One of the most misunderstood and difficult parts of setting up a workers compensation insurance policy is classifying the type of work being done by each employee. With over 700 classifications there are a lot to choose from and some of the wording on the classification descriptions can be misleading. In most states, the classifications are written by the National Council on Compensation Insurance (NCCI). These class codes are one of the most important parts of the workers compensation policy, because they are one of the two driving factors in price or premium. The other factor determining what a business pays is the amount of payroll for the employees of that business. If the employees are not classified properly, there is a chance that upon an end of term audit for a significant difference in rate between the classifications. This can cause either a large increase in premium owed, or a refund because too much has been paid into the policy. Here are some examples of my experiences with some classification codes that are commonly misused. Hopefully this will help you as a business owner more effectively classify your business with the proper workers comp codes.
Class Codes 5606
Contractor – Project Manager – Construction Executive – Construction Manager or Construction Superintendent
In my opinion, this classification is one of the most misused of all 700 codes. This classification is designed for an employee who is in charge of a construction project, but the employee does not take part in any of the physical work whatsoever. They also cannot have direct contact with the employees doing the work. They must be talking with the foreman who then will line out the work to be done by the employees on the job site. This position is mostly work being done in the office, but occasionally will include going to the job sites to check in with the foreman’s.
Class Codes 5437
Carpentry – Installation of Cabinets or Interior Trim
Carpentry is one of the commonly mis-classified class codes when it comes to general contractors. General contractors cannot separate out this classification from other work being done. Even if the other work was done weeks prior, the contractor still cannot use this classification. It will default to the classification that has the highest risk for the work done at the job site. The higher risk typically has a higher rate of premium. This particular classification is designed to be used by an artisan (specialty) contractor. This is someone whose scope of work is only doing the installation of cabinets or trim inside of the structure. This person is not doing any other type of work on the building. It is a very specific classification and the rate for this type of work is much less than all the other construction classifications. For this reason, if a business is using this classification and it is incorrect the business will owe a very large amount at the end of the term after an audit.
Class Codes 8810
Clerical Office Employees NOC
Clerical employees are typically one of the least expensive class codes. This is for a good reason because the chances of someone sitting behind a computer being injured is very small. Since it is the least expensive classification, it is common that business owners try to classify as many of their employees as they possibly can with this code in an attempt to reduce cost. The biggest requirement for this classification is that there has to be physical separation of the clerical employee from the other work being done at the location. This separation can be a wall or even a reception desk. The other caveat of this classification is that you typically cannot use this in conjunction with any other classifications. People within the insurance industry refer to this as a standard exception class code. The standard exception class code means the employee cannot be doing any other class of work. You cannot have an employee who is classified as 5437 (trim carpenter) and then have the same employee come back into the office to be assigned class code 8810, which is a less risky class code. Some states may have certain instances where they allow this code to be split. Missouri is one such state that allows an owner to assign 10% of their payroll to the 8810 class and the remaining to the governing code. It is important to check the regulations of the state you are operating in to make sure.
Standard Exception Class Codes
As referred to with the clerical classification (8810) they cannot be used in conjunction with any other classification. There are three of these class codes that are commonly misused in this manner, 8742 (outside sales), 8810 (clerical), 7380 (delivery). Make sure that if you are using these classifications the employee is not participating in any other aspect of work being done in the company that should be classified elsewhere.
Conclusion on Class Codes
The biggest take away from this is a business owner should verify all the classifications the agent is using on the policy of their business. The insurance agent is in the business of analyzing risk. It is in their best interest to always assume more risk. This is because it is a lot easier for the agent to explain that a business over paid. This is easier than explaining that a business under paid and now they owe additional premium. Plus the insurance agent can only operate off of the information you give them about your business. No one knows your business better than you. For this reason, it is important to take an adequate amount of time to talk with your agent. Talk with them about all of the ins and outs of your business. This will help them properly protect your business.
It is equally important that part of your conversation with your agent is to talk through the class codes. Take time to make sure the class codes are being properly assigned. You can always look up class codes online as a consumer through several different sites. Most agents will be more than happy to explain why they used a particular classification. Classifications can sometimes be very tricky and it can even vary by how a particular insurance carrier views the work being done. A little research and questioning to make sure things are set up properly can end up saving you a lot of hassle. It will also save you money upon the end of term audit. For this reason, it is important to establish a comfortable working relationship with your insurance agent.
My Insurance Question is a contribution of the experts at The Insurance Shop LLC. The Insurance Shop was founded in 2005 as an independent insurance agency that partners with a couple dozen insurance carriers. This large amount of carriers allows the agents at The Insurance Shop the ability to shop your policy around in an attempt to make the carriers compete for your business. If you are looking for a better value when purchasing your commercial insurance package, let us shop insurance so you don’t have to. Give us a call today at 800-800-4864.
