December 30, 2010

Construction firms slammed with rising workers' comp rates

While many Washington businesses are bracing for a 12 percent jump in workers' compensation rates on Jan. 1, construction and forestry companies will be in much more pain. The Associated General Contractors of Washington says some contractors' rates will rise by more than double that average.

According to information from the state Department of Labor and Industries, the overall rate increase of 12 percent will move workers' comp premium base rates up to 68.3 cents per hour worked. Employees will save $12 from their annual wages, but employers will have to pay an additional $152 per full-time worker.

The bill for employers gets steep in high-risk industries like construction and forest products. The biggest jump listed by L&I is for logging operations, where each employee will pay $27 more yearly, but employers will get stuck with an additional $7,280 per worker, a 30 percent increase.

The overall rate for forest products companies will go up 15 percent. As an industry, that will only be topped by a 16 percent rise in the building construction and trades category, and a 17 percent rise in miscellaneous construction and mining.

In the building construction and trades category, the lowest rate increase will be 9 percent for sheet metal siding, gutter and downspout installation companies; the highest will be 25 percent for masonry construction.

The smallest rate increase in the miscellaneous construction and mining category will be 4 percent for project/site managers; the largest will be 27 percent for open-cut mine operators.

The miscellaneous construction and mining category includes a 20 percent hike for bridge, bulkhead and tunnel construction firms. That could affect several large upcoming construction projects in the Seattle area, namely the Alaskan Way Viaduct replacement tunnel, the new Elliott Bay seawall and the state Route 520 floating bridge replacement. Employees in that category will see their rates drop by $154 a year, but the employers will have to shell out another $1,942 per worker.

The workers' comp composite rate is made up of three components: the accident fund, the medical aid fund and the supplemental pension fund. The accident fund is paid entirely by the employer to cover time-loss benefits and pension- and disability-related costs.

The medical aid fund is split between employee and employer. It pays for medical, treatment and rehabilitation costs. The pension fund is a flat-rate account that pays cost-of-living adjustments to those on permanent disability. Its cost is split between worker and employer.

Rick Slunaker, AGC of Washington's director of government affairs, said employers pay for about 75 percent of the workers' comp premiums so they will actually pay a higher percentage than the overall increases stated by L&I.

Making cuts

Stephen Seger, manager of safety and health at Foushee and Associates, said they are expecting an 18 percent increase, which will cost them an additional $123,000 for 2011. The Bellevue-based contractor employs about 78 workers who put in 150,000 hours a year.

Seger said the increase will force them to lower employment levels and make other cuts to make their jobs pencil out.

“It hurts across the board,” he said. “You have to make cuts, you don't have any other choice.”

Abbott Construction CFO Mark Seaman said the rate increase will be just another expense cutting into already-thin profit margins. He said they can't pass the increase on because the construction market is so tight.

Seaman said profit margins have been eroded by more firms competing for Seattle-based Abbott's work — including larger contractors going after smaller projects, smaller contractors going after larger projects, and out-of-state contractors looking for work here.

“We've got to feed the beast and the beast is getting harder to feed with the margins the way they are,” he said.

Still, Abbott has increased its employee base by 10 percent this year because of a large number of health-care projects and work from its California office.

Seaman said he is more concerned about how fast L&I can close claims than the workers' comp rate increase.

L&I spokeswoman Elaine Fischer said the rates go into effect on Saturday under an emergency rule. She said L&I Director Judy Schurke will make a final decision after a comment period ends on Tuesday.

Fischer said L&I chose to draw down its contingency reserve by $94 million to offset some of the increases; otherwise, the overall rate increase would have been 17.8 percent.

“A lot of work went into bringing the rates down as low as possible before we announced them,” Fischer said.

The $94 million will be combined with $196 million from the 12 percent increase to generate the money needed to cover the program's increased expenses in 2011.

“The reason this (rate increase) is painful is that we aren't in good economic times now,” she said. “The recession hit workers' comp hard.”

Last year, L&I raised rates by 7.6 percent. Fischer said the agency has decreased rates in the past, including a 1.9 percent drop at the start of 2007 followed by a six-month “rate holiday” that equated to a 35.1 percent drop.

The coming rate increase won't be the largest by L&I: it raised rates by 28.8 percent in 2003, the last time they went up by double digits; and it raised them by 29.3 percent in 1984. Fischer said the current increase is different because of the poor economy.

According to L&I records, composite rates have increased from 5.38 cents per hour in January of 1972 to 60.99 cents in January of 2010, more than an 11-fold increase. During the same period, the average wage went from $8,408 to $48,592, an increase of nearly six-fold.

Calls for reform

Foushee's Seger said a lot of firms can't compete on hard-bid jobs, especially if their experience modification rates have risen. “It literally could put some companies out of business,” he said.

Seger said organized labor, the state Legislature, L&I and employers are on opposite spectrums of the workers' comp issue and need to come together to reform the program and its costs.

As an example, Seger said Oregon had only six cases in 2009 that resulted in pension status (where workers close to retirement suffer work-related injuries and are deemed not retrainable, so they are given early pensions), while Washington had 3,600 in 2009 alone.

(Editor's note: L&I says 1,481 workers were under “pension status” in 2009. Seger says his figure includes the awarded pensions plus those in “pension reserve status,” which are cases pending resolution.)

Seger said decision making over the past five years has gone in a negative direction for the construction industry. “There's a wide variety of things that have been driving these costs up,” he said.

One of the problems, he said, is there are disincentives for injured workers to return to the job. He said nearly 80 percent of injured workers being retrained in a vocational program end up going back into construction because of the high pay. Those workers collect full time-loss benefits while undergoing the 18 to 24 months of training they don't end up using, he said.

In some cases, disabled workers are making more than when they were working, Seger said. “Right now, an injured worker can collect $45,000 a year, tax free.”

L&I is holding two public hearings at 10 a.m. on Tuesday covering the new rates. They will be held at the Tacoma Convention Center in Tacoma and the CenterPlace Regional Event Center in Spokane Valley.

Written comments may be sent until 5 p.m. Tuesday to: Ronald Moore, Employer Services Program Manager, at MOOA235@LNI.wa.gov; or to Moore at the Department of Labor & Industries, P.O. Box 44140, Olympia, WA 98504-4140. Comments can also be faxed to (360) 902-4729.