The Workers' Comp Approach Boosting Franchisees' Cash Flow

Hospitality franchisees have a lot on their plates right now. Rising wages, inflation and consumer confidence are all front and center for small business owners. Anything that can increase efficiency and reduce administrative tasks gives them more time to grow the business. In a post-pandemic environment, however, nothing is for sure. Businesses need to control cash flow in any way they can.

A Triple Threat: Labor Costs, Inflation and Consumer Sensitivity

A recent International Franchise Association (IFA) survey of franchisors found that over a third (37%) identified recruiting quality employees and managing labor costs as significant challenges for franchisees. Additionally, 70% of respondents reported that their franchisees have open positions, highlighting the difficulty in attracting and retaining workers.

According to ADP Research’s Today at Work   report, as of September 2024, the median base wage and tips for sit-down restaurant employees reached nearly $24 an hour, a 28% increase from $18.60 an hour before the pandemic. 

Moreover, additional data from ADP Research found an unusual pay premium for leisure and hospitality workers. Typically, workers who switch jobs see larger wage increases than those who stay, but since December 2022, the leisure and hospitality sector has reversed this trend. Job-stayers in this industry have experienced higher year-over-year pay growth than new hires. Between November 2021 and February 2023, leisure and hospitality was the only sector where job-stayers saw double-digit annual pay gains.

That is great news for workers in the sector but higher wage pressure can also squeeze margins for hospitality businesses.

Inflation compounds these challenges. The IFA survey noted that 12% of respondents cited inflation as a major concern in 2024, up from 9% in the previous year. Rising inflation often leads to increased employee expectations for higher wages. However, in an inflationary environment, consumers become more price-sensitive, limiting businesses’ ability to pass higher costs onto customers.

Managing Cash Flow: The Workers’ Compensation Dilemma

As a small business, franchisees face the same challenges as larger companies but with less time and staff to accomplish tasks. Paying workers’ compensation premiums is a good example. It’s complicated and time-consuming and the penalties for doing it incorrectly are significant. 

Traditionally, businesses must pay workers’ compensation insurance annually, with premiums based on projected labor costs. Estimating payroll for the coming year is challenging in today’s unpredictable economy. With deposits of 25–100%, combined with limited payment options, traditional workers' compensation premium payments can greatly impact cashflow.

A Smarter Approach: Pay As You Go

Small business owners today need a better option, one that can help them monitor costs more closely and accurately pay only what is essential. A "pay-as-you-go" model offers a better alternative, allowing franchisees to distribute premium payments over the year instead of making a large upfront deposit.

A payroll-linked insurance solution automatically calculates workers’ compensation premiums each time payroll is run and sends the payment directly to the insurance carrier. This approach provides several advantages:

• Greater Accuracy – Instead of relying on estimated payroll figures to determine premiums, real-time payroll data ensures accurate premium calculations. This reduces the risk of over- or underpaying, minimizing costly adjustments during year-end audits.
• Improved Cash Flow – By eliminating the need for large upfront payments, franchisees can conserve cash and allocate resources where they are most needed.
• Timely Payments – Premiums are automatically sent to the carrier with each payroll cycle, reducing the risk of missed payments and potential policy cancellations.
• Easy Access to Insurance Information – A payroll-integrated solution allows business owners to manage insurance policies and generate certificates of insurance seamlessly.
• More Time for Business Growth – Automating workers’ compensation payments eliminates time-consuming calculations, enabling franchisees to focus on core business areas such as customer service, employee retention and strategic growth.

With rising labor costs, inflation, and changing consumer spending habits, hospitality franchisees need to streamline operations and optimize cash flow. A "pay-as-you-go" approach to workers’ compensation insurance aligns premium payments with actual payroll expenses, offering greater financial flexibility. By reducing administrative burdens and ensuring accurate, timely payments, franchisees can focus on navigating today’s economic challenges and building a more resilient business.

About the Author 

Deanna Rosenbaum is VP of Channel Sales, Insurance Services at ADP.