Managing Workers’ Compensation and Unemployment Insurance: Key Strategies for Manufacturers
Posted by Douglas Muth on September 24, 2024
For manufacturers, controlling labor-related costs like workers’ compensation and unemployment insurance is essential for maintaining financial health. Without proactive strategies, these expenses can quickly escalate and negatively impact your bottom line. By adopting the right measures, manufacturers can keep these costs in check and improve overall profitability.
Reducing Workers’ Compensation Costs: Focus on Safety
Most states mandate that employers carry workers’ compensation insurance. Given the physical nature of many manufacturing roles, the risk of injury or illness can make workers’ comp a significant expense. Here are some key strategies to help minimize these costs:
- Accurate Employee Classification: Workers’ comp premiums are influenced by employee classification codes, which insurers use to assess risk. Ensure that each worker is correctly classified. For instance, clerical employees should not be categorized alongside shop floor workers, as this could unnecessarily inflate your premiums.
- Monitor Your Experience Modification Rate: This rate, which reflects your company’s past claims relative to industry averages, has a direct impact on your premiums. A lower rate translates to lower premiums. Regularly verify that your insurer is using accurate data to calculate this rate, ensuring you’re not overpaying.
- Implement a Comprehensive Safety Program: The best way to lower workers’ comp costs is by preventing injuries. Develop a strong safety program that includes equipment maintenance, use of proper safety gear, and thorough employee training. This will reduce the likelihood of accidents and claims.
- Conduct Regular Safety Audits: Regular safety inspections help identify potential hazards and areas for improvement. By addressing issues promptly, you can further reduce workplace incidents and keep premiums low.
- Foster a Safety-First Culture: Safety should be a core part of your company’s culture, starting with leadership. Encourage employees to report accidents or injuries immediately. If workers feel pressured to hide incidents, it could result in more severe injuries, leading to higher claims.
- Establish a Return-to-Work Program: The longer an injured employee is off work, the higher the cost. A return-to-work program that allows workers to gradually return with light duties can help control wage claims and improve retention. Workers’ comp insurance may cover any wage difference during rehabilitation.
Lowering Unemployment Insurance Costs: Focus on Experience Rating
Unemployment insurance, funded by federal and state payroll taxes, is another major cost for manufacturers. State unemployment tax rates are partially determined by your company’s experience rating, which reflects how many former employees are collecting unemployment benefits. To lower this rating and reduce unemployment taxes, consider these strategies:
- Hire Strategically: Terminating employees often leads to unemployment claims, especially if they are let go through no fault of their own. Avoid over-hiring and ensure each position filled is necessary to minimize layoffs and terminations.
- Consider Independent Contractors or Temporary Workers: Contractors aren’t eligible for unemployment benefits, which can reduce your tax liability. Similarly, temporary workers may have limited eligibility depending on state law. Hiring through a professional employer organization (PEO) can shift the responsibility for unemployment taxes to the PEO.
- Support Employee Success: By investing in employee training and development, you can reduce terminations due to poor performance. Hiring candidates with the right skill set and providing ongoing support helps minimize turnover and associated unemployment claims.
- Challenge Invalid Unemployment Claims: If you have grounds to oppose a claim—such as when an employee quit voluntarily or was terminated for cause—challenge the claim. Each valid opposition can reduce the number of employees receiving benefits and improve your experience rating.
- Offer Severance Pay and Outplacement Assistance: Severance payments can delay the start of unemployment benefits, while outplacement services can help former employees find new jobs more quickly, potentially reducing the length of their unemployment claims.
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Labor costs, including workers' compensation and unemployment insurance, can significantly affect your profitability. By taking a proactive approach to managing these expenses, you can improve your company’s financial performance. Contact us for assistance in developing strategies tailored to your manufacturing business.
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Doug is a partner in Lumsden McCormick’s accounting and auditing department and has been with the Firm since 2008. Prior to joining the Firm, he worked at KPMG for three years. Doug is responsible for the supervision of staff and planning and completion of client engagements including audits, reviews, compilations, and other bookkeeping and consulting engagements. He has prepared financial statements, coordinated and reviewed work performed by internal auditors, and presented audit findings to management and boards. Doug has experience providing services to financial institutions, workers’ compensation trusts, employee benefit plans, and other commercial businesses, including those in manufacturing, construction, and general service industries. Additionally, he has experience working on SEC engagements. Doug is a member of the Firm’s recruiting team and chairs the Firm’s Accounting & Auditing Technical Committee.