By: Rose Gundersen, Small Business Liaison with WA State Department of Labor & Industries
Did you know when you buy an existing business — or a part of one — you assume the workers’ compensation claim liabilities of that business? It’s true. The new business owner inherits the claim responsibilities and their impact on premium rates.
How to protect yourself
To uncover potential hidden future expenses and risks, ask the seller to disclose the following 6 items before you buy a business. (This information isn’t usually included in financial documents and L&I can only disclose it to the current business owner, not to a potential buyer.)
1. Injury and Cost Profile: This 1-page report covers a 5-year history of workers’ compensation and injury data for the business, including:
- Premiums which may include savings from a Claim-Free Discount or higher rates due to time-loss or disability claims.
- Total number of claims per year.
- Experience factor (over 1.0 means higher rates).
- Claims-Free Discount history.
- Top 5 types of injuries specific to the industry and the injury types incurred by the business.
2. Injury Report: This report shows the claim expenses incurred by the business without revealing identifiable information such as the injured worker’s name or the claim number. Claim expense categories include medical, time-loss, partial permanent disability, pension, and more.
3. Estimated Future Rate Projection: This predicts the business’s future experience factor and premium expenses, assuming that the business data remains unchanged.
4. Safety and Health Consultation Report: The business’s workplace safety culture is an intangible asset or risk that you’ll inherit as a buyer. Scheduling a no-cost, risk-free L&I safety consultation will help you assess this culture and evaluate whether it is an asset or a risk. The consultation includes a walk-through visit to the worksite to look for workplace hazards and an evaluation of the Accident Prevention Program. The business can’t be fined as a result of the consultation. Correcting serious hazards, however, is required with no financial penalties.
5. Occupational Safety and Health Act (OSHA) Log Records: Businesses with 11 or more employees may be required to record workplace injuries and illnesses on an OSHA 300 log (OSHA.gov).Reviewing these logs will inform you of hazards and the effectiveness of workplace health and safety programs. (The business must keep these reports on site for 5 years.)
6. Risk Management Consultation: This free consultation provides a review of the business’s injury history and a step-by-step plan with best practices to help control costs. If you plan to proceed with the purchase after learning the injury history and safety culture, a risk management consultation is an excellent mitigation step.
Partial business purchases
Even if you purchase only a part of a business, you can inherit the seller’s workers’ compensation liabilities. For example, if you bought a customer list, inventory or other partial assets and employees working in those reported risk classifications were injured on the job, you could potentially assume the claim liability.
Example of potential impact
To better understand workers’ compensation rates, remember that:
- The risk class reflects the overall loss history of each industry.
- The experience factor reflects the loss history of the business.
- A claim affects a business’s experience factor for 3 years, but your rate won’t be affected for 2-3 years after the injury date.
- An experience factor above 1.0 means more claim liability than average for that industry. An experience factor below 1.0 means less claim liability than average for that industry.
Assuming 10 full-time employees working 480 hours per quarter, here is an example of how various experience factors could affect the annual premium you’ll pay.