In 1911, the first workers’ compensation plan was adopted in the United States. Over the years, workers’ compensation insurance has developed strict regulations. Rules can vary from one state to another, which can make it difficult to follow the applicable regulations in your area. 

One way to make paying workers’ comp easier for your business is by adopting a pay-as-you-go workers’ compensation plan. With this type of plan, you pay your workers’ comp premiums based on your actual payroll instead of an estimate. This simplifies workers’ compensation insurance, and it helps business owners avoid sudden liquidity crises when insurance audits happen each year. 

10 Reasons to Use Pay-As-You-Go Workers’ Compensation 

Depending on your payroll provider, you may be able to automate and incorporate workers’ comp into your payroll system. In addition to reducing your administration efforts, this decision can also provide some of the following benefits.    

1. Improved Cash Flow Management 

By switching from traditional workers’ comp insurance to pay-as-you-go plans, you can improve your company’s cash flow management. In a recent Mission to Grow podcast called, “Pay-As-You-Go Workers’ Comp: Cost Advantages For Businesses,” the vice president of partner strategy at E-COMP, Robert Campbell, discussed how businesses can enhance cash flow and liquidity. “Cash management is critical for a small business. Pay-as-you-go workers’ comp helps to manage that liquidity.” You don’t end up in a sudden liquidity crisis because of an unexpected premium payment.

Instead of paying an estimate each year, pay-as-you-go plans require a monthly premium based on your actual payroll. This means that you are paying what you owe instead of giving the insurance company a lump sum.

A huge, upfront payment can strain your finances, especially if you work at a small business. By turning a single, large payment into small, recurring premiums, pay-as-you-go plans can provide better cash flow management.    

2. Better Liquidity

Other than cash flow, pay-as-you-go workers’ compensation can also boost your liquidity. When you have to make a large lump sum payment, it cuts into the amount of money you have available. With smaller payments, you avoid tying up all of your resources at one point in time. 

3. Lower Costs

When an insurer offers a traditional workers’ comp plan, they know that there is a non-payment risk associated with it. At the end of the premium year, insurers will check to see if the amount you paid is the same as what you owed. When there is a balance left on the account, the insurer will request a payment. 

Unfortunately, many small businesses can’t simply write a check for an unexpected, large payment. When this happens, they may decide to skip out on their bill and move on to a different insurer. 

This non-payment risk leads to higher premiums because insurers have to recuperate their costs in some manner. With pay-as-you-go plans, you don’t have this problem. Because insurers know you’ll be paying your premiums with your monthly payroll, pay-as-you-go plans are typically charged a lower price than traditional plans.  

4. More Accurate Premiums 

With traditional workers’ compensation, you are expected to estimate your payroll in advance. If you’re a growing business or hire a lot of seasonal workers, this can be incredibly difficult. At the end of the year, the inaccurate payroll estimate can lead to a significant bill from your insurer. 

By switching to pay-as-you-go workers’ compensation, you don’t have to worry about underpayment or overpayment of your premiums. Your premium is based on your real payroll, so the cost is more accurate. 

5. Fewer Audit Adjustments

Traditional plans involve some of kind audit at the end of the term. This audit may take place in person, over the phone, or via mail. Because traditional workers’ compensation only uses an estimate, there is a decent chance that you will have to pay a major premium adjustment after an audit. 

Other than leading to a price adjustment, audits can uncover unintentional issues, like worker misclassifications. In turn, these issues can lead to higher costs. 

Pay-as-you-go plans don’t need as many audits because they’re based on your actual payroll. If an insurer decides to do an audit, it tends to be less intensive and may be conducted over email or phone. 

6. Easier Administration 

When you have workers’ compensation audits at the end of the term, you have to deal with a sudden premium payment. Someone has to be on hand to address audit questions and research any issues. If you don’t promptly answer audit questions, the auditor always assumes a negative response. 

With pay-as-you-go plans, you can automate the entire process. Everything can be handled by your payroll provider, so you don’t have to devote your labor hours to administering workers’ comp payments. 

7. Enhanced Scalability 

If you’re a growing business, it can be hard to estimate your payroll needs. This can lead to a sudden liquidity crisis when your traditional workers’ compensation payment is due. 

Pay-as-you-go insurance is different. As your payroll suddenly increases or decreases, you can immediately adjust your workers’ comp costs. Because of this, you can scale your company up or down as business needs change.     

8. Better Compliance

Unfortunately, it is incredibly easy for a company to forget to make its workers’ compensation payment. When you are only making a payment once a year, the payment can become lost. If the audit leads to a large price adjustment, some companies don’t have the cash flow to cover the cost. 

You are legally required to pay for workers’ compensation coverage. When you do pay-as-you-go workers’ comp, it makes regulatory compliance much easier. Your payments are pulled out automatically through your payroll system, so you don’t have to worry about an employee forgetting about a premium payment or an audit. 

9. Added Flexibility for Workforce Changes 

If you hire a lot of seasonal, part-time, or temporary workers, your payroll can change drastically from one month to the next. Because of this, it is easy to significantly overpay or underpay your insurance premium. By switching to pay-as-you-go plans, you can easily adjust to workforce changes because your premiums are based entirely on your month-to-month payroll

10. Reduced Risk of Errors 

With traditional workers’ comp insurance, you have to enter data yourself. This can lead to payroll reporting issues as well as employee misclassifications. If you enter your employee classification codes or payroll numbers incorrectly, it can lead to large cost adjustments at the end of the year.

Learn About the Advantages of Pay-As-You-Go Workers’ Comp

By adopting pay-as-you-go workers’ comp, you can streamline your company’s administration processes, decrease the likelihood of an error, reduce your insurance costs, and boost your company’s liquidity. Plus, workers’ comp can easily be run through your existing payroll provider, so you don’t have to do a lot of work to make the switch. 

If you are looking for a way to save your company time and money, Asure can help. To get more information about integrating pay-as-you-go workers’ comp into your payroll, reach out to our small business HR and payroll experts today.