The idea of compensation for injuries goes back as far as 2050 B.C. in ancient Sumeria.1 Recorded on a clay tablet, the law of Ur instituted distinct payouts for specific injuries, such as a severed foot or nose. Through several millennia, injuries that occurred while performing work for another moved from the worker assuming most of the risk to primarily an employer liability.

Today in the United States, workers’ compensation is a standard type of business insurance and is a requirement for most employers. Each state regulates its own workers’ compensation program, and the federal government manages its own program for federal workers.

“Depending on the industry, number employees, type of work they do, and payroll structures, business owners are mandated by their state laws to provide some form of workers’ compensation insurance for their employees,” says Bob Mayo, director of business development for AP Intego, a national business insurance broker based in Massachusetts and New York. “Businesses that fail to comply can face severe fines, a massive lawsuit, and, generally, more headaches than anyone needs.”

Workers’ compensation insurance plans provide four types of benefits: disability loss of income, medical, survivorship, and vocational, or rehabilitation. Traditionally, organizations have to pay premiums based on estimated annual payroll with a 25% minimum deposit. However, as employees come and go and payroll fluctuates, this form of projection for yearly insurance can be inaccurate. Businesses end up with more work on their plates, sending quarterly or monthly reports to insurance agencies, as well as conducting year-end audits, and potentially making additional payments at the end of the year.

A relatively new type of workers’ compensation insurance premium billing based on actual payroll data eliminates some of the drawbacks of traditional workers’ compensation insurance. The convenient process calculates insurance premiums using actual payroll data, instead of estimated annual payroll, and insurance premiums are paid automatically each payroll.

Workers’ compensation insurance based on actual payroll is typically offered through an outsourced payroll provider, either through an in-house insurance agency or a network of approved partners. The payroll company sends employee and wage data automatically every pay period to the insurance agency where the premium is calculated and remitted to the insurance carrier.

Many insurance providers, like Mayo’s small business insurance firm, form partnerships with payroll companies. “AP Intego exclusively offers this type of workers’ compensation insurance to organizations that use payroll companies. We find that in doing so, the process becomes more efficient and seamless for all parties,” says Mayo.

Determining workers’ compensation insurance premiums using actual payroll means accurate premium calculations and reduced surprise payments. It also eliminates up-front costs. And, unless it is state mandated, the year-end audit will be handled internally, with minimal adjustments and no additional paperwork.

“This particular insurance process has been around for years but is not well known by the public,” says Mayo. “Research by The Hartford found that around 10% of businesses know about it. Then it becomes a matter of education. In our experience, as soon as an organization understands the process, they want to switch over.”

There is an approval process to qualify for workers’ compensation insurance calculated and paid on actual payrolls—approximately 80% of businesses qualify. Additionally, this type of workers’ compensation insurance is not available in all states. North Dakota, Ohio, Washington, and Wyoming mandate that workers’ compensation insurance be purchased through state-run programs.

For more information on workers’ compensation insurance, we recommend that you start with your state’s workers’ compensation division. The U.S. Department of Labor has a list of state workers’ compensation offices. And, the NFIB has a helpful overview of each state’s workers’ compensation laws.


  1. Guyton, G. P. (1999). A Brief History of Workers’ CompensationThe Iowa Orthopaedic Journal, 19, 106–110.

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