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Work Comp 101


What is the benefit to the employer of purchasing workers’ compensation insurance?

The employer receives the protection of “exclusive remedy” defined in Section 418.131 of the Workers’ Disability Compensation Act (the Act).  Employees injured in the course and scope of their employment are entitled only to medical and wage loss benefits.  The employer cannot be sued by the employee for benefits or damages beyond those prescribed in the Act, unless the employee can prove the injuries resulted from deliberate and intentional acts of the employer.

What happens if an employer fails to purchase workers’ compensation insurance?

Noncompliance with the Act is considered a misdemeanor offense and could imprison the employer for 6 months and result in a $1,000 fine for each day he or she is non-compliant.  More importantly, noncompliant employers are not protected by the “exclusive remedy” provision of the Act.  As a result, employees may recover damages from the employer in a civil action.

Which employers are required to carry workers’ compensation coverage?

All private employees that regularly employ 1 or more employees for at least 35 hours a week for 13 weeks or longer in the preceding 52 weeks or regularly employing 3 or more employees (full or part-time) at any time.

Who is considered an employee?

An employee is any person in the service of another, under any contract of hire, express or implied.  A partner is considered an employee of the partnership, a corporate officer is considered an employee of the corporation and a member who is a manager is considered an employee of a limited liability company.  A sole proprietor (self-employed individual) working in his or her sole proprietorship is not considered an employee of that business. 

Who is considered an independent contractor?

Anyone who maintains a separate business and holds himself or herself out to and renders service to the public is considered an independent contractor.

The “economic reality test” will be applied to determine the status of an independent contractor.  Consult your attorney for further explanation.  Generally summarized:

A person is not an independent contractor just because he or she wants to be.  A person is not an independent contractor just because the employer wants them to be, even if the employee and employer agree that they are.  A person is not an independent contractor just because the employer is not withholding federal income tax liability or matching the employee’s FICA tax.  If an individual works for only one business or is directed or controlled by that business, the individual is considered an employee, not an independent contractor.

Who determines whether an individual is an employee or independent contractor?

Your insurance carrier or self-insured fund.  Request and complete theIndependent Contractor’s Statement from your fund.  This form requests information on the relationship between the employer and contractor.  The information on this form helps the fund determine if the individual meets the definition of an independent contractor. Click here to view the Independent Contractor's Statement (pdf file).

Which employees are eligible for exclusion?

If a corporation has 10 or fewer shareholders, any individual owning at least 10% of the outstanding shares and who is also an officer of the corporation may elect to be excluded from coverage.  Any individual named partner of a partnership may elect to be excluded from coverage.  If a limited liability company (LLC) has 10 or fewer members, any member who is also a manager may elect to be excluded.  If a sole proprietor has employed their spouse, child(ren) or parent, the spouse, child(ren), or parent may elect to be excluded.  Eligible individuals may only be excluded at the consent of their employer.

What happens if an eligible employee elects to be excluded?

The excluded employee is no longer eligible for the benefits prescribed in the Act in the event they suffer an injury in course and scope of their employment.  The employer is not required to pay premium on any excluded employee.

What should an employer do if all their employees are eligible for and elect exclusion?

It should request and complete Form BWC 337 from the Workers’ Compensation Agency at 517-322-1195.  The proper filing of this form allows the employer to comply with the insurance requirements of the Act without purchasing workers’ compensation insurance coverage.  Remember, however, the excluded employees are not eligible for workers’ compensation benefits prescribed in the Act in the event they suffer a workplace injury.  If an employer was issued a Form BWC 337 and later hires employees that are not excluded, Form 337 is automatically voided and the employer must obtain workers compensation coverage to remain compliant with the Act.

A sole proprietor with no employees is not issued an exclusion form.  The sole proprietor is not considered an employee and is, therefore, exempted from provisions of the Act.

What should an employer do if he or she hires a sub-contractor?

Request proof of workers’ compensation coverage.  If the sub-contractor has only excluded employees and does not have workers’ compensation coverage, request a copy of BWC Form 337.  If the sub-contractor is a sole proprietor with no employees, request and complete the Independent Contractor’s Statement so the fund can determine the status of the sub-contractor.

What if the sub-contractor cannot provide proof of workers’ compensation coverage?

As the contractor, the employer becomes responsible for injuries sustained by employees of the sub-contractor just as if they were direct employees of the employer.  Consequently, the fund or insurance carrier is likely to charge premium to the employer for all uninsured sub-contractors.

Can compensation be withheld from sub-contractors if the employer becomes responsible for paying workers’ compensation premium?

Probably not.  If the sub-contractor does not pass the “economic reality test” and is considered an employee, the employer may not, under any circumstance, withhold compensation to pay workers’ compensation premium.  If it is determined the sub-contractor is not an employee and is subject to the provisions of the Act, the contractor may, if allowed by the contract, withhold sufficient compensation to reflect the cost of workers’ compensation premium paid by the employer.  Always determine the status of sub-contractors and require proof of insurance prior to engaging the sub-contractor.

What is a governing class code?

A governing class code is a four digit number, used by the fund, to define the nature of the employer’s business operation.  It generally reflects the purpose of the employer.  Most employers have only one governing class code.  Some employers may have multiple business operations and, therefore, multiple governing class codes.  All employees of the business are classified into the governing class code.

What is a standard exception class code?

Standard exceptions are class codes meant to define operations of the employer that do not reflect the nature of the employer’s business operation but are necessary to the efficient operation of the employer.  Employees with specific duties consistent with the definition of a standard exception class code may have their compensation removed from the governing class of the employer and placed into a standard exception class.  Clerical office and accounting staff are often eligible for classification into a standard exception class code.

What is remuneration?

All compensation paid to employees including wages, salaries, bonuses, commissions, sick pay and vacation pay is considered remuneration.  Additionally, the value of any non-cash benefits provided to the employee by the employer as a result of employment is considered remuneration.  For example, if an employer provides discounted meals to employees during their period of employment, the monetary value of the discount is considered remuneration.

Compensation provided by someone other than the employer is not considered remuneration.  For example, tips paid by customers for good service are not considered remuneration.

Additionally, the premium portion of overtime is not considered remuneration.  Overtime remuneration is valued at the regular straight-time wage of the employee.

What is an experience modification factor (mod)?

A mod is a multiplier to the premium that is intended to reflect the 3 year loss performance of a business compared to an average business of the same size.  If a business’s 3 year loss history is better than expected based on the number of employees and amount of payroll of that business the mod is usually less than 1.00 which means the business receives a reduction to their premium.  If the business’s 3 year loss history is higher than expected based on the number of employees and amount of payroll of that business, the mod is usually higher than 1.00 which results in an increase to their premium.

Is it better to pay claims directly rather than report them and raise the mod?

No.  Most insurance carriers and self-insured funds pay medical expenses according to a state published fee schedule.  The fee schedule reduces costs for most procedures 10-45%.  A business does not typically have access to this schedule and would likely pay more for the same service.  In addition, the business would lose the time value of the money paid for the claims.  It would take 1-2 years for the same costs associated with the claim to start affecting the modification factor.  Lastly, if the claim ends up being more expensive than anticipated, the business may have lost the ability to control the costs later by not reporting it early.  An experienced adjuster can direct many of the medical procedures soon after the injury occurred to avoid aggravating or compounding the injury later.