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The construction industry: leverage classifications to save money

For the construction industry, proper classification is both an opportunity and a challenge. Generally, the Workers‘ Compensation system classifies the overall business enterprise; however, the construction business is a major exception. A construction company can classify the “separate employments, occupations or operations within the business.” Done properly, this can mean significant savings.

To appreciate the potential confusion and complexity, consider the following similar classification names:

While it may be clear to the construction company that each of these is different, it's doubtful the overworked auditor who comes to your office from the insurance company will understand the difference. In many businesses, someone from the accounting department or an outside bookkeeper meets with the auditor and they, too, may not be cognizant of the differences.

Furthermore, in construction, it is common for employees to do more than one job. The payroll can be divided among the separate classifications. However, 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 the employee spends on each task.

If precise records aren't kept, the insurance company will classify employees in the most expensive classifications that apply to the employee during the course of the year. While keeping these records can be time consuming and costly, the resulting savings can easily offset these costs.

For example, if an employee is roofing in the morning and doing finish carpentry in the afternoon, then, absent records, the insurance company will place the employee in the roofing classification, which is one of the most expensive in the entire system. However, if there are records that show the employee spent four hours roofing and four hours doing finish carpentry, the payroll will be split.

There are a few exceptions that are important to know about:

  1. Payroll in the clerical class, which is one of, if not the least expensive codes in the system, can't be divided. Once clerical employees perform a construction task, even if temporarily, none of their payroll can be allocated to the clerical code. The same rule applies to outside salespeople.
  2. For the construction industry, there's a class code 5606, Contractor – Executive Supervisor. 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, they can't be in the executive supervisor class code; you can't separate the payroll. So, if there are employees who fit this classification, they must do the job all year, or they'll be classified into another applicable class.

Classifications are the foundation of a Workers' Compensation policy. It's critical to review the classifications in the policy and understand the value of keeping accurate payroll records. Because of the frequent changes in the industry, this should be done annually.