Workers Compensation insurance premiums are based on several factors, specifically:
A problem that we run into all the time with new clients is that their employees are classified under the wrong code. This can lead to “shock audits” at the end of the policy term if the carrier determines that the employees are classified incorrectly. It can also lead to you paying more for your Workers Compensation insurance then you should be.
What Are Workers Compensation Classification Codes?
Workers Compensation class codes are three or four-digit codes created by the NCCI. The NCCI is an independent advisory organization whose primary function is to obtain and provide accurate statistical loss data that is used by insurance carriers to set manual rates for Workers Compensation insurance.
This rate is then multiplied by the payroll associated with that job classification per $100 in payroll. Most states used the NCCI class code system.
There are over 700 different codes that not only distinguish different job duties performed by employees, but also represent the amount of risk and type of hazard each job or work environment may entail. For example, you may know the job duties of a contractor by their job title. However, the insurance company knows them as “5606”.
Many companies will have more than once class code representing its employees and their corresponding job function.
Why is it Important to be Correctly Classified?
Consider a company that installs fences at residential homes. While some employees are involved in constructing the fences, there might be a team of inside sales reps who are on the phone all day in an office setting.
Obviously, there is a difference in risk for these two job functions. It would not make sense to charge everyone for the exposure of those constructing the fences. For example, let’s say the payroll associated with employees install the fences is $200,000 and the inside sales payroll is $200,000.
Those who were involved with fence installation would be placed into class code “6400” and charged a rate of around $25 per $100 in payroll. The inside sales reps would be placed into class code 8810 and charged a rate of around $0.25 per $100 in payroll.
As you can see from the above chart, using the two different class codes resulted in $45,000 of premium difference. Therefore, it is extremely important for you and your insurance agent to make sure your employees are assigned to the correct class code.
On the other hand, business owners might be enticed to misclassify their employees on purpose to obtain a lower rate. This is a bad idea and can lead to a “shock audit”. A “shock audit” would be when the insurance company audits your records at the end of the policy and determines that your employees were incorrectly classified. If so, the insurance company can retroactively bill the client for up to three years of premium that has been incorrectly classified.
Not only will the employer be on the hook financially for the incorrect classification, but they also may be non-renewed by their carrier. This can put a business in a frantic rush to find new coverage, taking away time from income producing functions.
Overall, it is not a good idea to misclassify your employees because the insurance carrier will find out. As a business, the best way to save money on Workers Compensation insurance is to build a long, trusting relationship with the carrier.
J.Krug & Associates, Inc.