It’s often difficult to get your arms around Workers’ Compensation. It’s complex and fraught and much of it is open to interpretation. While there are several places to start, none is better than classifications. Check the Workers’ Comp manual and you’ll find something like this for classifications:

The assigned classification reflects the exposures common to those employers and the rate charged reflects the exposure to loss common to those employers. It goes on to say that it’s the business of the employer within a state that is classified, not separate employments, occupations or operations within the business.

The construction business is one of the exceptions. A construction company can classify “separate employments, occupations or operations within the business.” This sounds like a great opportunity, and it is, but it can also be very expensive. Be sure it’s done correctly. If it isn’t, you’ll find yourself paying more than you need to for your Workers’ Comp coverage.

To appreciate the significance of classification names, let’s take some that are quite similar to see how easy it is to misclassify and the difference that it can make in your cost:
● Street or Road Construction: Paving or Repaving & Drivers
● Street or Road Construction: Subsurface Work & Drivers
● Street or Road Construction: Rock Excavation & Drivers
● Excavation & Drivers
● Irrigation or Drainage System Construction & Drivers
● Sewer Construction

It may be clear to you that each of these is different. You understand the business and you know exactly who is performing which type of job. But think about the overworked auditor who comes to your office from the insurance company. How likely is it that the auditor will know the difference as far as your employees are concerned? Who meets with the auditor to review the work to make sure it is correct? Many times it’s likely to be someone from the accounting department or an outside bookkeeper.

Take it a step further. If your company is like so many others, you have employees who are doing more than one job. For each of the jobs they perform, you can classify them separately for each function. To do that, you have to keep records. 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 Joe spends on each task. If you don’t keep precise records, the insurance company will classify employees in the most expensive classifications that apply to anything they do during the year.

Keeping these records can be a challenge. You need to do a detailed analysis with your agent for each employee to determine if it makes sense to separate the payroll. If you haven’t done such an analysis, there’s greater than a 90 percent certainty that you’re paying more than required for your Workers’ Comp coverage.

Here’s an example. If you have someone who is roofing in the morning and doing finish carpentry in the afternoon, then, without records, you can be assured the insurance company will place that employee in the roofing classification, which is one of the most expensive classifications in the entire system.

However, if you tell the auditor that the employee spent four hours roofing and four hours doing finish carpentry and present the records to back it up, the payroll will be split. There are exceptions:

1) If you have clerical employees, you don’t want to use them as temporary construction help. Once they swing that hammer, they can’t have a penny of their payroll allocated to the clerical code, which is one of the least expensive codes in the system. The rules say there can be no separation of payroll from clerical. The same applies to outside salespeople.

2) For the construction industry, there’s a class code called Contractor – Executive Supervisor, class 5606. These are employees who sit in the construction trailer. The code is very specific that they cannot supervise 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.

Also, if someone is an executive supervisor for only part of the year, you can’t put them in the executive supervisor class code; you can’t separate the payroll. So, if you have employees who fit this classification, you must make sure they are doing this job all year, or they’ll be classified in whatever other class codes are applicable.

Two years ago, California reviewed the Workers’ Comp policies of about 250 of the largest employers in the state looking for mistakes in the policies. They classified a mistake as something that would make a difference of more than 10 percent in the premium. In the review, they found just over 50 percent with mistakes that amounted to more than 10 percent of the premiums. Never mind how many must have had errors of a lesser magnitude.

Classifications are the foundation of a Workers’ Comp policy. It’s critical to review the classifications on your policy every year.

Kevin Ring is the Lead Workers’ Compensation Analyst for the Institute of WorkComp Professionals, Asheville, N.C. He leads workshops, analyzes Workers’ Comp programs and is co-developer of a Workers’ Comp software suite that helps insurance professionals. He can be reached at 828-274-0959 or kevin@workcompprofessionals.com.