Do you know the true cost of operating your business?
Many business owners – even people with years of industry experience — don’t fully understand the financial impact of workers’ compensation insurance. The cost can be substantial, and if you don’t account for all of your firm’s costs, you can’t price your product to generate a profit.
Use these tips to understand how workers’ compensation costs impact your firm’s profits.
How it works
Workers’ compensation insurance covers employees who are injured while working for your company, and a majority of states require businesses to carry this insurance. The insurance is in place to cover medical costs for injured workers and to provide an income to an injured employee who can’t work.
The state requirements can vary, depending on the number of workers you have, and the type of work they perform. Some jobs have a higher risk of injury than others, and the insurance premiums you must pay are based on the type of work performed.
Each year, the state will review the dollar amount of workers’ compensation claims filed for workers on your payroll. If the number of claims increases, your insurance premiums will increase. Fortunately, if you can reduce the number of claims, your premiums may decline.
Carrying workers’ compensation may prevent a worker from suing you in civil court for a work-related injury. Consult with an attorney and your state workers’ compensation program for details.
Meet Julie
Julie operates Prestige Home Builders, a home construction and remodeling company. Prestige has full-time carpenters, painters, and other tradespeople on staff, and hires independent contractors as needed for certain projects.
Bob works as the Prestige Safety Manager, and Prestige has an extensive workplace safety program to minimize the risk of employee injuries on the job. Bob visits every worksite and ensures that the company’s safety procedures are in place. Here are some of the requirements:
- Safety Gear: Each worker must wear a hard hat, safety goggles, and other gear, depending on the type of work performed.
- Training Manual: Each worker must attend a safety meeting before each new project is started, and every employee must sign an acknowledgment form that they received and read the company training manual.
- Worksite Access: Workers and company vendors must review and follow a specific plan for entering and leaving each worksite. To prevent injuries, trucks, tractors, and other vehicles must receive permission from a worker to enter the job site. Drivers must enter and exit the worksite as instructed.
Prestige spends over $200,000 on safety-related costs, including the salary and benefits paid to the safety manager. However, as an industry veteran, Julie knows that her safety program can reduce the risk of worker injuries, and minimize her workers’ compensation insurance premiums.
Other risk factors
Julie uses several other strategies to reduce the risk of worker injuries:
- Experienced workers: Julie keeps experienced workers on her full-time payroll, because they know their craft, work carefully, and are less likely to injure themselves. When Prestige needs to hire contractors for a particular job, Julie personally interviews each candidate and requires at least three references before hiring.
- Training: When Prestige starts using a new tool or piece of equipment, Julie ensures that each worker is properly trained before starting on a job site.
- Types of work: Prestige has succeeded as a homebuilder, and the firm turns down work commercial building work, and other projects that are unusual. By sticking to her area of expertise, Julie is able to manage each job successfully and minimize the risk of worker injury.
Julie accepts the fact that Prestige loses revenue by turning down commercial building projects. However, if the company can grow sales and continue to minimize workers’ compensation costs, profitability will increase. (Check out this employee cost calculator.)
What can go wrong?
Prestige Home Builders is spending money to address safety concerns, but what are the consequences of not focusing on worker safety?
- More injuries: Prestige workers may be injured on the job more often, and the company will have to deal with the emotional impact of losing a valued worker to injury. The firm will also have to address staffing issues on future building projects.
- Higher premiums: More injuries will result in more workers’ compensation insurance claims. As a result, the insurer will increase the firm’s insurance premiums, to cover the cost of the higher claims.
- Legal risk: If Prestige neglects worker safety, the company runs a higher risk of being sued by an injured worker. The cost to litigate or settle a lawsuit can be substantial.
Companies that neglect workplace safety may incur far higher costs over time.
The payoff
Julie’s workers’ compensation costs are lower than many of her competitors, and she can provide customers with a lower bid on building projects. In addition, Prestige has a good reputation in the community, and the firm attracts business through referrals. Tradespeople also like working for Prestige, and the firm can easily find contractors for projects.
By minimizing workers’ compensation costs, Julie is able to price her projects more competitively, attract referrals, and grow her business. These benefits more than offset the costs incurred to create a safe work environment.
To learn more about protecting your business, check out this guide for how to structure your business.
This article originally appeared on the Quickbooks Resource Center and was syndicated by MediaFeed.org.
Featured Image Credit: DepositPhotos.com.
