Unrecognized Contractor Risk Brings Hefty Financial Consequences

Owner/Operators demand WCB Clearance Letters from Contractors. All the major registries are required to obtain and track WCB Clearance Letters. Inability to provide one or having one that states the account is not in good standing (late premium payment) is a show stopper resulting in instantaneous failure on registry scores. Contractors are often immediately walked off site, are forbidden to go back to work and are suspended from the Owner/Operator approved vendor list until a clearance letter in good standing can be obtained.

Why are these clearance letters so critical impacting the very ability for contractors to work? What risk is the Owner/Operator attempting to mitigate?

The common perception among Supply Chain, Legal and Safety professionals is that WCB operates identically to insurance. The understanding is that if a contractor hasn't obtained a WCB account or paid premiums then they are not covered and importantly if they are not covered then any incidents that happen on site will be applied against the Owner/Operators account. In short, they do not want to be responsible for contractors’ injury incidents as it can result in significant costs. What the Owner/Operators are misunderstanding is that the WCB Clearance Letter does not protect against this circumstance. Yet they go through great pains and expense in administering and tracking clearance letters.

WCB is not typical insurance it is mandated legislatively. All employers (companies) that work in an industry to which the WCB Act applies must by law have a WCB account. If they do not have an account and one of their employees are injured then WCB will fine them, make them setup an account and charge the claim to that account. In the case where premium payments are late WCB will merely assign the claim to the Contractor account. If the contractor continues to not make payments the WCB has the capability to seize equipment and bank accounts. Should the contractor go out of business the claim costs will be picked up through industry rates. The real risk is the Owner/Operator may be held responsible for a portion of the unpaid premiums.. However, it is generally insignificant and only applies to very small contractor operations e.g. a guy with a couple of trucks and 10 employees. Companies such as Baker Hughes, Weatherford, Schlumberger may be late in payments but they always eventually pay the WCB bill. There is little risk of them going out of business and leaving an Owner with the premium tab.

The requirement for clearance letters has become a red herring providing false assurance from the very real risk that contractor claim costs can and have been transferred to Owner/Operators accounts. In Alberta this capability is part of the legislation and is referred to as “Transfer of Claim Costs Section 95(2) of the WCB Act”. Historically in Alberta this is done upon application by the Contractor. There is substantial financial impact on the Owner/Operator as illustrated in this all too real example:

Imagine a case where a contract worker slips your stairs that have not been adequately cleared of snow and ice. In slipping the worker grabs at the handrail and wrenches his back. He seeks medical attention and the doctor puts him on restricted work duties. However the Contractor does not have a modified work program so the case is manage by WCB until the worker is found fit to return to regular duties. Several years later the contractor (who no longer does any work for you becomes concerned about high surcharges and premium costs as well as ability to bid for work. Upon review of the file it is noticed that the Owner/Operator is responsible for the injury given the stairs were not cleared. They then file an application to have the costs transferred to your account.

The total claim cost is what WCB paid out on the claim with compensation and medical aid payments. However, the impact on premiums paid is shocking:

	Subcontractor	Owner/Operator
Total Claim Costs	$6,299	$6,299
Premium Impact	$11,780	$61,698
WCB Return	187%	979%

In this case the Contractor applied to have the costs transferred however there is nothing in legislation that prevents the WCB from applying the legislation unilaterally. In fact, over the last several years WCB has, even without the Contactor’s awareness, transferred costs in motor vehicle incidents. As the chart indicates as there is a substantial financial incentive for WCB to in transfer costs to an Owner/Operator. Given the magnitude in which contractors are used and the fact that there is an inherent disincentive formost contractors to transfer costs presents a skewed picture of industry safety it is only a matter of time before WCB follows other jurisdictions and unilaterally transfer of costs in all cases where fault can be applied to another Employer.

What can an Owner/Operator do to protect themselves given that clearance letters provide ZERO protection:

1.     Complete comprehensive investigations in all injury incidents that occur on their site with contractors emphasizing negligence and fault,

2.     As part of contractor pre-qualification ensure that the Contractor has an effective Return-To-Work Management system, and

3.     Apply oversight to the Contractor’s return-to-work with any of their injured workers that have the potential to be transferred to your account.

Effective return to work programs will not eliminate the transfer of costs but it will significantly reduce the impact:

Cost Categories	Aggressive Management	Management by WCB
Compensation	$0.00	$4,799
Medical Aid	$500	$1,500
Total WCB Cost	$500	$6299
Subcontractor Premium Impact	$935	$11,780
Owner/Operator Premium Impact	$4,897	$61,698

Transferring of subcontractor claim costs is a very real risk. There are significant financial benefits to WCB there is no time limit on how fare back they can retroactively transfer claim costs, they have the capability to to unilaterally apply the costs and are currently doing so with motor vehicle incidents. It is time to stop focusing on clearance letters and start ensuring contractors have effective claims management systems.

Suspicious Industry Results Requires Examination

Earlier this year I had a meeting with Deputy Premier Thomas Lakaszuk (former Minister of Employment & Immigration) responsible for Occupational Health and Safety. The meeting was to discuss the state of health and safety in the province of Alberta. During this meeting he cited the exemplary safety record of the oil sands as an example for the world to follow and how well Alberta is doing in this portfolio. He supported his statement based upon the accident claim history as reported by WCB. Interestingly he is not wrong “by the numbers” however; he is seriously misinformed on how those numbers are derived.

WCB is an insurance company and set their rates based upon risk. In setting up Industry Classification they group employers together with similar loss expectations. This makes sense as one would expect the Construction Industry to have higher rates than say Financial Services based purely upon risk. However when one looks at the WCB rates it creates a head scratching moment:

Industry	Rate Classification Description	Rates
Oilsands Mining & Processing	06600	$0.41
Hair Salons	87200	$0.60
Disk Jockey	85907	$0.66
Dry Cleaners	87401	$1.53
Camp Catering - Industrial	87505	$2.10
Fruit Farms	01901	$2.72
Suspended Ceiling Installation	42141	$4.20

This is counterintuitive. Based upon the above one has to conclude that Disk Jockey industry is 161% more risky than Oilsands Mining and Suspended Ceiling installation is over a 1000% riskier. Part of the explanation is that premium rates are also set upon the actual loss experience. However for these numbers to then make sense one would have to believe that Hair Salons etc. are having more injury incidents and are not effectively managing their claims. This would effectively impact industry rates higher. Perhaps an examination of similar risk industries that are highly regulated with implemented Safety and WCB Management Systems provides a better comparison:

Industry	Rate Classification Description	2013 Rates
Oilsands Mining & Processing	06600	$0.41
Coal Mining – Open Pit	06110	$1.44
Construction General Industrial	40400	$1.62
Contract Plant Maintenance	42129	$1.62

Open Pit Coal Mining provides the best comparison both from a risk and management perspective yet, Coal Mining is over 350% higher. The difference is that within Oilsands Mining operations there is an extraordinary reliance on the use of subcontractors for engaging in high risk work. It is not that there are fewer accidents or that they are even being better managed. What is happening is that when an incident occurs with a subcontractor that incident is being assigned to the Contract Plant Maintenance and General Industrial Construction industry accounts. If one included the subcontractors as part of the Oilsands Industry one can easily conclude that Open Pit Coal Mining is more safe that Oilsands Operations. This is a more accurate depiction given inherent risk of work and actual loss experience.

So Deputy Premier Lakaszuk a bit of advice. If something appears to be counter-intuitive do a bit more digging. It is worthwhile to maintain your credibility and to avoid looking ill informed. 

Industry Custom Pricing Appeal Decision Throws Plan into Disarray

CanLII - 2010 CanLII 57105 (AB W.C.A.C.)

This decision should result in the demise of the industry pricing (ICP)/cost relief efforts by WCB. The appeal was initiated when WCB retroactively removed previously applied cost relief and increased an Employer’s premiums. The reason provided was that the industry had agreed to ICP with the removal of pre-existing cost relief. I do not recall in any of the discussions or meetings that this was a consequence of agreeing to the proposal. What an erosion of trust! WCB probably did not count on something like this becoming part of the public record.

One can only term this a complete fiasco and hopefully some lessons are learned throughout industry on taking these types of WCB proposals on face value.

The Appeals Commission needs to be commended on their decision as does the Employer representative who made such a compelling case. There are many highlights in this decision one of them defining the term “may” as it applies to cost relief and the ability for industry to remove a specific employer’s rights.

However, given the history of WCB actions, I fear that while cost relief is still officially on the books that WCB has essentially killed it. This will have social and business ramifications that have not been well thought out by WCB.

Special thanks to Denise Howitt at EHS Partnerships Ltd for bringing this very interesting decision to my attention.

Explanation of Lost Time and Fatality Report - Government of Alberta

www.employment.alberta.ca/documents/WHS/ER-Usage.pdf

This is a joke, and even worse is dangerous. I believe a case can be made for Alberta Employment and Immigration to be culpable for serious injuries and fatalities.

This data is valueless for assessing safety. The statement about "Lost Time Rate" providing a statistical probability for injury in a year is absurd. I was hoping that releasing numbers would cause industry to request more accurate data given that the data was unfairly depicting safety performance i.e. poor performance surcharge, severity rates, modified work days etc and there would be a hew and cry for better metrics. As this stands currently it is a mere shrug beyond looking at fatalities.

If anything these numbers will cause corporate decision makers to further believe there are no issues leading to eventual catastrophe. Further more this will not drive safety but place more emphasis on modified work programs. Perhaps the one silver lining may be that industry will look and see where time loss is originating. After 22 years of reviewing claim files, three of which were as an employee of WCB, it is my opinion that WCB’s inconsistent adjudication, failure to follow procedures, along with the bureaucracy is responsible for the majority of time loss with minor injury events.

Industry Custom Pricing

I originally removed this submission but have re-posted it given some interesting developments with the WCB proposal. In short, WCB is now proposing the new pricing model with the option of keeping "pre-existing cost relief." I had a behind the scenes role with the Canadian Association of Petroleum Producers (CAPP) committee which evaluated this proposal. The recommendation from the committee was for an option that allowed pre-existing cost relief to be retained. On the surface this appears to a complete reversal of WCB's position to eliminate cost relief. However, my greater fear is that this is merely a "fall back" position and nothing has really changed. I will explain further in a subsequent blog. The blog below provides the context for the next submission "The Demise of Pre-Existing Condition Cost Relief".

Introduction

WCB Account Managers and Employer Services representatives are making presentations and contacting large employer individually to gain approval for their Industry Custom Pricing (ICP) initiative. They are also sending out survey letters to company contact people looking for approval for the proposal. The people who are being contacted may or may not know the implications of their response and in many cases may not have the authority to make such a decision. This is being done by industry sectors utilizing WCB industry account codes making it more challenging for industry to organize and launch an effective opposition campaign to combat this proposal or negotiate a better deal.

Employers need to have all the facts and be aware of the unspoken consequences of the proposal before agreeing to it.  The intent of this blog is to provide you with the information that is not being told and provide a course of action and negotiation items to obtain a fair deal that provides accountability and responsibility for all stakeholders including WCB decision-makers!

Proposal Synopsis

In brief, the WCB is stating that the current experience rating (ER) program may have worked well as a “base” program but ER is no longer a “one size” fits all program. They are offering to allow industry to customize certain features of ER that will send a stronger message to industry code competitors about the importance of safer workplaces:

·         Employers who do well will pay less; employers who do poorly will pay more.

·         Greater accountability for performance creates fewer subsidies and greater incentives to manage claims.

·         Better outcomes for workers.

·         Premium rates will be lowered immediately for most employers.

·         Value added disability management and administration.

Features of ER that can be modified include:

1.     Experience ratio

2.     Maximum discount surcharge (up to 60%)

3.     Participation Factor

WCB will only agree to these changes if 51% of the industry code payroll agrees to it and and will lower premiums immediately with agreeing to  the elimination of “pre-existing cost relief”. For detailed information on the proposal see http://www.wcb.ab.ca/employers/ICP.asp

As an incentive to agreeing to the proposal WCB will reduce industry rates. Examples of rate reductions by industry codes are as follows:

Industry Number	Description	Proposed Decrease In Industry Base Rate
51502	NDT Testing Incl Visual Inspection	$0.02
30801	Machining	$0.02
09911	Downhole Servicing	$0.02
30100	Steel/Metal Fabrication	$0.03
40400	Construction, Industrial	$0.05
10100	Meat Processing	$0.08

At first glance this seems like a deal that is too good to be true. Everyone wants more accountability and if it means there is an opportunity to pay less then so much the better. In fact in the case of industry code 40400 they are offering an immediate industry rate discount of $0.05 per $100 of payroll. WCB states that approximately 13% of their time is spent managing and applying pre-existing cost relief. By eliminating this policy they will put these additional resources towards enhanced disability management on your behalf. WCB has not provided any details on what the value added disability management looks like or how it will be delivered.

To date 46 industry codes have agreed to this proposal with two industry groups meat packing and automobile dealerships voting for all proposal options.

What is Not Being Told

WCB experience rating is very sensitive and changing on or more elements create consequences that may be deemed as unfavourable. It is necessary to have a strong understanding of how ER works and how these changes can impact your premiums.

As an example I will utilize a large construction company industry code 40400 that is at the industry rate to run a simulation on the consequences.

•          Industry rate: $2.23

•          Payroll: $40,000,000

•          Premiums: $892,000

Premiums payable to WCB ($2.23/$100 x $40,000,000)

This simulation will provide some of the basic information which is necessary before you make a decision as to whether or not accept the WCB proposal. This will only hit on the highlights as it is not possible to explain all the nuances of the ER system and the proposal impact using this medium. Although a general statement does suffice in that WCB does have all the numbers, have run their own simulations, and you can be assured they are not giving up anything!

The WCB is offering an immediate discount on premiums of $0.05/$100 for this industry code. This is a premium savings of $20,000 annually.

($0.05/$100 x $40,000,000)

However, this number is not completely accurate as the WCB is clawing back the premium net savings through their incentive rebate program (Certificate of Recognition and Partnership in Injury Reduction)

	Rate Reduction	Premium Savings
Industry Custom Pricing	$0.05	$     20,00.00

WCB Rebates	Current	ICP	WCB Savings
Certificate of Recognition	$44,600.00	$     43,600.00		$1,000.00
Self-Comparison	$66,900.00	$     65,400.00		$1,500.00
Safety Leadership	$66,900.00	$     65,400.00		$1,500.00
Total	$178,400.00	$    174,400.00		$4,000.00

	Rate Reduction	Incentive Rebate Reduction	Total Company Savings
Company Net Benefit	$20,000	$4,000	$16,000

Once this “claw back” is considered the net savings is only $16,000. Interestingly this negative impact only affects good performers that have established audited safety programs and are actively managing return-to-work.

Of greater impact is the condition that pre-existing cost relief policy be removed. Pre-existing cost relief is applied to claims where an injured workers recovery is impacted and prolonged by a pre-existing condition this also includes back claims.

This is best illustrated through a real case example which involved a worker who picking up an object and strains his upper spine and neck. This relatively simple injury was exacerbated by a pre-existing degenerative disc disease condition. This simple lifting incident resulted in the need for a surgical intervention with extensive medical expenses and time loss. This claim easily exceeded the maximum per claim costs of $72,600 for 2009. The cost relief policy states that you are not responsible for the pre-existing portion and for spinal (back) claims they will remove all costs in excess of eight weeks at the maximum compensation rate $7,341.04. What this means is that if you have a claim such as this and you had the knowledge and applied for cost relief then WCB would use the $7,341.04 for calculation of your employer ratio rather than the $72,600 if you did not apply. Given the above you we were able to run the following simulation:

The difference between the maximum per claim cost and the remaining costs from application of cost relief is $65,258.96. This number was used to simulate the impact of utilizing this policy upon premiums. The immediate impact is at $0.39 cent reduction totalling $156,000 in premiums. In agreeing to the ICP proposal you would be giving up an important loss control to reduce premiums by this method.

	Rate Reduction	Incentive Rebate Reduction	Total Company Savings
Company Net Benefit	$0.05	Less incentive ($4,000)	$16,000
Pre-Existing Cost Relief	$0.39		$156,000

 

It would take 9.75 years through ICP to actualize this savings. You need to ask yourself with an aging workforce (greater likelihood of pre-existing conditions) if this makes financial sense. In fact by eliminating pre-existing cost relief which by the WCB’s own admission is the greatest utilized you are actually increasing your risk of a obtaining a poor performance surcharge which has the potential of increasing premiums by an additional 200%

  

Max Surcharge Year	Year 1	Year 2	Year 3	Year 4	Year 5
Poor Performance Charge	0%	25%	50%	100%	200%
Rate Adjustment	40.00%	65.00%	90.00%	140.00%	240.00%
Employer Rate	$3.12	$3.68	$4.24	$5.35	$7.58
Premium Impact	$1,248,800	$1,471,800	$1,694,800	$2,140,800	$3,032,800

If this policy were to be removed the only recourse available to protect your interests demands increased surveillance on hiring through the use of post offer employment testing i.e. functional testing. While it is our opinion that these should be done regardless it does add extra costs that need to be considered.

All safety sensitive positions need to be identified and analyzed by a certified professional (kinesiologist) to obtain a physical demands analysis (PDA) and bonafide occupational requirements. These are then used, post employment offer, to measure functional capabilities of an employee, to ensure that they are capable of engaging in all the required job tasks. The development costs of PDAs average around $1000 per occupation. The PDA is then used as a measure against functional screening. Mid level functional screening; ones that have some validity in measuring physical capabilities, costs approximately $450 each. It should be noted that even the best functional screening program has only an 80% success rate. Depending on turnover rates this can become a costly proposition.

Proactive Costs	Amount	Number	Total
Safety Sensitve Physical Demands Analysis	$1,000.00	25	$25,000.00
Post Offer Functional Pre-screens	$450.00	100	$45,000.00
Annual Loss with ICP			$29,000.00

Elimination of pre-existing condition cost relief will make functional testing a business necessity. It is important to note that even if the functional screen indicates the individual is NOT capable of engaging in all aspects of the occupation requirements human rights legislation implicitly states that you have a “duty to accommodate.”

The ICP is less about increased accountability and a more flexible ER system than it is about the elimination of pre-existing cost relief. The proposed model has greatest benefits for WCB as they will increase revenues while reducing work load. The promise of “value added disability management” is a non-starter without a tangible plan along with performance measures to achieve the objective.

The current ICP proposal is not favourable to large employers. However, you may not have any say unless you can obtain 51% of your competitors (based on payroll) to agree. This requires that they take the time to understand the implications.

Negotiate a Better Deal

It is my opinion that WCB will find a way to eliminate pre-existing cost relief or make it exceedingly challenging to apply for it regardless of employer sentiment. Therefore, industry needs to take this opportunity to organize and lobby for meaningful changes to WCB operations. Immediate requirements are to find ways to get the message out to industry about the ICP proposal and what to negotiate for to ensure a better deal which is the intent of this blog.

I am happy to make myself available if you would like to discuss the ICP proposal in further detail or would like an analysis of how this impacts your WCB premiums.