Pay as You Go

The logical way to pay workers' compensation premiums

If you carry workers' compensation coverage, you probably know about additional premiums-that often whopping lump sum due at the end of your policy period when the insurer conducts an audit to calculate what your final premium actually should be. Paying that lump sum can be a significant cash-flow headache, especially for growing or seasonal operations that can't precisely predict what their payrolls will be a year in advance. But there is a solution.

A growing number of insurance companies and payroll services are teaming up to offer automatic direct payment of workers' compensation insurance premiums as part of regular payroll processing. The treatment for premiums is similar to the way taxes are handled, calculating them based on the actual payroll using a complex process that considers job classifications, claims records and other factors, and then remitting them with each payroll run. The result is that you won't have any audit surprises or large lump sum payments either upfront or at the end of the policy period, says Robert King, director of workers' compensation product development for Fireman's Fund Insurance Co. in Novato, California. You also won't have any refunds due to inadvertent overpayments.

Fireman's Fund has an agreement with Advantage Payroll Services, based in Auburn, Maine, to provide a pay-as-you-go service to mutual clients. While the program sounds simple, setting it up takes substantial effort and commitment. "Putting together a program like this, to make it as robust and accurate as needed, takes a considerable investment on our part and on the part of the carrier," says Philip Horrisberger, vice president of business development for Advantage. Even so, the companies don't charge extra for the service; rather, they see it as a solid method of customer retention that's well worth the expense.

And business owners appreciate the investment. "It's a good cash-management tool, and it's very good for a company that does not have a standard payroll," says Heidi Miller, 43, owner of Silver Brush, a hair salon in Bradenton, Florida. "My salon income and compensation expenses fluctuate. With this program, when my income is greater, I'm paying a little more; when my income is not as great, I'm paying less." Another benefit, she says, is that the annual audit is easier, faster and much less intrusive because the payroll information and supporting documentation has already been provided.

A number of protections for customers are built into the system. Insurance companies require participating payroll services to be bonded and insured, so clients are assured the money collected is remitted to the carrier. The insurance company works with the payroll service and the client upfront to make sure employees are properly classified and the premium calculation will be accurate. And because the premium is paid with every payroll cycle, discrepancies can be spotted and corrected quickly, before they become substantial.

To participate, you must use a payroll service that has an agreement with your workers' comp carrier. Insurers require that your payroll be processed by an independent outside company, not internally, to qualify for this type of payment arrangement. Explains King, "This is one of the things that makes a payroll service worth purchasing. For some companies, this is what moves them in that direction." If you already use a payroll service, ask whether they have any such agreements. Or, if you're shopping for one, ask your insurance carrier whether they have formed any agreements with payroll services. Currently, only a few services and insurers have set up pay-as-you-go programs, but King predicts that, within five years, it will be a common and accepted way of paying workers' comp premiums.

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