Workers Compensation Total Cost of Risk

The term “iceberg effect” in the insurance world refers to hidden claims dollars. When considering the cost of a workers’ compensation claim, what usually first comes to mind is the initial cost of the claim. However, what most may not know is that when a claim is incurred, it affects several factors that all equate to dollars and impact the employer’s bottom line. These are referred to as indirect claims costs. OSHA has spent considerable time and resources in researching what these dollars actually are. According to the study, the smaller the claim, the higher the percentages of the indirect costs associated with that claim. This makes sense as there is a common cost in setting up a claim, doing associated paperwork, etc. for all claims and this would certainly cost more as a percentage for smaller claims.

According to the study, for claims under $3000, the indirect costs are 4.5 times the amount of the claim, they are 1.6 times the amount of the claim for claims between $3,000 to $5000, and 1.2 times the amount of the claim for claims between $5000 and $10,000; finally for claims about $10,000, they are 1.1 times the amount of the claim. Even though it is fairly easy to spreadsheet these numbers, there is a worksheet on OSHA.com that does the work for you. It even goes a step further to show you what sales are needed to cover your claims. When our agency has completed these in the past for clients, they are very surprised when you show them the numbers, but the amount of sales to cover the claim is where it really hits home. Here is an example using a small to medium sized company with a workers’ comp premium of $80,000. If they had two $20,000 losses that year, it would cost them $21,000 in additional premium over the next 3 years and $44,000 in indirect costs which would total over $65,000 in total costs. When calculated like this, it is really just like you are self-insuring because the amount the claim ends up costing your company exceeds the initial claim amount. In the above example, the original claim was $40,000 yet it cost the company over $65,000. If you operate on a 3% margin, which is standard for manufacturing companies, this would take over $14,000,000 in sales to replace these 2 losses in that same 3 year period. Keep in mind, most of these costs are incurred in the first year.

What makes up these soft costs or indirect costs? Loss of use, loss of productivity, lost customers, damage to brand, lost contracts, investigation expenses, administration, bad morale among employees, time to attend hearings, etc. The list goes on and on. I would challenge those of you who have changed your culture to a safer workplace to look at your financial statements and give the credit for the improvements to the reduction of these direct and indirect costs. For those who may struggle to get upper management to look at something besides sales, use the worksheet to show them the importance of safety and loss prevention.

By Chris L. Moxley, CIC, CRIS

Professional Insurors Agency, LLC

Chris Moxley is the Vice-President of Operations for Professional Insurors and President of TCOR Services USA. He earned his Certified Insurance Counselor Designation in 1995 and his Construction Risk and Insurance Specialist designation in 2005. He is active in several industry associations and is a member of the Oklahoma State and Oklahoma City Chambers of Commerce and serves as President of the Arbor Lake HOA. With over 20 years’ experience in the industry, Chris serves as publisher for TCORBLOG.com and teaches classes in risk management and workers compensation.

Employee Discipline Simplified

Should employers require steps in the disciplinary action process? First, what is disciplinary action and what does it entail? Disciplinary action is the means of communicating corrective action to an employee whenever some type of workplace infraction has occurred. Usually managers make it harder than what it has to be. This could be for many reasons; some of which may include the discomfort of having to confront the worker, fear the worker may do or say something and the manager will not know how to respond or react; or perhaps the manager doesn’t want to take the time to find and replace a worker that needs replacing so they keep the employee longer than they should. Also, some managers may be under the impression they first must issue warnings before they can fire an employee. These are all valid concerns and most can effectively be addressed with training.

While there are many great places to work, ultimately a manager will be faced with having to impose some type of disciplinary action on a worker so it is important to understand the best practices. On occasion, an employee may violate a policy or workplace standard, display poor performance or misconduct. It could be worse, and some form of discrimination, harassment, retaliation, safety violation, or gross negligence and/or misconduct could have occurred. Unfortunately, disciplining employees is part of what supervisors and managers sometimes have to do. So, should there be steps? We said in the beginning that disciplinary action was a means to correct behavior or performance; to inform the employee of the minimal expectations for improvement so he/she has a chance to save his/her job. If we want to give chances, it seems logical to inform an employee this is his/her first strike; and sometimes second chances are warranted. However, some managers loosely say three strikes and you’re out; even going so far as to broadcast and put in written policies that an employee will first receive a verbal warning, then a written warning, and after three written warnings, they will be fired.

Having steps in the disciplinary action process is not a good idea because it takes away the employer’s authority to take appropriate action at its sole discretion, given the offense. How? Very simply, if an employer’s policies state an employee must receive three warnings before being fired, and some type of gross misconduct occurs, it will be more risky for the employer to fire that employee. It is much better for an Employee Discipline Policy to state the employer can take whatever disciplinary action it deems appropriate given the infraction. The types of disciplinary action include: verbal warning, written warning, suspension (paid or not paid) and termination but in no particular order. Implementing disciplinary action in this way, the employer can reduce liability associated with wrongful termination claims. It is then important to train managers on these practices and company policies.

Independent Contractor or Employee?

How do you know if the person you hire should be classified as an independent contractor or employee? Does it really matter? After all, he/she is performing a service and you are paying for the service. Oh, if it were that simple. Employer liability can be great when workers are misclassified. Penalties can include years of unpaid employment taxes, workers’ compensation unpaid premiums, reimbursements for work-related expenses and potential unpaid overtime compensation, not to mention liability for not providing employee benefits such as health insurance and retirement. That said, it’s not a problem until it’s a problem, right? If you subscribe to that philosophy, keep reading…

If you hire a landscape company to maintain the perimeter of your facilities, usually they are incorporated, have workers they pay and provide benefits, including workers’ compensation insurance (by the way, you should always obtain a certificate of this insurance), perform their services for other employers, and your arrangement with them is centered on the project results. In other words, you are not giving them details of how to do the work. If you hired an individual to perform this same service, the relationship could change…

The relationship between the company and the individual worker is central to determine if the person is an employee or independent contractor. Generally, if the company controls what will be done and how it will be done, the worker is an employee. Independent contractors have greater control over their work. Usually the work is project based with emphasis on a particular trade or subject matter that individual is specialized in.

The IRS has identified 3 categories to assist employers in the relationship analysis: behavioral control, financial control, and type of relationship.

Behavioral considerations (an individual is subject to the employer’s instructions):

• When, where, and how to work (must they adhere to the employer’s set schedule?)
• What tools or equipment to use (does the employer provide the tools?)
• What workers to hire or to assist with the work (does the employer dictate this?)
• Where to purchase supplies and services (does the employer or worker supply materials?)
• What work must be performed by a specified individual (who is supervising delegated tasks?)
• What order or sequence to follow (does the employer provide instructions?)

Financial considerations (right to control the business aspects of a worker’s job):

• The extent to which the worker has unreimbursed expenses (are there fixed, on-going costs for the worker?)
• The extent of the worker’s investment (is the worker responsible for their own supplies and labor costs?)
• The extent to which the worker makes services available to the relevant market (does the worker promote/contract his/her skills/services to other employers?)
• How the business pays the worker (Is the pay on a project basis? Hourly basis?)
• The extent to which the worker can realize a profit or loss (does the individual have the ability to make a profit or loss?)

Type of relationship (define the relationship between the employer and worker):

• Written contracts describing the relationship the parties intended to create (does a contract agreement exist between the parties?)
• Whether the worker is provided with employee-type benefits (is the worker provided access to benefits otherwise reserved for employees such has health insurance, retirement, etc.?)
• The permanency of the relationship (is the work performed indefinitely rather than a specific period?)
• How integral the services are to the principal activity (are the services performed an integral part of the business?)

In addition, the IRS developed its 20-Factor Test to assist employers in determining classification. While no one factor is more indicative of status than another, a high number of “yes” answers could indicate an employment relationship.

IRS 20-Factors (Circle YES or NO for each)

1. Instructions: Is the worker required to comply with employer’s instructions about when, where, and how to work? YES NO

2. Training: Is training required? Does the worker receive training from or at the direction of the employer, includes attending meetings and working with experienced employees? YES NO

3. Integration: Are the worker’s services integrated with activities of the company? Does the success of the employer’s business significantly depend upon the performance of services that the worker provides? YES NO

4. Services Rendered Personally: Is the worker required to perform the work personally? YES NO

5. Authority to hire, supervise and pay assistants: Does the worker have the ability to hire, supervise and pay assistants for the employer? YES NO

6. Continuing Relationship: Does the worker have a continuing relationship with the employer? YES NO

7. Set Hours of Work: Is the worker required to follow set hours of work? YES NO

8. Full-time Work Required: Does the worker work full-time for the employer? YES NO

9. Place of Work: Does the worker perform work on the employer’s premises and use the company’s office equipment? YES NO

10. Sequence of Work: Does the worker perform work in a sequence set by the employer? Does the worker follow a set schedule? YES NO

11. Reporting Obligations: Does the worker submit regular written or oral reports to the employer? YES NO

12. Method of Payment: How does the worker receive payments? Are there payments of regular amounts at set intervals? YES NO

13. Payment of Business and Travel Expenses: Does the worker receive payment for business and travel expenses? YES NO

14. Furnishing of tools and materials: Does the worker rely on the employer for tools and materials? YES NO

15. Investment: Has the worker made an investment in the facilities or equipment used to perform services? YES NO

16. Risk of Loss: Is the payment made to the worker on a fixed basis regardless of profitability or loss? YES NO

17. Working for more than one company at a time: Does the worker only work for one employer at a time? YES NO

18. Availability of services to the general public: Are the services offered to the employer unavailable to the general public? YES NO

19. Right to discharge: Can the worker be fired by the employer? YES NO

20. Right to quit: Can the worker quit work at any time without liability? YES NO

The IRS has announced it will be conducting thousands of random audits over the next 3 years. Therefore, it is important to be proactive and perform the above self-audits per individual case; then make internal corrections where necessary and remember, err on the side of caution when uncertain. Click here for more information.

Inclement Weather - To Pay or Not to Pay

With the recent storms that swept the nation, many employers were forced to close their operations for one day, if not a few days depending on their region of the country. Some employers do a good job of communicating office closures to their personnel while others...not so much. One fundamental fact is that several employers are faced with determining compensation for employees for the days missed due to inclement weather. Employers should always first turn to applicable federal and state laws, as well as their company policies, to guide them. Within the scope of this article, it is not possible to explore every state law or every employer's policy should they even have one. Therefore, keep the following tips in mind when you are deciding - to pay or not to pay:

1. Decide if the company is (was) officially open or closed for business.

2. If officially open, that means employees are expected to be at work for their regularly scheduled time. If an employee does not come to work, that employee should use available vacation or sick time, providing the company has such policies; otherwise the time will be unpaid.

a. Exempt employees (those not eligible for overtime compensation) should be deducted in full-day increments. If they work any part of the day, however, they must be paid for the full day. Otherwise, you will be in jeopardy of losing the exempt status for that employee.

b. Non-exempt employees should be deducted for the amount of time actually missed from their regularly scheduled workshift. If they work any part of the day, they should be compensated for only those hours actually worked.

3. If officially closed, that means most employees are not expected to arrive at work. I say "most" because some employees go to work anyway, especially if they live close by, have a key to the building and there are no other restrictions placed upon them from working - usually these will be key employees or exempt employees and it also depends on the industry, type of work, security measures, etc. If work is performed by an employee, the above rules apply.

4. Where officially closed, and no work is performed, a company may advise employees they will have to use available vacation or sick leave if available. Where no benefit is available, employers may not deduct the pay of exempt employees but may deduct the pay of non-exempt employees for the actual time missed.

5. That said, here are best practices for when the office is officially closed and no work is performed by either exempt or non-exempt employees:

a. Exempt employees should be paid for the full day.

b. Non-exempt employees should be paid for the actual shift hours they missed due to the company officially closing its doors.

You may wonder why not make them use available vacation and sick leave; after all no production occured while the office was closed yet we have this payroll expense and nothing to offset it. That is a fair question when considered at face value. However, consider also the employee did not request this time off; consider the inclement weather was not within anyone's control; consider the office being officially closed was a decision made by the employer for safety concerns and to make an employee use available vacation and sick leave on top of that seems like a form of punishment; consider the morale of your workforce and the workplace standards your company strives to uphold and the extent to which you rely on your employees to do their part in this effort. The benefits of paying your employees far outweigh not paying them when considering these factors.

It is safe to say an employee who believes a company, no matter its size, takes their welfare into consideration is an employee who, more times than not, can be retained.

I hope everyone was as safe and snug as possible during this recent snowstorm. More information can be found at www.dol.gov.

The I-9 is Not That Hard

Many employers struggle with the I-9. While there are a few complexities, it should be a relatively simple process for completing, storing, and tracking. I have performed several I-9 and Employee File Audits and have found the same mistakes among employers. Usually, forms are not stored properly, are missing key information such as signatures, hire dates and, yes, even the fields where document information must be listed are blank! Another common mistake is not dating the I-9 within 3 business days of employment and, sometimes, an employer won’t even have an I-9 for an employee at all!

The Act regulating I-9s is the Immigration Reform and Control Act of 1986 (IRCA). In a nutshell, it prohibits the employment of individuals who are not legally authorized to work in the United States. It also prohibits discrimination in employment related matters on the basis of national origin or citizenship. You cannot fail to hire someone because he/she is NOT a citizen. IRCA requires employers to certify the identity and eligibility to work within 3 business days of employment using the I-9 form.

The I-9 does a good job of giving instruction on how to complete it. I think several employers simply do not take the time. This is a good first step. Read the instructions on the form itself. Be sure that you are using the correct form with the latest document number and expiration date. As of now, that date is “OMB No. 1615-0047; Expires 08/31/12”.

I have provided 10 steps for you to use as a cheat sheet. Keep this in your desk to refer to:

1. All employees must complete an I-9. They cannot complete it until AFTER they have received a conditional offer of employment. Use an Offer Letter to document this was the case.

2. The I-9 must be completed AND dated within 3 business days after the employee’s hire date. If an employer wants an employee to complete hiring forms PRIOR to their start date, this is okay AS LONG AS a conditional Offer Letter has been extended and accepted by the employee.

3. The employer must examine the original documents, not photo copies, to ascertain if they are genuine.

4. The employer cannot TELL the employee WHAT documents to bring for examination. A list of documents is provided on the I-9. Give this list to the employee so they can choose what documents they have that satisfy the requirements.

5. All documents must be UNEXPIRED!

6. Section 1 is completed by the employee and signed and dated.

7. Section 2 is completed by the employer and signed and dated. This should be the SAME person who examined the original documents. Within the “Certification” paragraph, there is a blank line to insert the employee’s hire date. This is often left blank. Be sure to complete this and ensure it is the correct hire date that was used on the Offer Letter.

8. Section 3 is ONLY for RE-verification so this is left blank UNTIL it is time to RE-verify the employee’s documents. You should have some type of tickler/reminder system in place for I-9 re-verifications. Every document must maintain an unexpired date now, including Driver’s Licenses.

9. Store the I-9s separate from the Personnel Files. A binder is a good method. Use alphabetical dividers for organization. Keep the binders locked. Electronic storage and signatures are allowed.

10. The retention for I-9s is the duration of employment PLUS one year OR 3 years from the date of hire, whichever is longer. It is not necessary to keep I-9s beyond the retention period.

IRCA imposes fines for hiring illegal aliens ranging from $275-$11,000 per alien. There are also paperwork fines between $110-$1,100 per offense. Finally, employers can even face criminal penalties for repeated violations. These can include up to 6 months in prison and up to $3,000 per unauthorized alien! So, I tell you, the relative simplicity of maintaining the I-9 form is not worth facing any of these penalties! If you find errors on an I-9, these can be corrected by lining through the mistake and initialing the correction beside it. If the I-9 is really messed up, have the employee complete a new one with current dates but staple the incorrect I-9 to the back of this and store them together.

Once you get your system in place and train your staff, you will see the process is easy to maintain. More information, including a Handbook for Employers, can be found at www.uscis.gov.