How HR Outsourcing Reduces Workers' Comp Costs

How HR Outsourcing Reduces Workers' Comp Costs

by on 31 Aug, 2021

Are you struggling to pay your workers' comp costs? They're mandatory, but they drain your finances terribly, especially if you are a smaller company. Mitigating workers' compensation costs is vital for the health of your small to medium-sized business. The most effective way is through HR outsourcing. In fact, reduced workers’ comp costs are just one of the benefits of HR outsourcing that can make a huge difference for your business.

What Determines Your Workers' Comp Costs? 

The cost of workers' compensation insurance varies from place to place and is also strongly dependent on your company's size. The following factors affect your premiums:  

1. Payroll: Your gross annual payroll is one of the lead determinants of premiums. Note that this includes things like vacation pay, pension plans, bonuses, and even store credits. More employees mean higher costs. You need to cover full- and part-time employees, but not contractors, who pay their own workers' compensation. 

2. Experience rate: This was created by state regulators, and it raises or lowers your premium depending on your actual losses. That is to say, your claims history. It's calculated by comparing your claims to what would be expected for your industry. 

3. Classification codes: Your employees are classified according to a risk profile. This means that you pay more for a factory worker than a receptionist, and more for a chef than a hostess. This is by job type, not industry. 

4. State-specific legislation: Some states also require you to carry occupational injury insurance, while others only specify the minimum amount for workers' compensation. It's vital to know your state laws and be compliant with them. 

How Does HR Outsourcing Reduce Costs? 

How much your costs can be reduced by HR outsourcing depends on your claims history and the state where your business was registered. However, general savings are possible, depending on your state. These include: 

Lower Premiums 

In many states, if you use a comprehensive HR outsourcing solution, you can adopt their experience rate. This gives a couple of advantages. If you are a new company with no claims history, your experience rate is not going to be favorable. When you partner with an HR outsourcing service, your employees are in a larger pool of eligible individuals, meaning that any given claim will affect the overall pool less. 

Return-to-Work Programs 

Having a good return-to-work program can reduce the amount spent on individual claims. Although this is not weighted as heavily as frequency, consistently high claim amounts can and do affect your experience rate. 

A return-to-work program helps employees get back earlier in a light-duty capacity and is generally better for everyone, including the employees concerned. Designing one, however, takes considerable expertise that a new company may not have available. An outsourcing partner, meanwhile, will already have done a number of them. 

Class Code Optimization 

Classification codes are fairly fixed, and "tampering" with them is a bad idea (you will be caught if somebody is hurt). However, some employees may legitimately fit within more than one classification code. 

An outsourcing partner can audit your class codes and optimize them, finding savings where possible. They can also make sure you don't have people assigned to a completely incorrect code (which might be as simple as a typo). 

Risk Management 

Outsourcing partners also tend to have a lot more experience in identifying and managing workplace risks. They can perform a workplace safety audit for you and identify gaps in your safety protocols and training. 

Many HR outsourcing partners also have their own safety training protocols and can run classes for you and your employees that legitimately help reduce risk and minimize injuries. In addition to lowering your workers' compensation premiums, safety training improves productivity, reduces downtime, and can increase morale. 


HR compliance can feel like a full-time job, and one that small companies can't always afford. Your outsourcing partner will have compliance specialists who can ensure that your workers' comp policy follows state and federal legislation at all times. This minimizes the chances of fines and lawsuits. Workers' compensation is heavily regulated at both the state and federal levels, and the rules are always changing


Traditionally, you pay workers' compensation with an initial upfront deposit of 25% of the total premium, which is based on your expected payroll. Later, they make an adjustment, after which you either get money back or have to pay more. Needless to say, this is not fantastic for your budget and cash flow. 

HR outsourcing partners can offer pay-as-you-go workers' compensation. Under this system, they pay your upfront deposit and then you pay them back what you actually owe each month. They, not you, worry about any under or overpayment. It also means that you save time by not having to deal with an insurance company auditor. 

Increase Savings With a Professional Employer Organization 

So, how do you get all of these benefits? The only way to get all of these cost-saving mechanisms is to partner with a Professional Employer Organization (PEO). A PEO is the most comprehensive HR outsourcing solution. In addition to significantly reducing your workers' compensation premiums, they also offer cost savings on benefits and, depending on your state, unemployment insurance. 

This is all while taking on HR's tedious administrative burdens such as payroll, benefits administration, and updating employee manuals.


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