Job classifications and special considerations: Year-end strategy for Workers' Compensation

Job classifications

Job classifications are a central factor in Workers' Comp premiums. With the exception of construction, staffing companies and agriculture, the overall business operation, not individual duties, is assigned a governing classification that best identifies the type of work being performed. This is the classification that contains the most payroll and the first critical step is to be sure that it's accurate.

Since some workplace functions are common to all businesses, there are standard exclusions for clerical, sales and driver classifications. Commonly, errors are found in the clerical classification 8810 Administrative/Clerical, often the largest classification outside of the governing class.

Employers taking the time to place classifications into the payroll records provide helpful information for the auditor; however, many auditors will probe a clerical classification because it is usually the least expensive, reflecting minimal risk. "What do they do? Where do they do it? Do they do it full-time?" are common questions. Key determinants of a clerical classification are physical separation from the plant and exclusive performance of office work (non-clerical duties can be, at the most, incidental).

While a company representative familiar with the financial records and the operations of the company should be present at every audit, it's not unusual for the person to be unfamiliar with an employee's specific duties and as a result clerical employees may be erroneously assigned to the governing classification.

To reduce the possibility of error, a simple solution is to add job titles for each employee that provide a common sense description of what people do, such as payroll clerk, data entry clerk, receptionist, etc.

It's also important to note that in most cases, auditors are not allowed to add a higher rated class code to the policy at the time of the audit. They can add the class code for the renewal policy, but not to the audited policy. This does not apply to construction, agriculture or staffing companies.

Special consideration for contractors, agriculture and staffing companies

There is a major exception to the rule of a single governing classification. Contractors, agriculture and staffing companies have the opportunity to separate the payroll for their employees based on what the employee does. This means if an employee is roofing in the morning and plumbing in the afternoon, payroll records can be separated. Detailed records must be maintained and it is not permissible to separate them into a standard class such as clerical or into 5606, Executive Supervisor.

Special payroll considerations - Sole Proprietors, Partners, LLC Members and Executive Officers

Sole proprietors, partners, LLC members and executive officers are treated differently than regular employees. In some states, sole proprietors and partners who choose to be subject to the Workers' Compensation law and covered by the policy are generally assigned a payroll regardless of their actual gross income. This amount is adjusted annually to account for inflation and other cost of living factors. Each state allowing these individuals to "opt in" assigns its own payroll limit (it varies throughout the country).

Unlike the payroll of sole proprietors and partners, executive officers' payroll is generally limited by state specific minimums and maximums. It is important to make sure that executive officers payroll is accounted for correctly and that payroll is attributed to the correct class code.

Uninsured subcontractor charges

Certificates of insurance are a chronic problem and are often the source of unnecessary costs. A certificate of insurance is a written assurance that subcontractors, temporary agencies or employee-leasing companies are providing Workers' Compensation for the period of time that workers are engaged. If certificates are not available at the time of the audit, the primary employer will be charged for the exposure on its Workers' Compensation policy. Commonly, the entire amount of the contract is picked up on the audit, which may not be correct.

Workers' Compensation policies start with an estimated premium, but after the policy expires the insurance company will audit to determine the final premium, by determining actual remuneration for the policy period. It's good business sense to prepare for a premium audit by positioning yourself for the lowest possible premiums.