Workers' Comp: Shattering the Myths 

by Peter Schlactus, CIC, AAI                     [ Back To Table of Contents ]

No other form of insurance elicits as much fear, loathing and misunderstanding as Workers' Compensation. And for good reason: 
Except for couriers with large fleets, no other form of insurance can lay claim to so large a piece of your revenues.

A lot is at stake.

Before venturing to tackle so hefty a subject within a brief article, a few words of caution are in order.

First, Workers' Compensation is a state-by-state affair. General principles may apply to the majority of jurisdictions, but each state's 
particular statutes and regulations ultimately govern. Indeed, your insurance policy says little other than promising that the carrier 
will comply with the terms of your state's laws.

Second, even laws and regulations cannot anticipate every situation. When disputes or ambiguities arise, administrative hearings 
must resolve differing interpretations. The results are inherently unpredictable ... and not always consistent. By staying well within 
the bounds of established practice, you can minimize -- although never eliminate --the chance of finding yourself at the mercy of 
this quasi-judicial system.

Myths that circulate about Workers' Compensation are legion. Below are just some of the more common notions we run across in 
our consultations with couriers.

I. Workers' Compensation is nothing more than another unjustifiable tax.

Many business owners see how much money goes to pay their Workers' Compensation premiums each year and conclude that 
the system is robbing them blind. While it is true that most businesses do not have claims in excess of their premiums during any 
given year, the evils of Workers' Compensation can be over exaggerated.

Since Wisconsin passed the first Workers' Compensation law in 1911, business and labor have agreed that the system benefits 
both groups. Workers benefit by gaining access to guaranteed benefits to pay for medical expenses, lost wages and so on. 
Businesses profit from virtual immunity from worker lawsuits for injuries sustained on the job. It was judged far better to budget 
for the known costs of compensation premiums than to reserve unknown funds for the defense and payment of worker suits.

Given the size of jury awards today, Workers' Compensation may be more an ally than enemy. As with many types of insurance, 
its undeniable costs are balanced by the fact that, without it, many could never shoulder the risks of going into business at all.

II. Independent contractors are not covered for Workers' Compensation.

Just because you are not currently paying Workers' Compensation premiums on your contractors does not mean they are not 
covered ... or that premiums are not due. The fact is that, in a large majority of states, a business will be held responsible for 
Workers' Compensation benefits on its subcontractors ... unless those subcontractors have their own insurance and can prove 
it with certificates of insurance.

This is true for the over thirty states where NCCI (National Council on Compensation Insurance) rules apply, and we recently 
have reviewed the regulations in New York, Illinois, Pennsylvania, New Jersey, Georgia, Kansas, and Louisiana as well.

Consult your state Workers' Compensation Board or Insurance Department -- the rules are there in black and white. Illinois 
puts it succinctly: "If you employ uninsured subcontractors, the Workers' Compensation Act holds YOU responsible for 
injuries to their employees. The conditions of this policy provide that the premium is to be paid by YOU, based on total payroll ... 
including the payrolls of all such uninsured subcontractors."

The only ambiguity surrounds the case where the subcontractor has no employees and no payroll. Unfortunately, administrative 
judges are close to unanimous in ruling that the subcontractor, himself, is treated as an employee of himself and entitled to benefits. 
Regulations, therefore, provide that premiums are to be based on "the full subcontract price of the work performed" (NCCI).

IlI. We don't need Workers' Compensation.

We hear a couple of variations on this theme. The first is that a courier has only one or two employees -- all the rest are independents. 
Of course, all the arguments for the previous myth then apply.

The second rationale is that your state allows companies to "opt out" of Workers' Compensation. Only a very few states permit 
this: New Jersey, South Carolina, and Texas. Only in Texas is the practice common. Yet, before anyone reading this relocates to 
one of the three states mentioned, consider all of the consequences.

Texas publishes a pamphlet entitled "The Dangers of Going Bare," covering the reasons why employers might want to think twice 
before foregoing Workers' Compensation. It applies equally well to the other states. Among the chief perils of "going bare" are:

1. Employers face unlimited liability if an injured worker can prove any negligence. And the burden of proof is on you. Try convincing 
a jury of your peers that you had nothing whatsoever to do with putting the worker in a dangerous situation.

2. Employers lose their most potent defenses, such as citing the "worker's own negligence, his acceptance of the risk, and the 
negligence of other employees."

3. No protection against awards for pain, suffering and punitive damages.

4. Full responsibility for your own attorneys fees and other defense-related legal expenses.

5. Risk of having a federal bankruptcy judge "order the immediate sale of [your] business." That means you lose not only your 
business -- but rights to your customer lists, etc.

You cannot count on simply being able to reincorporate and start over. Weigh all of these serious and costly risks against the 
real -- but limited -- savings associated with not carrying Workers' Compensation at all.

IV. If we pay for Workers' Compensation on our lCs, we're admitting that they are employees. 

Not so. Workers' Compensation laws operate independently of state and federal tax and unemployment laws. Treatment of your 
workers with respect to Workers' Compensation has no bearing on those other areas. Take the IRS's exhaustive list of criteria 
for judging contractor status. No mention is made of Workers' Compensation.

In addition, Workers' Compensation specifically calls for coverage and payment to be made on uninsured subcontractors. As 
the NCCI Manual states, "Most workers' compensation laws provide that a contractor [you, the courier firm] is responsible for 
the payment of compensation benefits to ... its uninsured subcontractors [and] additional premium shall be charged."

Far from being a Trojan Horse for employee status, proper treatment of ICs under the Workers' Compensation system can 
support your defense of contractor status.

V. We haven't had a serious claim in three years, so our rates should be lower.

Sounds logical, doesn't it? Welcome to the wonderful world of Experience Rating, where a couple of strained backs can affect 
your costs as much as having one of your drivers knocked into a coma.

If your company generates more than a couple of thousand dollars in Workers' Compensation premiums, you are subject to 
this plan and assigned a "modifier," or multiplier, that is applied against your premiums. For example, if your premium is $10,000 
and your "experience modifier" is 1.5, your final cost is $15,000. Conversely, if your modifier is .75, then you get away with a 
$7,500 bill. This modifier describes how your losses have compared over time to the average in your class of business. The time 
period considered is three years -- not counting the year immediately prior. Again an example: Suppose your policy dates 1/1/98. 
Your experience modifier would reflect your losses for the years 1996 (we skip 1997 as the most recent year), 1995 and 1994.

So far so good. But what about the fact that your last big loss was in 1994?  Our friends at NCCI, in their infinite wisdom, have 
designed the system to give greater weight to accident frequency than to accident severity. This is because the seriousness 
of a given loss is subject to so many unpredictable circumstances, while the number of losses over time is more predictable 
and controllable. If you were an insurance company, which would you put your money on: a company with one $50,000 loss 
over three years, or one with fifteen $3,000 losses? Most people would choose the first, even though the previous carrier paid 
$5,000 more on it.

In conclusion, only the first $5,000 of a claim counts fully against you. The rest has an effect, but only incidentally. Your experience 
modifier -- and therefore your ultimate rate -- depends much more on how many "moderate" losses you have had.

VI. Our auditor came and went --everything is  OK.

Not quite. Some "lucky" couriers are lulled into a false sense of security because they have survived an audit unscathed. You 
are not paying for your ICs but, hey, that's water under the bridge now, right?

Actually, the law gives carriers three years to discover and adjust premiums for undeclared or new risks. Any time a new auditor 
decides to ask the dreaded question, -- "May I take a look at your 1099's?" -- you can be held responsible for three years of back 
premiums on your contractors.

Furthermore, if a carrier "discovers" your contractors in this way, it will be far less amenable to arguments about contractor 
discounts, what constitutes earnings, etc. It may be better, in the long run, to negotiate a favorable deal on contractors upfront 
with your carrier to avoid the costs of a nightmare audit.

VII. We must resign ourselves --there's no real alternative.

If, by an "alternative," people mean a way to stop paying for Workers' Compensation without incurring any other costs or risks, 
then the statement is true. There are, however, potentially advantageous alternatives to standard Workers' Compensation policies.

Dividend plans and retroactive plans allow you to recover some --even most -- of your costs when losses are low. Couriers with 
contractors can sometimes obtain a carrier agreement to charge less, utilizing the fine print of the ratings manuals.

Finally, it appears that at least one carrier may agree not to charge or audit your contractors, so long as the contractors obtain 
less expensive Occupational Accident coverage from the carrier. This would be a new innovation in the Workers' Compensation 
marketplace, and would offer couriers -- for the first time -- a permanent and completely legitimate way of avoiding all compensation 
costs for contractors.

As a result, we can talk about shattering another widely-held myth: that the insurance industry never responds creatively to real-world business problems. 

^{Peter Schlactus, a Certified Insurance Counselor and  Accredited Advisor in Insurance, is Co-President of KBS International Corp., which provides specialized  insurance programs, benefits, and  risk management services to courier companies and executives nationwide. Mr. Schlactus is available to answer inquiries  at 1-888-KBS-4321 or via e-mail at peter@courierinsurance.com.}

COURIER MAGAZINE - October/December 1997     [ Back To Table of Contents ]

(c) copyright, 1999 by KBS International Corp.  All Rights Reserved.