Pay-as-you-go workers' comp: how it works and who it suits

Pay-as-you-go (PAYG) workers' comp is a billing method, not a different kind of policy. Each pay period the premium is calculated on the actual payroll you just ran and collected with it, so you avoid a large deposit and most of the year-end surprise. The coverage, the rates and the audit rules still come from the same underlying workers' compensation policy.

How the billing works

A traditional policy is priced on an estimate of your annual payroll by class code. You pay a deposit, usually followed by installments, and the insurer audits after the policy ends to true up the premium. See premium audits: how they work and how to prepare for that process.

With PAYG:

1. You buy a policy from a carrier that offers the program. The coverage form is the usual one for your state (the NCCI policy WC 00 00 00 in most states).
2. The carrier connects to your payroll. Your payroll provider, or you through a portal, reports gross wages by class after each pay run. Eddy's integration description says some links are one-way file transfers sent once per payroll.
3. Premium is calculated for that period. Wages by class are multiplied by the rate for that class, adjusted for your experience modification rate and any other credits or debits on the policy.
4. Payment is collected automatically. Usually it is drafted from your bank account, so there is no separate bill to forget.

ADP, which sells a version called Pay-by-Pay through its insurance affiliate, describes the model as premiums paid each payroll cycle on actual payroll rather than estimates, and says up-front payments can be reduced or eliminated compared with traditional plans that may require 25 to 100% of the premium at the start. Pie Insurance announced that new policyholders pay on their own payroll cycle with no initial deposit. Check the specific carrier's terms, because programs differ on deposit, minimum premium and state availability.

What changes and what does not

Two points matter most. First, PAYG does not make coverage cheaper. ADP says so directly: the model is not insurance coverage in itself, and it helps by improving cash flow and accuracy. Second, the rate per $100 of payroll is the same for the same carrier, class and mod, so you still need to get the class right (see workers' comp class codes and why they matter).

Audits under PAYG

Because premium is based on reported payroll, the audit mostly confirms what you already paid. That removes the worst surprise, the year-end bill for payroll you under-estimated. It does not eliminate the audit. An auditor still checks classifications, subcontractor payments and uninsured subcontractors, overtime treatment and officer payroll. A misclassified worker, or an uninsured subcontractor treated as an employee under the policy's rules, can still add premium. If you use contractors, read independent contractors and workers' comp: the misclassification risk before assuming PAYG protects you.

Some carriers and payroll vendors say audits "largely disappear." That is a marketing point, not a policy term. Look in the policy and the program terms for how final audits are handled, and keep your payroll register, 941s and subcontractor certificates ready.

Who benefits

• Seasonal and fast-growing businesses. Payroll rises and falls. Paying on actuals keeps premium in step with the cash you have.
• Small employers with thin cash. A deposit of a quarter of annual premium or more can be painful when an employer is also funding payroll.
• Businesses that use full-service payroll. The integration is easiest when the payroll platform already reports by class and employee.
• Owners tired of audit disputes. More frequent reporting catches class and payroll errors earlier.

Who may not

• Employers in monopolistic states. The state fund bills on its own schedule, and ADP notes PAYG may not be accepted in the four states where coverage comes only from a government agency (in Wyoming, employers outside the extra-hazardous list may buy from a private carrier, so ask that carrier). See Monopolistic state funds: workers' comp in ND, OH, WA and WY.
• Employers whose payroll is volatile or lumpy. Large quarterly bonuses mean a bigger debit that period, so plan for it.
• Employers who want predictable monthly costs. The variable payment is the trade-off for the lower deposit.
• Employers in a state or class the carrier does not write. Availability varies by carrier, class and state. Ask the carrier for its filed states.
• Employers placed in the residual market, where plan rules control billing. See assigned risk and residual markets for workers' comp.

Hypothetical example

Say a landscaping company in a state where the carrier offers PAYG has an estimated annual payroll of $400,000, with seasonal swings: $20,000 per month in winter, $45,000 in summer. Under the traditional approach it would pay a deposit and installments sized to the annual estimate, then settle at audit. Under PAYG, the winter premium is a small debit and the summer premium a larger one, and the final payroll for the year would already be in the carrier's records. If the company hired a crew in June for a new contract, the premium would follow the payroll without anyone updating an estimate. Rates and class codes in the example are not given because they vary by state and carrier.

Questions to ask before you switch

1. Is there a deposit, a minimum premium or a setup fee? Some states may still impose assessments, as ADP notes.
2. Which payroll providers does the program integrate with, and what happens if you change providers mid-term?
3. What if a payment fails? Is it a missed payment under the cancellation provisions, and what notice do you receive?
4. How are final audits handled, and how are subcontractors and officers treated?
5. Are rates, discounts and schedule credits the same as on a standard policy?
6. Does the program apply to every state where you have employees? See employees in several states: other-states coverage and multistate workers' comp.

PAYG is only one way to ease cash flow. Others include installment plans and premium financing, covered in paying commercial premiums: installments and premium financing. If you also use a PEO, which bills comp as part of its fee, see PEOs and workers' comp: co-employment explained.

Key takeaways

• Pay-as-you-go is a billing method that charges premium from each payroll run, so it reduces or removes the deposit and shrinks the year-end audit gap.
• It does not lower the rate per $100 of payroll. Class codes, the experience mod and carrier pricing still decide what you pay.
• The final audit is not guaranteed to vanish, so keep payroll, subcontractor and certificate records tidy.
• It is not available everywhere: monopolistic state funds and residual market plans generally follow their own billing rules.
• Compare programs on deposit, minimum premium, payroll integration, failed-payment rules and audit handling before you switch.