How to Calculate Workers’ Comp Cost Per Employee

Workers’ compensation is a form of employer insurance coverage that provides benefits to employees who experience work-related injuries or illnesses. This no-fault system aims to offer financial and medical support, covering medical costs, lost wages, and rehabilitation, while generally protecting employers from direct lawsuits related to these incidents. Understanding these costs is important for businesses to manage their finances effectively, especially for budgeting and financial planning.

Understanding Workers’ Compensation Premiums

A business’s base workers’ compensation premium is determined by several factors, beginning with the classification of its employees. Classification codes, such as those provided by the National Council on Compensation Insurance (NCCI) or state-specific bureaus, categorize different types of work based on their associated risk of injury. For instance, a clerical worker will have a lower risk code than a construction worker. While many businesses might have a single classification code, companies with diverse operations may have multiple codes for different employee groups.

Payroll is another primary component in premium calculation. Insurers use the gross payroll for employees within each classification code. This includes elements such as regular wages, salaries, commissions, bonuses, and paid time off. However, certain items like tips, the premium portion of overtime pay, and employer contributions to qualified insurance or retirement plans are excluded from this calculation.

Each classification code is assigned a rate, expressed per $100 of payroll, which is set by state regulatory bodies or rating bureaus. These rates reflect the collective risk associated with that type of work and can vary significantly by state. For example, in 2025, the national average rate was around $1.03 per $100 of payroll.

The basic formula for calculating the manual premium involves multiplying the payroll (divided by 100) by the applicable rate for each classification, then summing these amounts. The premium may then be subject to adjustments such as minimum premiums, premium discounts for larger policies, or expense constants, which are fixed charges applied to policies.

The Experience Modification Rate

The Experience Modification Rate (EMR), often called an “x-mod” or “mod rate,” is a multiplier that adjusts a company’s workers’ compensation premium. This rate compares a business’s actual claims history to the expected losses of other businesses within the same industry and of similar size. The EMR serves as an incentive for employers to maintain safe workplaces, as a better safety record leads to a lower rate.

The EMR calculation involves comparing a company’s actual incurred losses (the cost of its claims) against its expected losses over a specific period. This period spans the three most recent full years, excluding the current policy year. For instance, the EMR calculated for 2025 would consider claims data from 2021, 2022, and 2023. The National Council on Compensation Insurance (NCCI) calculates the EMR for most states, while some states have their own independent rating bureaus.

The impact of the EMR on the premium is direct: an EMR of 1.0 represents the industry average. If a company’s EMR is greater than 1.0, it indicates a worse-than-average claims history, resulting in an increased premium. Conversely, an EMR less than 1.0 signifies a better-than-average claims history, leading to a premium reduction. A 1.20 EMR would increase the premium by 20%, while a 0.80 EMR would decrease it by 20%.

Several factors influence the EMR, including the frequency and severity of claims. While large, severe claims can have an impact, a high frequency of smaller claims can also negatively affect the EMR. Timely reporting and effective management of claims, including strategies like returning injured employees to work in a modified capacity, can help mitigate the EMR’s impact. Businesses can obtain their EMR from their insurance carrier or the state rating bureau.

Other Cost Considerations

Beyond the calculated premium, businesses face several other direct and indirect costs associated with workers’ compensation. Policies may include deductibles, where a business pays a set amount per claim before the insurance coverage begins. Some large businesses might also use retrospective rating plans, where the final premium is adjusted after the policy period based on the actual losses incurred, offering potential savings but also increased risk.

Investing in safety programs incurs costs but often leads to long-term savings by reducing claims. These costs include expenses for safety training, providing personal protective equipment (PPE), conducting regular safety audits, and implementing preventative measures. While these are upfront expenses, they aim to reduce the frequency and severity of workplace injuries, which can directly lower future workers’ compensation premiums and EMR. Studies suggest that for every dollar invested in effective workplace safety programs, employers can save $4 to $6.

Administrative overhead represents another category of costs. This includes the time and resources spent on managing workers’ compensation, such as reporting claims, maintaining detailed records, participating in payroll audits, and communicating with insurance carriers or brokers. These internal costs, though not always immediately obvious, can accumulate and affect a business’s bottom line.

Lost productivity is an indirect cost of workplace injuries. When an employee is injured and unable to work, it can disrupt workflow, reduce overall team output, and potentially lead to missed deadlines. Businesses may incur additional expenses for temporary replacement workers, overtime pay for existing staff to cover the workload, and the time required to train new or temporary personnel. Lost productivity due to poor health, including injuries, can cost US employers hundreds of billions annually.

For businesses that self-insure or manage claims in-house, legal and medical management costs become direct expenses. Even with traditional insurance, there might be internal costs for legal review, medical case management oversight, or fees for external consultants to navigate complex claims. The complexity of claims, especially those leading to litigation, can increase these costs.

Determining Your Per-Employee Cost

To determine the workers’ compensation cost per employee, a business must first consolidate all identified expenses related to workers’ compensation for a specific period, annually. Begin with the base premium calculated using classification codes and payroll. This base premium is then adjusted by the Experience Modification Rate (EMR) to reflect the company’s claims history. Any other direct premium adjustments, such as premium discounts or expense constants, should also be factored in.

Next, add the “Other Cost Considerations” to this adjusted premium. These include safety program expenses, the monetary value of administrative time spent on workers’ compensation management, and any out-of-pocket costs related to deductibles or medical and legal expenses not covered by insurance. The sum of these components represents the total workers’ compensation cost for the period.

Once the total workers’ compensation cost is established, calculating the per-employee cost is straightforward: divide the total cost by the number of employees. For this calculation, it is most accurate to use the average number of full-time equivalent (FTE) employees over the period. If average FTEs are difficult to ascertain, simply using the total number of employees on staff during the period can serve as an estimate.

This per-employee cost provides a metric for several purposes. Businesses can use it for budgeting, allowing them to allocate appropriate resources for workers’ compensation expenses in future periods. It also enables comparison against industry benchmarks, if available, to gauge how a business’s costs stack up against its peers. Understanding this figure can highlight areas for potential cost reduction, such as enhancing safety programs to lower the EMR or streamlining administrative processes. Accurate payroll reporting, implementing proactive safety measures, and efficient claims management are all factors that influence and optimize the per-employee cost of workers’ compensation.