Payrolls - Everything You've Always Wanted to Know

The premium that you pay for workers compensation is based on three factors, payrolls, classifications, and the experience modifier.  This page discusses payrolls.  In the insurance industry, payrolls are more broadly called “remuneration.”

For workers compensation purposes, payrolls measure an employer’s size. The higher the payrolls, the more the premium. The NCCI defines payrolls broadly to include:

Remuneration does not include

Sometimes, the broad definition of payroll results in contradictions within the insurance contract. This is best explained with an example.

Several months ago, a client called with a problem. He operates a chain of ice skating rinks and conducts organized ice hockey league games on Saturday mornings.

The referees for this league are paid a modest flat fee for each game. The refs and the client assumed that the referees were independent contractors and were not covered for workers compensation. There had never been a claim. No wages were withheld. The referees had the final decision as to whether they would work a particular game.

This went on for many years and was never questioned by the insurance carrier. Then, during a payroll audit, a premium was charged for the referees. The basis of the premium was the flat fee paid for each game. The auditor also decided to make this charge retroactive. Two prior policy years were reaudited. Referee payments were added to those audits. The additional premium for the three years would have been just about enough to put this client out of business.

Once contacted, our first step was to verify the actual “remuneration” that was paid to the referees. We then contacted the insurer and asked that they justify this charge. Their response was a general statement about "direction and control" and "relative nature of the work". Neither applied in this instance. But this is the type of canned response that has earned the insurance industry its' stellar reputation.

We challenged the payments to refs on the basis that these individuals were Independent Contractors, similar in function to an accountant or lawyer. The insurer denied our request. Their carefully worded reply never stated if coverage actually existed for the referees. While it might seem obvious that coverage must exist if a premium is charged, that is not the way things work in the world if insurance.

Put another way, the insurance company's position was that it is OK to charge a premium today and deny coverage for those same individuals at some future date. This must surely be the classic case of wanting to have your cake and to eat it at the same time.

Here is how we approached the problem: First the insurance carrier's underwriter was asked for an endorsement that explicitly added coverage for referees. As expected, she refused. Next, we sent her refusal along with the audit and correspondence to the state's Department of Insurance.

After the State became involved, it took just three weeks for the audits to be revised and premium for the referees was eliminated. Case Closed.

This section has provided a brief overview of the Workers Compensation payrolls. For a more in-depth discussion of this and other Workers Compensation subjects, I suggest that you order a copy of PRA's Premium Cost Cutting System. For more information, just click on the cover.