programs and streamlining administration, proponents say such a change addresses the increasing difficulty of distinguishing between work- and nonwork-related injuries and illnesses, such as injuries due to repetitive motion and stress claims.

It also improves productivity since nonwork-related disabilities are managed with the same focus of getting the employees back to work as work-related cases, and at the same time addresses the potential for reporting injuries that occur outside the workplace as work-related to reduce the employee's out-of-pocket costs. Workers compensation pays for all reasonable medical treatment without deductibles and co-payments, as opposed to healthcare, where the policyholder incurs some out-of-pocket costs.

Residual Markets: Residual markets, traditionally the market of last resort, are administered by the NCCI in 29 jurisdictions. In some states, particularly where rates in the voluntary market are inadequate, the residual market provides coverage for a large portion of policyholders. In 1993 they represented about 26.5 percent of the total workers compensation market (excluding employers who are self-insured). Since that time, the NCCI has taken steps to reduce the size of the residual market by creating financial disincentives to obtain coverage from it.

Terrorism Coverage: Since the terrorist attacks of September 11, 2001, workers compensation insurers have been taking a closer look at their exposures to catastrophes, both natural and man-made. According to a report by Risk Management Solutions, if the earthquake that shook San Francisco in 1906 were to happen today, it could cause as many as 78,000 injuries, 5,000 deaths and over $7 billion in workers compensation losses.

Workers compensation claims for terrorism could cost an insurer anywhere from $300,000 to $1 million per employee, depending on the state. As a result, firms with a concentration of employees in a single building in major metropolitan areas, such as New York, or near a “trophy building” are now considered high risk, a classification that used to apply only to people in dangerous jobs such as roofing. Faced with the possibility of a huge death toll costing millions of dollars and the threat of insolvency as a result, all but the largest insurers are limiting coverage. This is forcing some employers to raise their deductibles, in effect self-insuring part of the risk, and to deal with several insurers to reduce the potential maximum loss for each.


Issues Report, a yearly overview of the workers compensation system, National Council on Compensation Insurance.

"Property/Casualty Insurance Facts," Insurance Information Institute, annual publication.

"Analysis of Workers' Compensation Laws," U.S. Chamber of Commerce, annual publication.

Publications from the Workers Compensation Research Institute, Cambridge, MA.

© Insurance Information Institute, Inc. - ALL RIGHTS RESERVED




Illinois Workers Compensation and Sub Contractors

Manage Your Workers Compensation Independent Contractor Exposure

One of the biggest challenges that a contractor faces on a job site is managing its independent contractor exposure. Understanding the legal difference between what constitutes an "employee" versus an "independent contractor" enables the contractor to avoid becoming the legal employer of a contractor's or a subcontractor's workers. The most effective way to mitigate the exposure is to require the contractor to carry workers compensation insurance and take reasonable steps to verify that such coverage is in place. Other steps for reducing this exposure include:    

  • Check the state statutes for independent contractor qualifications. Seek legal advice for clarification as needed.
  • If the state requires independent contractors to register, check the state's online portal to verify the contractor in question is registered.
  • Execute a written contract with the independent contractor outlining the relationship. Avoid placing restrictions on the contractor's freedom to perform work for others.
  • Require the contractor to provide its own tools and equipment.
  • Pay the contractor based on completion goals rather than on a weekly or biweekly basis to avoid the appearance that the independent contractor is drawing a paycheck. Require an invoice for payment.

These suggestions were offered by Sonja Guenther, Senior Vice President, Willis of Colorado, at the "Controlling Workers Comp Costs in Modern Times" workshop during the 32nd IRMI Construction Risk Conference in Orlando.


Illinois Workers Compensation Insurance Rates and Injury Codes

When analyzing overall work comp costs and rates,  it's important to know how injuries affect your Illinois Workers Compensation Insurance modification factor.  To take full advantage of the Illinois ERA credit it's important to know what these injury codes stand for. 

An injury code is assigned to each claim by your insurer based on the type of injury. Each code is described in the following table.

IJ Code





Permanent total disability


Major permanent partial disability


Minor permanent partial disability


Temporary total or temporary partial disability




Contract medical or hospital allowance


Compromised death (California only)


Permanent partial disability




Illinois Workers Compensation Insurance and the Work Comp Contractor Credit

Illinois Workers Compensation Insurance and the Work Comp Contractor Credit

For Illinois Contractors, one of the most important reasons for managing your Experience Modification Factor is the Illinois Contractor Classification Premium Adjustment Program (CCPAP).  In order to qualify for this credit your Work Comp Mod must be 1.00 or less.  AND, this credit can be as high as 40% which can be the difference in your bottom line for securing new business.

It's important to understand that controlling your long term costs take more than just getting an Illinois Workers Compensation Insurance quote at your policies renewal every year.  If you're struggling with your mod and would like to learn more on how to control it - give me a call.   Contact Info Link 

To learn more about CCPAP, including an overview of the program and how to complete an application, view the webinar available at via this link.

CCPAP Webinar






How Many Contruction Workers Hide On-the-Job Injuries to Save their Jobs?

This is a replublished write-up provided by Pete Stafford and the Counstruction Safety Council:

It makes for pretty shocking reading. Dr. Hester Lipscomb and her colleagues administered an anonymous survey to more than 1000 apprentice carpenters in metropolitan Chicago, downstate Illinois and the St. Louis area. The findings, reported in the American Journal of Industrial Medicine, reveal a pervasive fear among carpenters that reporting a workplace injury or illness is an express ticket to the unemployment line.

That translates into a widespread practice of concealing injuries rather than reporting them and courting retaliation. Nearly one in six reported personally knowing of a case where a colleague had been hurt on the job but sought treatment through private insurance rather than filing a workers' compensation claim. About one third reported that on their job sites injuries were "rarely" or "never" reported.

Most eye-opening, though, were the many comments offered by the respondents:

"If you get hurt and report it you will be replaced."  
"The term 'fired before you hit the ground' is used too much in our industry."
"They want it faster and if you are injured, go home and don't report it. There are a lot of other guys in line to replace you."
The study, Safety, incentives, and the reporting of work-related injuries among union carpenters: "You're pretty much screwed if you get hurt at work," is available online now and will appear in print shortly.

By: Pete Stafford