How Will Minimum Wage Increases Affect Workers' Comp?

Raising the minimum pay for workers is a hot-button topic throughout the U.S.—in California, for example, legislation has resulted in periodic increases since 2016. And it’s not just California workers getting a pay bump. A number of states will see new minimum wage increases in the next year.

But a higher minimum wage does more than just increase payroll—it also plays a role in workers’ compensation costs. But how, exactly, does it do that? And what can you do to lower those costs?

Let’s unpack this issue to get a better sense of how minimum wage increases will affect your business and what you can do about it:

The Basics of Minimum Wage

Setting a low-end cap on what workers are paid is common in most developed countries. Doing so is one way to prevent the exploitation of workers and help financially support lower-level wage earners and their dependents. It’s not universally beloved though and opponents of the minimum wage say that it can increase poverty and unemployment—the exact opposite of what it is designed to do.

In the U.S., the national minimum wage is $7.25 an hour. It hasn't been raised since 2009, but there is growing support for the federal government to change that.

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State legislatures also play a role in determining this wage for workers in their state. And employers have to pay whichever minimum wage is highest, be it their state, local or the federal government's wage. Thirty states and Washington, D.C. have minimum wage thresholds that are higher than the federal government's. What's more, 13 states are increasing their minimum wage in the next year.

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Now that you know the basics, let's get into how these increases might impact what you pay for insurance.

How Raising Wages Impacts Workers’ Comp

Increasing the average weekly wage of workers might seem like a good idea, but it can increase how much a business pays for workers’ comp. How is that?

The premiums that you, the business owner, pay for your workers’ comp policy are tied in part to the amount of your payroll. Why? Because workers’ compensation claims and payouts are themselves tied to the amount of money that the employee makes as an hourly wage.

Consider that workers’ compensation insurance benefits include payments to the worker if they are approved for temporary total disability (TTD). TTD is paid at a rate of two-thirds of the employee’s regular wage. 

If the wage rates increase, so does the TTD payout. Thus, your workers’ comp insurer will need to charge more for the coverage. The same is true for those on social security disability benefits (SSDI). Those are likewise related to an employee’s wages and will rise if the employee’s pay rate rises.

What Other Factors Impact the Cost of Workers’ Compensation Insurance?

Clearly, a rising minimum wage can impact workers’ comp premiums—but that’s not the only factor that will impact your costs. The workers’ compensation system is set up to look at several factors in determining what your premium costs will be. Workers’ compensation law is determined at the state level, so your insurer will look first at what is required by your state law.

Other factors that play a role include:

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• The number of employees you have: The more employees you have on staff, the more you are likely to pay for your workers’ comp. Why? Because workers’ comp premiums are based on the total amount of your payroll, so a larger payroll means a higher premium.
• The type of work your company does: Every business has a class code based on the sort of work it does. The codes indicate the level of risk involved. That risk plays a role in determining your rate. So, for example, if you have a construction company where the risk of injury is high, your premiums may be more than a similar-sized accounting firm, where employees are usually desk workers. Likewise, if you have a history of making frequent claims, you may be considered a higher-risk business, and that increased risk level will be reflected in your premium.
• The size of your payroll: This is why it is vital to be able to report your exact payroll numbers regularly. If you estimate, you may underpay and face a large bill at the end of the year, while an overpayment means you’ll need a reimbursement of money that should never have left your bank account. To solve this problem, Hourly simplifies and digitizes your payroll system so that you are only paying exactly as much as your premium requires, no more and no less.

How Can I Lower my Workers’ Compensation Premiums—Even with Minimum Wage Rising?

Workers’ compensation benefits are mandatory in almost all states in the U.S. If an employee is dealing with a work-related injury, it is important for them to receive any necessary medical treatment and health care so that they can return to work as soon as possible—and keep your company strong. So paying your premiums regularly should be considered just another cost of doing business. 

But with increases in the state minimum wage, it becomes more important than ever for employers to ensure that they are not paying more than is required for workers’ comp.

Luckily, there are ways to ensure that your payments into workers’ comp are as low as possible. Here are some suggestions to help you keep payments from taking too large a chunk out of your profits:

• Keep safety a priority: As we mentioned above, if you have a record of multiple claims at work in the past, your rates may be higher. So it’s a good idea to make sure that your employees are well-trained and equipped to handle machinery and perform the necessary tasks of their jobs. Minimize distractions and ensure that cleaning activities such as floor mopping happen when few people are around. Let your employees know that you take safety seriously—and expect them to do the same.
• Handle injuries quickly and responsibly: If you are faced with an injured worker, move quickly to ensure that their needs are taken care of immediately. Inspect the area around the accident to be sure that whatever happened isn’t likely to happen again—and result in further claims. Later, be sure to fill out any paperwork promptly, and communicate openly with your insurer as well as the employee and their family. You may need to fill out forms required by the department of labor, as well as for your state or your insurer. Late filings may result in penalties, as well as aggravation for your employee and the insurer—which is best to avoid.
• Review your payroll annually: Make sure your classification codes are correct and that you’re only paying as much into the insurance as is necessary. This can be a hassle if you’re working with spreadsheets and paper time cards, but Hourly can take away that hassle so that you can monitor your payroll throughout the year and at audit time right from your phone.
• Develop a program to allow injured employees to return to light duties when they can and are approved by their doctor, possibly on a part-time basis: Keeping experienced employees engaged and feeling valued is one way to help them recover and return to full duties when they are able. It may also save money in lost-wage payouts.

Proactive Legislation Can Help Mitigate Increased Costs

There’s one other factor to consider, however, and it translates to good news for business owners. In some states that have increased the minimum wage, legislatures have also passed laws to decrease the cost of workers’ comp as a way to ease the burden on businesses. 

Florida, for example, increased their minimum wage in 2019 because of legislation that ties the state’s lowest wage to inflation. At the same time, however, Florida lawmakers and regulators approved a 13.8% decrease in the rates that insurers could charge business owners for workers’ comp, thus balancing out the wage increase.

Your takeaway from all this? Legislators may not be the enemy they seem to be when they raise pay rates. Advocating for the needs of small businesses can play a role in what legislation works its way through state legislatures each year—and you can help. 

It pays to stay involved with your local chapter of the Small Business Association and trade groups so that you are aware of possible changes as early as possible—and can prepare for them if necessary.

Make Payroll Changes as Seamless as Possible

While a rise in minimum wage can certainly lead to higher workers’ comp premiums, it doesn’t necessarily mean your costs have to skyrocket. 

You can proactively reduce your workers’ comp premiums by implementing a sound safety program and making sure your payroll is reported accurately to your insurance carrier—so you’re not overpaying for workers’ comp in the first place. One way to do that? Consider signing up with Hourly. They tie your live payroll data directly to your workers’ comp, so you only pay for as much coverage as you need. 

The silver lining? Now you get to find creative ways to save time, and money, so you can focus on running and growing your business.