The Return of Earnings (ROE) is a term used to describe the assessment of an employer's workers' compensation liability. It is essentially a statement of remuneration and earnings paid by an employer to its employees over a specific period, and it is a critical component in determining an employer’s annual workers' compensation insurance premium. The ROE report provides the basis for calculating the contributions payable by employers to the Compensation Fund, which is an insurance pool that provides compensation to employees injured or incapacitated during work. In this article, we will discuss how the Return of Earnings is calculated.
Step 1: Determine Gross Earnings
The gross earnings refer to the total remuneration paid by the employer to its employees for the relevant period. This includes salaries, bonuses, overtime pay, commissions, and any other form of compensation paid to employees. It is important to note that when calculating the gross earnings, the amounts paid to employees who are not eligible for workers' compensation are excluded.
Step 2: Calculate the Remuneration Ceiling
The remuneration ceiling is the maximum amount of remuneration that can be taken into account when calculating workers' compensation premiums. The remuneration ceiling is reviewed annually and is announced by the Minister of Employment and Labour in South Africa. Employers are obligated to pay compensation only on earnings that do not exceed this ceiling.
Step 3: Establish the Cost of Benefits
The cost of benefits refers to the money paid out to employees for medical expenses, disability claims, and death benefits. It is calculated by multiplying the gross earnings by a predetermined percentage known as the assessment rate. The assessment rate is reviewed annually and is based on industry risk profiles and loss experience.
Example
Suppose a company has a total gross earnings of R2,500,000 and an assessment rate of 0.9%. The cost of benefits would be calculated as follows:
- Gross earnings = R2,500,000
- Assessment rate = 0.9%
- Cost of benefits = R2,500,000 x 0.9% = R22,500
Step 4: Calculate the Employer's Contribution
The employer's contribution is calculated by adding the cost of benefits to the administrative fee. The administrative fee is charged by the Compensation Fund to cover administrative expenses. It is calculated as a percentage of the employer's total payroll. The administrative fee is set at a fixed rate of 0.8% for all employers.
Example
Suppose a company has a total payroll of R3,000,000. The administrative fee would be calculated as follows:
- Payroll = R3,000,000
- Administrative fee rate = 0.8%
- Administrative fee = R3,000,000 x 0.8% = R24,000
Once the administrative fee is added to the cost of benefits, the employer's contribution can be calculated as follows:
- Cost of benefits = R22,500
- Administrative fee = R24,000
- Employer's contribution = Cost of benefits + Administrative fee = R22,500 + R24,000 = R46,500
Conclusion
The calculation of the Return of Earnings is a critical process that determines an employer's obligation to pay workers' compensation premiums. Employers must ensure that they accurately calculate their ROE to avoid overpaying or underpaying their premiums. The steps outlined in this article provide a guide on how to calculate the ROE, but employers must consult with a qualified professional for specific guidance on their unique situation.
