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Payroll - Limited vs Unlimited Payrolls

Total payroll is the most equitable measure of distributing the cost of job related injuries among similar employers.;

In the early days of workers compensation insurance, the rules allowed a cap on wages used to determine premium. This rule caused problems because the employer was required to pay the same premium for a part-time helper as for a full-time employee, regardless of the hours worked.

It appeared reasonable that a fairer method would be to use total payroll. This method recognizes the difference in hours worked and the result is an average rate derived from statewide total payroll and losses for each industry (classification code). Total payroll has, for many years, been considered the most reasonable reflection of the overall exposure for the workers' hazard. It requires no additional recordkeeping and is easily verified, since it is universally available and utilized for purposes other than insurance.

Rate Calculation
Each occupation has an average rate of pay. This average varies considerably from one occupation to the next. As an example, lawyers, on average, earn considerably more than office workers. They both work in an office environment. It is this higher average payroll which has resulted in lower advisory rates for lawyers than for office workers. If a cap were established on the remuneration for all attorneys, the advisory rate would have to be increased to the degree necessary to collect the same amount of premium. For example, if half of the payroll were eliminated from Code 8820, "Attorneys," the losses would remain the same, and therefore, the rate would have to be doubled.

So, as shown in this example, using total payroll as the basis of premium helps to keep the rates lower. If we required the use of limited payroll, simple math tells us a higher rate would be necessary to pay for the same amount of losses.

Problems with Limiting Payroll
Another area to consider in using total payroll is the business expense if a program were implemented to exclude certain remuneration. Under the present rules which provide for the use of virtually unlimited payrolls, the accounting records of the employer provide an easy and accurate source. If certain payrolls were eliminated from the premium base, the employer would have to establish and maintain special payroll records for no other purposes than the calculation of insurance premiums.

The additional recordkeeping would involve considerable expense which, for some employers, could offset any possible premium benefits believed to accrue in using this approach. This approach would also likely result in a greater expense for the insurance carrier since additional time and money would be required to accurately determine the payroll to be included for premium purposes. This greater expense would, in turn, be passed on to the ultimate consumer, the employer who buys insurance coverage.

Overall, a reduction in the payroll base would not change the amount of premium collected to pay for an industry's losses and any change would undoubtedly increase the expenses for the employer and the insurance company. Additionally, a problem exists if certain payrolls were excluded in that it could lead to an inaccurate premium base due to poor recordkeeping and ultimately result in inequitable worker's compensation insurance rates.

Average Weekly Wage Benefit vs. Unlimited Payroll
It has been suggested several times in the past that the basis of premium should be limited to the average weekly wage that qualifies the injured worker for the maximum weekly benefit. The basis of the argument is that if the worker can't receive anymore benefits, the employer shouldn't pay any more premium.

This suggestion, however, is based on the mistaken assumption that the basis of premium is in some fashion related to the basis of benefits the employee receives in indemnity (lost wages) benefits. The basis of premium must be based on the total potential liability, which includes both lost wages and unlimited medical benefits. The injured worker is not only being compensated for the loss of his wages, but also receiving the benefit of the cost of his medical expenses being paid, which can vary in relation to the seriousness of the injury.

Payroll is used in both cases (lost wages benefit and medical benefit) because payroll is a verifiable measure that may be easily obtained. Payroll varies with the time the worker is on the job and is a standard that is subject to objective reporting. When determining indemnity benefits, the use of pre-injury wages limits the amount that an injured worker can receive. This is desirable because otherwise the injured worker could conceivably receive benefits greater than his earnings which might act as a disincentive to returning to work.

In Indiana about 75% of the benefits paid injured workers consist of medical and rehabilitation benefits. These benefits are not directly related to the injured worker's wages. So even though you have a maximum weekly benefit for an injured worker there is no limit for the portion providing for medical benefits.

Additionally, the duration of the injury and the benefits paid could last years which could be far greater than a workers actual payroll for the policy year.

NAIC Review
The National Association of Insurance Commissioners (NAIC) reviewed this matter years ago and was of the opinion that total payroll offers the most solid premium base. The following is an excerpt of the NAIC Workers Compensation Committee discussion on this topic.

Any system of adequate and reasonable rates requires that the same overall premium to be collected to pay the losses incurred and the expenses of conducting the business, regardless of the basis under which such premium is collected. Thus, the simplest and most readily verifiable basis is of the greatest advantage to all concerned. Total payroll offers the only universally available basis and is the most readily verifiable of any base which has been found.

The present approach, which requires the use of total payroll, has demonstrated to be a fair and practical method in computing worker's compensation insurance. A certain amount of premium must be developed to pay for claims and assure the continuance of necessary services to the insured. Since premium is the product of the rate and exposure base, any reduction in payroll through the use of a payroll cap ultimately results in an increase in the rate, otherwise the overall premium collected will not remain the same.

Payroll Limitations for Business Owners
For calculating premium, our rules place an advisory minimum and maximum payroll for executive officers, and beginning for 2012, also for sole proprietors, partners, and limited liability company (LLC) members.

The limitations apply to the average weekly payroll. The amounts appear in the Basic Manual rate pages, Miscellaneous Values page. Below is a chart showing the amounts for recent years.

(Refer to Basic Manual Rule 2-E)



Sole Proprietor, Partner, LLC member
Fixed (prior to 2012)
min/max same as officermin/max same as officermin/max same as officer​​
can opt in
included (corp officer can opt out)
Min Annual
$ 36,400$39,000 $ 39,000
Max Annual
Min Week
$ 700 $ 750 ​​$ 750
Max Week
$ 3,400$ 3,400​​$ 3,600





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