Most employers do not realize that the classification codes used to calculate workers’ compensation premiums are based on the riskiest activity an employee performs, rather than the activity they perform most often. However, there are strategies you can use to ensure that you are accurately describing and recording each job to avoid creating unnecessary workers’ compensation premium exposures.
“It is really important for employers to know this because misclassification can not only have an adverse effect on the premiums charged, but also on claims,” said Tammy Rainwater, Premium Audit Manager at Safety National.
“One of the main issues resulting from misclassification is that you have an out-of-balance payroll to your claim ratio, and that is going to draw the attention of the regulatory rating bureaus,” cautioned Dave Baiter, Premium Audit Manager at Safety National.
Class Code Calculations
Class codes are determined by rating bureaus like the National Council on Compensation Insurance (NCCI). In fact, NCCI utilizes more than 700 codes to classify workers. These codes are based on the specific job function, not the overall nature of the business. For example, a clerical worker at a foundry should be coded to the clerical worker risk, not a foundry risk.
Class codes group employees together with a similar risk and they apply a rate that calculates an adequate premium based on the level of risk that is associated with that classification. That classification rate multiplied by the total annual employee wage determines the insurance premium for that classification.
When there are multiple levels of risk exposure and employers are not keeping detailed records, employees are automatically placed in the highest-rated class code. At times, employers are able to assign more than one class code to an employee.
For instance, an auditor will allow the payroll to be split between driver and auto maintenance, but not between clerical and maintenance. Payroll recordkeeping when splitting class codes on an employee has to be in actual dollars and cannot be a guesstimate.
Further, if you have a company that allows the receptionist to also drive once in a while if needed in a pinch, that immediately takes 100% of Sally’s payroll and puts it in a higher-rated driver class code.
Accurate Recordkeeping Can Lead to Cost Savings
Detailed recordkeeping is key to achieving cost savings. This is even more important in the riskier industries. In the construction sector, for example, companies are allowed to split payroll if they have detailed records that distinctly show the time worked on each and every risk. If a worker is framing one day and the next day they are pouring the foundation, the employer must have detailed records specifying that this person, on this particular day had $2,500 worth of exposure while framing and $5,000 worth of exposure pouring the foundation. These numbers cannot be estimated. They must be exact.
The rating bureaus are comparing payroll dollars to claims classifications and if these things are not aligned appropriately, it could have a very negative impact. As an example, if a company has $5,000 put into a construction class code, but they have 32 claims, that is an immediate red flag and it might require a second audit. Instead of having people classified properly the first time and going through the audit process once, companies are forced to spend time and resources on further audits and corrective measures.
Accurate classification of risks is not only an important part of the premium audit process, but is also essential to underwriting and rating.