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Q &A: Premium audits: Furloughed workers, changing classifications, COVID-19 claims, Experience Mod

Under "normal" circumstances, many workers' comp experts say that up to 75% of premium audits are incorrect. Even when the employer receives a return premium, money can be left on the table because the list of possible errors and mistakes is almost endless. But that's just the tip of the iceberg today. States have implemented rules for excluding payroll of furloughed workers, changing employee classifications, and treatment of the COVID-19 claims on the Experience Mod and many businesses have changed the nature of their operations. Recording the payroll inaccurately and incorrect classifications could cost your business a lot of money.

Here are FAQs that address the impact of COVID-19 rules on the workers' comp premium audit. While these generally apply to NCCI states as well as others, the rules do vary by state and it is important to confirm the changes that affect your business.

  1. Q. Who is considered a paid furloughed employee?

    A. Any employee who continues to receive pay but is not performing any work duties for the employer during a temporary layoff or involuntary leave as a result of federal, state, and/or local emergency orders, laws, or regulations issued due to the COVID-19 pandemic that impact an employer's staffing and business operations. It's important to note that the amounts paid to employees for time not worked must be because they could not work due to federal, state, and/or local emergency orders, laws, or regulation, not that they had no work to do.

  2. Q. How is the pay to the furloughed employee treated on the premium audit?

    A. Payroll for furloughed employees will not be used in the calculation of Workers' Compensation premium at the time of audit only if the employer keeps separate, accurate, and verifiable records of this payroll. If separate, accurate, and verifiable records are not maintained, payroll is assigned to the classification for work normally performed by the employee prior to any emergency orders, laws, or regulations issued due to the COVID-19 (coronavirus) pandemic. In most states, this new class code is 0012. Pennsylvania and Delaware use the class code 1212. It also will not be included in experience rating calculations. In New York, paid furloughed workers are assigned to a new class code, 8873, which mirrors the clerical rate. The 8873 payroll will be included on the Experience Mod.

  3. Q. Are employees who are on leave under federal programs such as FFCRA, EPSLA, and EFMLEA considered paid furloughed employees?

    A. In most cases, no, the definition of paid furloughed employees DOES NOT extend to employees on leave under such programs. However, in some states such as California, payments made under certain leave laws are excluded.

  4. Q. How is paid time-off, such as sick time and vacation, treated for paid furloughed employees?

    A. This does vary by state, so it is important to know the rules. In most states, the paid time off is NOT excluded.

  5. Q. If I have used government appropriated funds or loans to retain or hire employees, is the payroll excluded from the calculation of my workers' comp premium?

    A. No, any appropriated funds or loans received by an employer as authorized by any law or regulation, or public governmental entity, that are used by an employer specifically to retain or hire working employees are NOT excluded.

  6. Q. What if employees are returned to work on a part-time or intermittent basis?

    A. When an employee is requested to perform any duties for an employer, the employee is not deemed a paid furloughed employee for the period of time they are performing duties for the employer and are assigned to the classification applicable to the work being performed. Most states do not specify how many times an employee can switch from furloughed to working; however, there are exceptions and California is one of them. Accurate, separate payroll records must document working and furloughed time.

  7. Q. Does idle time count as furloughed?

    A. The definition of "idle time," such as a construction worker waiting for another job to be done on a jobsite, has not changed and is INCLUDED in the payroll calculations.

  8. Q. We transitioned to a new business operation and some employees are in new roles because of the pandemic. How do the classifications change?

    A. The rules governing classifications have not changed. Generally, it is the business of the employer within a state that is classified, not separate employments, occupations, or operations within the business. A change of classification can occur when the employers' operation has changed to a different classification. Businesses have pivoted to save themselves, some shifting to producing needed supplies to combat the pandemic, others moving brick-and-mortar operations online. If the business is offering new products or services or its operation has significantly changed, it's important to provide a full, detailed description for the auditor to recognize that the overall classification warrants changing. It's also important to determine if this is a permanent shift or a temporary one. A change of classification can also occur when an employee's occupation for the employer has changed. Some examples are salespeople and customer service reps who worked in retail showrooms and now work from home and waitstaff who are now doing deliveries. The employer is responsible for maintaining properly segregated payroll records for the wages earned while the employees were in their new job descriptions. If these records are not maintained, then all payroll would be assigned to the highest-rated applicable classification.

  9. Q. What about employees who are now remote?

    A. The impact of telecommuting on workers' compensation for your employees depends on their class codes and the employees' duties. If the employee is normally a clerical employee, they may remain in the same class code or move to a clerical telecommuter code, which is available in many states. If the employee is not normally a clerical employee, but the job has changed as a result of the pandemic and they are going to work from home in a clerical capacity, it may qualify as a clerical or clerical telecommuter classification. Again the key is separate verifiable payroll records, including a description of the work performed. If these records were not maintained, then the employee's payroll would be assigned to the classification representing their normal duties before the stay-at-home order. If they are performing work other than clerical duties, it would be unlikely that a different class code would apply.

  10. Q. To remain competitive as a contractor, it is important that my Experience Mod be under 1.0. If the payroll of my paid furloughed workers is excluded, how will it affect my Mod?

    A. This is an important consideration. A dramatic drop in payroll can lead to an increase in the Mod and it may make sense not to exclude the payroll of furloughed workers. It's best to work with your insurance advisor to determine the best course of action.

  11. Q. Will COVID-19 claims be included in the calculation of my Experience Mod?

    A. The Experience Mod is a tool to predict an employer's future workers' compensation costs and the presence or absence of a pandemic in a recent historical period is not believed to be a reliably good predictor of future loss. Therefore, most states have approved measures that will exclude COVID-19 claims from employers' experience rating. Michigan has approved the provision but leaves it up to the carriers to adopt the rule.

To be sure, this is complicated and confusing and rules vary by state. Most of the overcharges in premium audits arise from mistakes employers make in recordkeeping. The best way to protect yourself is to be prepared. This is our expertise, and we are here to help. As trained Certified WorkCompAdvisors, we can help resolve issues in advance and prevent costly overcharges on the audit.