Whether you’re an insurance professional, an employer, or “the person in charge of insurance,” it’s often difficult to get your arms around Workers Compensation. It’s complex and fraught with so many “moving parts” you can almost be certain that what you say will be challenged and certainly open to interpretation.
While there are several good places to start, none is better than classifications. If you check the Workers Compensation manual, you’ll find something like this for classifications: The assigned classification reflects the exposures common to those employers, and the rate charged reflects the exposure to loss common to those employers.
Then it will go on to say that it’s the business of the employer within a state that is classified, not separate employments, occupations, or operations within the business. It so happens that the construction business is one of the “certain exceptions” that the rule talks about. A construction company can classify the “separate employments, occupations, or operations within the business.”
This sounds like a great opportunity, and it is, but it can also be very expensive. You want to be sure it’s done correctly. If it isn’t, I’ll guarantee you will find yourself paying more than you need to for your Workers Compensation coverage.
To appreciate the significance of classification names, let’s take some that are quite similar to see how easy it is to misclassify and the difference that it can make in your cost. Here they are:
- Street or Road Construction: Paving or Repaving and Drivers
- Street or Road Construction: Subsurface Work and Drivers
- Street or Road Construction: Rock Excavation and Drivers
- Excavation and Drivers
- Irrigation or Drainage System Construction and Drivers
- Sewer Construction
Now, it may be clear to you that each of these is different. You understand the business, and you know exactly who is performing which type of job. But think about the overworked auditor who comes to your office from the insurance company. How likely is it that this individual will know the difference as far as your employees are concerned? Who meets with the auditor to review the work to make sure it is correct? In most businesses, it’s likely to be someone from the accounting department or an outside bookkeeper.
Let’s take it a step further. If your company is like so many others today, you have employees who are doing more than one job. For each of those jobs they perform, you can classify them separately for each function. To do that, you have to keep records. It can’t just be “Joe works half the time in job A and half the time in job B.” The records must be exact for the time that Joe spends on each task.
If you don’t keep precise records, the insurance company will classify employees in the most expensive classifications that apply to anything they do during the year.
Keeping these records can be a real challenge. You need to do a detailed analysis with your agent as to what each employee is doing and see if it makes sense to separate the payroll.
If you haven’t undertaken this analysis, it’s safe to say that there’s greater than 90% certainty that you’re paying more than required for your Workers Comp.
Here’s an example. If you have someone who is roofing in the morning and doing finish carpentry in the afternoon, then, absent records, you can be assured that the insurance company will place that employee in the roofing classification, which is one of the most expensive classifications in the entire system.
However, if you tell the auditor that the employee spent four hours roofing and four hours doing finish carpentry and present the records to back that up, the payroll will be split.
Now, as with just about everything in life and in Workers Compensation, there are exceptions:
- If you have clerical employees, people who sit at a desk all day, you don’t want to use them as temporary construction help. Once they swing that hammer, they can’t have a penny of their payroll allocated to the clerical code, which is one of, if not the least expensive, codes in the system. The rules say there can be no separation of payroll from clerical. The same rule applies to outside salespeople. Here’s a fun example, though it’s from outside the construction industry: We work with a former insurance company auditor in Charlotte, NC, the hub of NASCAR. One of the race teams had made a habit of taking its office staff to the races as a perk. While that was thoughtful, a problem occurred when the team put those folks to work. They weren’t jumping over the wall to service the race car, but just having them work at the track was enough to dump them out of the clerical code and into the much more expensive code that applies to race teams. Needless to say, that put a stop to that perk.
- For the construction industry, there’s a class code called Contractor-Executive Supervisor. It’s class 5606. These are employees who sit in the construction trailer. The code is very specific about a few things. First, they cannot supervise the employees who do the actual work, since there must be a layer between the supervisor and the laborers. They have people coming to them asking for directions, not walking around the job directing employees. Second, if someone is an executive supervisor for only part of the year, you can’t put him in the executive supervisor class code; you can’t separate the payroll. So, if you have employees who fit this classification, you must make sure they are doing this job all year, or they’ll be classified in whatever other class codes are applicable.
These mistakes happen all the time. Two years ago, California reviewed the Workers Compensation policies of about 250 of the largest employers in the state. Don’t chuckle because it’s California. Believe it or not, California has the best Workers Compensation statistics because of the way the system works there. What the reviewers were looking for was mistakes in the policies. They classified a mistake as something that would make a difference of more than 10% in the premium.
In the review, they found just over 50% with mistakes that amounted to more than 10% of the premiums. Never mind how many must have had errors of a lesser magnitude.Classifications are the foundation of a Workers’ Compensation policy. It’s critical to review the classifications that are on your policy, and because of the business you are in, this should be done every year.