Some contractors no doubt experienced sticker shock when their most recent workers’ compensation audit came back with a higher-than-expected Experience Modification Rate, or EMR[35], that raised their insurance premium despite maintaining a good safety record. In all probability, the new EMR stemmed from a change to the workers’ compensation rating formula used by most states. But, good luck trying to explain to a general contractor or project owner that the number is inaccurate and misleading, and that you only appear to be less safe on paper. And worse, your EMR might further increase as the new formula becomes fully phased-in by next year.

The ramifications extend beyond higher workers’ compensation premiums. It also potentially means lost work opportunities, because an EMR that suddenly exceeds 1.0 may disqualify most contractors from securing work, or at least place them at a substantial competitive disadvantage. This reality has no doubt led to a recent uptick in legal actions where an EMR is at issue.

Given the effect that upward-trending EMRs will have on the contracting industry, contractors should consider taking a critical look now at their company practices.

The EMR Dilemma In Plain English

Your EMR is a reflection of your company’s loss history compared with that of similarly situated employers. It is primarily utilized to adjust your workers’ compensation premiums upward or downward to better reflect actual risk.[36] The benchmark EMR rating is 1.0, which theoretically reflects the average safety rating of a comparable employer in your industry.[37]

Most states—including Arizona, Nevada, Colorado and Utah—utilize the National Council on Compensation Insurance (NCCI) to calculate an employer’s EMR.[38] A company’s insurer provides data to NCCI every year. In turn, NCCI determines the company’s EMR according to a mathematical formula that, in essence, divides actual losses by expected losses.

Expected losses (the denominator in the equation) are impacted by the payroll size among various job classifications. Actual losses (the numerator in the equation) are impacted by workers’ compensation claims filed against the company and the corresponding reserves established by the insurer for future payment; however, these figures are adjusted for “primary” versus “excess” losses. Further mathematical detail is unnecessary here, but suffice it to say that the “primary” component of actual losses is weighted much more heavily than the “excess” component. Every employer, therefore, seeks to minimize primary losses.

Whether a loss is considered primary or excess is determined by the “split point.” From 1993 to 2012, NCCI’s split point was $5,000. For example, a $25,000 workers’ compensation claim was considered a $5,000 primary loss and $20,000 excess loss. However, NCCI doubled the split point to $10,000 last year, which will further increase to $13,500 this year and $15,000 in 2015 (plus two years of inflation adjustment).[39]The potential result is that, with no year-to-year change in your company’s loss history, a larger percentage of your loss will be considered “primary” based solely on the split point change.

Thus, due to how the rating formula disproportionately weighs primary losses, your EMR could increase dramatically. Some contractors no doubt began to feel the pinch last year.

The EMR As A Legal Issue

By the late 1990s, the EMR found its way into government contracts. For example, the State of California mandated that the “evaluation of [certain] prospective bidders shall be based on consideration of … [t]he contractor’s or subcontractor’s workers’ compensation experience modification factor.” Cal. Gov’t Code § 4420.

The EMR has become a requirement in various federal contracts as well. For example, the DOD encourages contracting officers to require offerors to submit EMR data for the past five years and suggests that a “.7 is considered superior,” “a rate of .7 to 1.0 is considered acceptable,” and “a company with a rate of greater than 1.0 should be considered sub-standard.”[40]

The private sector has been no less impacted either. Many hirers—general contractors and project owners alike—have established the EMR as a safety indicator of contracting risk.

Not surprisingly, as the EMR has become more common as a contract requirement, so has litigation over its significance.

For example, public contractors have lost work due to their failure to provide the requisite EMR data. In Griffy’s Landscape Maintenance v. United States, 46 Fed.Cl. 257 (2000), the Court of Federal Claims overlooked this deficiency and held that a contracting officer has a duty to inquire about missing EMR information before disqualifying a prospective bidder.

The GAO has been less charitable, however. In Brickwood Contractors, B-290305, 2002 CPD ¶ 129 (2002), the GAO denied a contractor’s protest based on its failure to comply with the solicitation requirement to “[s]ubmit [an] Experience Modifier Rate (EMR) for each of the past three years.” On the record before it, the GAO could “not question the agency’s overall rating of Brickwood’s proposal as ‘unacceptable’ based on the missing information.”

The GAO denied a similar protest just three months ago in Robert F. Hyland & Sons, LLC, B-408940, 2013 CPD ¶ 296 (2013). According to the contractor, its EMR was contained in a separate envelope provided by its surety company. However, the contracting officer did not discover the envelope and, upon reviewing the particular exhibit where EMR information should have been included, did not find any cross-reference directing him to look elsewhere. The GAO again upheld the agency’s decision to reject the proposal entirely.

Some contractors appear to have been confused about how the government would treat their EMR. In Dependable Disposal and Recycling, B-400929, 2009 CPD ¶ 69 (2009), the dispute turned on how to interpret the RFP’s requirement to submit safety records for the “last three (3) years.” The contractor happened to submit its EMR for the years 2008-2000, but the Navy chose to only consider the contractor’s EMR for 2007, 2006 and 2005, noting a “high” rate of 1.18 for 2005. The contractor argued that, because a given year’s EMR contains data for prior years, the Navy should have only considered the contractor’s 2008 EMR of .84. The GAO denied the protest, however, and chided the contractor for not protesting prior to contract award.

Likewise, in OER Services, LLC, B-405273, 2011 CPD ¶ 210 (2011), the Navy specified that “safety” would be judged (among other things) by the contractor’s EMR. The contractor submitted a bare bones proposal and, upon losing the contract, protested that “it was not given a clear direction on exactly what information [the agency] was looking for.” However, the GAO held that “[i]t is an offeror’s responsibility to submit an adequately written proposal that establishes its capability” and noted that “[a]gencies are not required to ‘spoon feed’ offerors during discussions.” Finding the Navy’s evaluation reasonable, GAO denied the protest.

Just this January, the GAO in Cherokee Chainlink & Construction Inc., B-408979, 2014 CPD ¶ 20 (2014), denied a protest stemming from a Navy contract to install and repair fencing. Offerors were instructed to provide their EMRs (among other information), but the contractor could not do so because its premiums were too low to generate an EMR. The Navy deemed this a minor weakness, but since the contractor also failed to provide its DART (Days Away from Work, Restricted Duty, or Job Transfer) rates, the contractor’s overall proposal was scored unacceptable. The GAO agreed that “Cherokee’s proposal was deficient under the safety factor” and denied the protest accordingly.

Lessons Learned

As recent history suggests, most contractors’ wounds in this area appear to be self-inflicted. Attention to detail, thoroughness and responsiveness to the solicitation criteria are necessary for securing any contract—commercial or governmental, not just those involving EMRs. The pitfalls identified above are easily avoided through vigilance.

For those that comply with bidding requirements but are saddled with an EMR they deem misleadingly high, there is hope in the fact that many public and private customers either: (1) measure safety by other metrics beyond just the EMR; or (2) permit bidders to explain why their EMR is unreasonably high. A client who rejects a prospective contractor based solely on a 1.0 or higher EMR is only hurting itself by artificially narrowing the talent pool. Plus, as the above cases indicate, the contractors who are shut out of contract opportunities often find themselves in that position for reasons beyond just their EMR.

Of course, the surest way to remain competitive is to reduce the EMR itself. A well-executed safety plan remains the best way to accomplish that goal. Moreover, most insurance brokers can provide their contractor clients with valuable advice on how to strategically reduce their EMR in other ways. For example, a contractor should consider having its broker review its carrier’s treatment of existing claims (along with the corresponding loss reserves established), the accuracy of the data provided to the rating organization, its job classification codes, and the payroll assignments to those classification codes. In some circumstances, a contractor might limit its EMR by shifting certain types of injured workers to administrative tasks on a temporary basis instead of keeping them off work completely—assuming it complies with applicable employment laws, which a knowledgeable attorney can advise upon.

The bottom line is that contractors hovering around the 1.0 mark need not roll over and passively accept a steadily-increasing EMR. If a contractor’s broker has helpful tools in its toolkit, now is the time to use them. If a contractor loses (or stands ready to lose) an important contract, however, then the contractor should consider seeking knowledgeable legal counsel. Although there are no reported legal decisions (as of yet) addressing whether a government agency can validly reject a proposal where the EMR exceeded 1.0 solely due to NCCI’s split rate change, a contractor might have to make this cutting edge argument in court or before an administrative agency in the near future.