Established in 1911, workers’ compensation was created to protect employees from work-related injury or death. Today, all U.S. states and territories, except for Texas, require some degree of workers’ compensation coverage. This coverage traditionally involves lump-sum payments at the beginning of the year based on an employer’s . At the end of the year, businesses conduct an audit to assess the accuracy of the liability cost projection, which may require additional payments.
Workers’ compensation can be an inefficient, unnecessary financial and administrative burden to businesses. However, pay-as-you-go workers’ compensation is a great alternative for businesses. Here are the top five reasons to consider a pay-as-you-go workers’ compensation plan.
Overview of Pay-As-You-Go Workers’ Compensation Insurance
Pay-as-you-go (or PayGo workers’ compensation is a system of remitting workers’ compensation insurance based on monthly payroll. This system allows the compensation premiums to be adjusted month to month depending on changes, such as terminating and hiring of workers.
Due to its dynamic nature, PayGo allows a more accurate, simplified payment plan for businesses. Those with high employee turnover rates are its biggest beneficiaries, especially those in the hospitality, janitorial, and construction industries.
The PAYG system can be achieved in one of two ways:
- Self-report payroll information to the insuring agency, who will then provide a premium amount to be paid.
- Automated insurance and payroll systems that allow an automatic deduction of the premiums directly from accounts.
Whichever system is implemented, pay-as-you-go worker’s compensation insurance is a concept that can be implemented easily and reap its many benefits at once. PayGo workers’ compensation is available to every business with private workers’ compensation insurance.
The only exceptions are the monopolistic states and territories. These are states that control workers’ compensation exclusively, excluding any options for private insurance, which include North Dakota, Ohio, Washington, the U.S. Virgin Islands, and Puerto Rico.
If that option is available, here are five good reasons to consider switching to pay-as-you-go workers’ compensation immediately.
1. Improve Cash Flow Management
Consider a business that has 15 employees, earning a combined $1.2 million a year. If the compensation coverage rates are $1.2 per $100 of wages, this amounts to an annual lump-sum payment of $14,400.
Even to a healthy business, having to pay such a sum at once strains cash flow. While a business can opt to make a down payment of about 25% of the full amount and clear the rest in installments, the amount is still unmanageable for many small to mid-sized businesses (SMBs).
According to JPMorgan Chase, most SMBs have a daily cash flow of between $219 and $957, which is why most end up taking out premium financing resulting in additional unnecessary costs down the line.
With pay-as-you-go, you still make a small down payment, but the rest is distributed through the rest of the year based on your monthly payroll. This makes it far more manageable and eliminates the need for external financing. In addition, employers won’t need to tie up a lot of your business cash and can divert it to more urgent needs.
2. Eliminate Estimates and Ensure Accurate Payments
The traditional workers’ compensation system requires you to make projections based on how you expect your business to perform and grow that year. This is an intensive, unreliable process prone to error. If you make mistakes or your business experiences a significant change, you have to wait until the end-year audit to correct it.
The PayGo workers’ compensation insurance system is based on your monthly payroll. As such, the premiums you pay are accurate and can be varied as your business changes.
Monthly premiums are predictable and simple, no matter how many employees come and go. Plus, the incremental changes make it easy to correct over or underpayments in time.
3. Never Miss a Deadline with Automated Payments
It is easy for insurance premium deadlines to creep up on you. This is especially true when you don’t have the money to make payments in time and continue postponing payments.
You might think that pay-as-you-go workers’ compensation introduces more deadlines for you to miss, but it makes it easier for you to meet deadlines. By integrating it in your payroll system, premiums can be remitted on time whenever you process your payroll, eliminating the time and frustration and allows you to refocus on other things.
4. Simplified Compliance and Auditing
At the end of every year, executives are oftentimes rushing around to complete audits, meet compliance requirements, and beat various deadlines. The traditional system doesn’t make things any easier, given that you have to dig up payroll and employment records that might be out of date.
At the same time, you have to be sure that you have accounted for every employee who worked for your company during the year or face potential penalties. In some states, contractors and subcontractors are also treated as your employee, which means that they also need coverage and a certificate of insurance.
Pay-as-you-go workers’ compensation insurance simplifies this process. Since you are dealing with short-term periods (weeks vs months), there is less likelihood of missing something and attracting penalties. It also means that the end-year audits become much easier to conduct.
5. Flexible Payments
Administrative tasks become an enemy to your growth when they threaten your most precious resource: time. Time spent on repetitious, mundane tasks takes away from the amount of time and energy spent on growing the business.
Pay-as-you-go workers’ compensation is a great way to make sure that your time is free of non-revenue generating duties. While PayGo workers’ compensation insurance can simplify your payroll process and taxes, savvy business executives also outsource payroll management. This step radically helps simplify, strengthen, and grow business by freeing up resources.
At Avitus Group, we are business administration experts who specialize in helping our clients co-manage their vital administrative duties. Our goal is to help you achieve unprecedented growth by removing administrative inefficiencies.
With Avitus Group, you have the option to outsource your payroll and simplify, strengthen, and grow your business safely. Invest your time and partner with us today.