What is Workers Compensation Insurance?

In today’s world within the restaurant industry, it’s important to have Workers Compensation Insurance. It’s state-regulated and in the restaurant industry, it protects both you and your employee – your employee for insurance that covers on the job injuries and you from on the fines and penalties associated with not having this type of insurance in place.

Workers Compensation insurance protects both employers and the employees in the case of an on the job injury. This insurance covers not only the employee’s medical bills (in the case of an accident on the job), but often times, lost wages and legal expenses associated with the specific case. It can also protect employers from costly lawsuits from employees as a result of on the job injuries.

Employees are assigned classification codes based on the industry they work in and the job duties that they perform. Employers will typically purchase a yearlong policy and pay insurance premiums to the carrier on an ongoing basis.

Q: What is Workers Compensation Insurance?
A: Workers Compensation insurance protects both employers and the employees in the case of an on the job injury. This insurance covers not only the employee’s medical bills (in the case of an accident on the job), but often times, lost wages and legal expenses associated with the specific case. It can also protect employers from costly lawsuits from employees as a result of on the job injuries.

Employees are assigned classification codes based on the industry they work in and the job duties that they perform. Employers will typically purchase a yearlong policy and pay insurance premiums to the carrier on an ongoing basis.

Q: What types of losses does Workers Compensation insurance cover?
A: Workers Compensation insurance typically covers the following: Injuries or loss of limbs, repetitive motion injuries work site accidents, medical treatment, rehab needed to return to work, lost wages (2/3 employees salary), death and liability insurance for company lawsuits filed by employees.

Q: Who is required to have Workers Compensation insurance?
A: Workers compensation requirements vary depending on the state, but in general employers are responsible for providing coverage to employees, depending on the type of business and work employees are performing – this is determined by the Department of Labor. In most states,

Workers Compensation insurance is required for companies with one or more employees. Only a handful of states do not require employers to carry this type of coverage. In general, the requirements for Workers Compensation vary by the state and the industry – certain industries are exempt, some have specific codes, and some states require that you buy this through the specific state workers compensation fund.

Q: Why do you need it?
A: Coverage is necessary, almost every state requires it per the Department of Labor. Health or medical insurance does not include on the job-related injuries or illness that may occur, this is completely separate. States that require it have very hefty penalties for those that don’t have this type of insurance. The insurance policy protects both the employer and the employee.

Q: How are premiums calculated?
A: Premiums are calculated based off of the industry you are in, the amount in which your employees are paid, the number of employees, where the employees work, and the daily activities that employees perform. Employees are assigned Risk Classification Codes based on this information. Employers are given an Experience Modification Rate based on the tenure of the company, number of employees, and number of past claims. The Workers Compensation rates are applied, and your total annual Payroll Amounts are used to calculate the premium amounts.

Here’s a quick refresher:

  • Risk Classification Codes: Assigned based on the industry and job duties of employees
  • Experience Modification Rate (EMR): Determines whether or not employees should pay more or less based on number and type of work. New businesses start with 1.0, and the number may be raised or lowered if there are additional claims in a period of three years.
  • Payroll: Total annual amounts for Payroll are used to calculate Workers Compensation premium. This is often based on a projected amount, since you don’t always know what your total will be for the year.

Calculation of the premium = Classification Code * EMR * Payroll (per $100)

Q: How is Workers Compensation typically administered?
A: There are a number of parties who can help administer or manage Workers Compensation policies on behalf of the employer. This can include: Payroll Software companies, Accounting Software companies, Private Insurance Carrier, Insurance Broker, PEO, State Funds, or those that a self-insured.

Q: What are some the difficulties associated with handling Workers Compensation policies and payments?
A: Workers Compensation insurance policies typically involve large payments that can cause serious cash flow payments for business. Payments are based off an estimate of wages and premiums are based on payroll amounts that are estimated, not actual wages. This can account for a large upfront payment. If the estimate Is off, employers are required to pay the difference in one payment.

If the employer chooses to participate in a Pay-As-You-Go policy, they can set up a plan in which they pay premiums based on actual amounts and minimize the up-front cost. However, with these types of plans, because payment must be sent in on a pay period basis, there is an often an additional level of administrative work required on an ongoing basis.

Additionally, it can be extremely difficult and frustrating to navigate the specific Workers Compensation state regulations, premiums and policies. The industry is changing on an ongoing basis, which makes it hard for employers to understand and know how to correctly pay and keep employee insured.

Q: What do you need in order to administer Workers Compensation Insurance?

  • A policy based on risk assessment
  • Understanding and assignment of correct classification codes to employees
  • Premium rate based on company, state, and industry
  • Cash flow for payment and ongoing payment sent to the insurance company
  • Payroll amounts to calculate payments
  • Reports for ongoing audit

Q: Why Pay-As-You-Go Workers Compensation?
Regular way: Policies are typically 1 year, and a deposit is paid upfront based on projected payroll amounts.

  • Pay a large up-front premium or entire premium at the start of the policy – you may get a discount on this amount
  • You have to pay based off a rough estimate for payroll for the year
  • Terms are limited for payment frequency
  • Hand checks and payment sent via mail
  • Auditing can be a pain – you have to determine at the end of the year what is underpaid vs. overpaid

Pay-As-You-Go: Policies are based on premiums per pay period, payment is sent to the carrier on an ongoing basis.

  • These policies can help restaurants better manage coverage, save on cost, and avoid the risk of having to pay large amounts during year-end audits.
  • No up-front premium is needed
  • Pay a portion each time you run payroll, which spreads out the cost and the cash flow
  • Visibility into total costs – payments are ongoing
  • Risk Reduction – Payments based on actual amounts, so you won’t run the risk of having large surprise payments at year-end audits.

Q: Why is it helpful to integrate Workers Compensation with Payroll software?
A: When employers integrate Payroll with their Workers Compensation policies, the premiums are calculated once payroll is posted. Premiums are calculated, deducted and payments are sent on time to insurance carriers. This eliminates the administrative burden associated with Workers Compensation and allows business to save on time and free up their cash flow.

What Restaurants Need to Know About Tip Pooling

It goes without saying that the restaurant industry thrives on tips. Although tip payouts are not required, it is a widely accepted norm in the U.S. that guests leave the server a percentage based on their total bill. Therefore, it’s no secret most servers in the restaurant industry rely greatly on tips as a part of their income. Of the approximately 4.3 million employees that rely on tips, 60% are servers and bartenders.

All tips that are paid out must also be tracked and reported accurately, which can be a stressful process for many restaurant owners to manage. With many state and federal regulations on tip payouts and wages that often go unreported, this can be a tough arena to navigate.

To help manage the tip payouts in an efficient way, many employers decide to adopt a Tip Pooling or Tip sharing policy, but with ever-changing laws, these policies can be difficult to unpack. For those enforcing a policy, here’s a breakdown on the basics:

What qualifies as a tip and who is considered a tipped employee?

  • Tip: this is a sum of money given to the employee that is an addition to the service provided. Common tip payments include cash and credit card payments.
  • Tipped employees: are qualified as those who earn at least $30 in tips each month. The IRS requires employees to report out on any tips of more than $20.

How is Tip Pooling defined?
Tip Pooling is the process by which tips are divided to pay out restaurant staff. Restaurants typically develop a policy for these types of calculations and payouts for the front of house employees within the restaurant. Employers can enforce a tip-pooling policy for employees that receive tips on a regular basis, as long as the employer is paying them at least minimum wage.

How are Tip Pools calculated?
Tip Pools are most often calculated by compiling the total tips employees receive, or from the total sales, the servers or bartenders receive in a given shift.

  • Tip-based calculation: when tips are pooled and reallocated to include additional roles like hosts, bussers, and back waiters.
  • Sales-based calculation: roles that earn tips are expected to earn a certain number of tips in relation to their sales. They must tip in according to their sales, not their tips earned. If they get exemplary tips, they get to keep the extra. If they get smaller tips, they might end up owing money to the Tip Pool.

What are the common ways in which Tips are paid out?

  • Hours worked: allocates a tip shortfall by spreading it across tipped employees based on their percentage of hours worked.
  • Percentage: This is calculated as a percentage of employee hours worked.
  • Equally: In this case, tips are pooled equally.
  • Pooling Points: Employees are assigned points based on their role and given higher levels of points or lower levels of based on the total number of tips (I.e. a server has more points than a cook).

What is the benefit to employers and employees?

  • The benefit to employers: Tip sharing helps address the gap in pay between front-of-house (servers/bartenders/bussers/hosts) and back-of-house employees (chefs/dishwashers/cooks). Closing the pay gap could potentially lower the employee turnover rate in restaurants and additionally, employers can subsidize wages that would not typically receive tips.
  • The benefit to employees: this helps foster an environment of support since back-of-house workers are included. With tip policies in place, all employees receive at least some share of tips.

What are the requirements by law?
The FLSA requires that employers pay employees at least the federal minimum wage, which is $7.25 per hour. Employers are also allowed to use $5.12 per hour of tips against the total minimum wage, which is often called a Tip Credit. That means that restaurants can pay employees as low as $2.13 per hour. If the tip amounts don’t net out to the minimum wage on the state level, the restaurant needs to pay out the difference.

Employers must also not retain tips paid to employees, however, employees must report their tips received, which is often done using a point-of-sale system.

There are hefty penalties for violations of the law.

What are the recent changes to the law as of 2018?
Employers that do not use the tip credit are able to adopt Tip Pooling policies that include back-of-house employees.

Now, if the employer decides to have a Tip Sharing policy or a Tip Pooling policy – they can require that back of house employees be included. Essentially, the law eliminates the prior restrictions for employers, not using the tip credit, from requiring Tip Pooling with employees who are not regularly tipped. For those that are receiving Tips on a regular basis, this has caused some backlash (i.e. Server/Bartender vs. Cook/Dishwasher positions).

Who ultimately do tips belong to?
Tips ultimately belong to the employee, not the employer. Employees cannot be required to give tips to the manager or supervisors, but employers will typically pay employees less than minimum wage under the assumption that the employee will receive some tips on shifts, if eligible.

Why does this matter?
Employers continue to look for accurate, more frequent and direct ways of paying tips to employees. They also would like to reduce the need to have large sums of cash on hand.