Workers’ Compensation Classification Codes: Why It’s Crucial to Get Them Right

The workers’ compensation premium calculation begins with classifying the company’s operations and the payroll exposure associated with them. Each classification carries its own rate, and most companies require more than one classification to accurately represent the work being performed.

Many insurance agents apply classifications based on broad titles instead of using more precise definitions. This problem is complicated by the fact that companies’ operations often change as they grow, and agents and brokers tend to simply roll over the classifications and their associated payroll numbers year after year, perpetuating any errors, which result in higher premiums.

USI has access to the same manuals used by auditors and underwriters to determine classifications, which we use to identify any errors and advocate for corrections on behalf of our clients.

Classification Review Example:

After reviewing a general contractor’s operations, USI discovered the company was performing both new construction and remodeling.  Many of the remodeling jobs involved only light interior carpentry, yet all payroll was being assigned to the higher-rated new construction work.

By adding the interior carpentry work classification and reallocating the payroll between the two, the company was able to reduce its premium by 19%.

How Payroll Reporting Impacts Workers’ Compensation Exposure

Workers’ compensation exposure is always based on payroll. Even when a company’s operations are correctly classified, we often discover errors in how payroll is reported. Certain portions of payroll may be excluded from premium calculations, or subject to limitations. For instance, payroll for owners and executive officers is capped at a maximum value that varies by state, or the additional pay for overtime beyond the normal hourly rate can be excluded.

Audit of Exposure Base Example:

USI worked with a metal products manufacturer that had recently acquired a nearby competitor and was concerned about this acquired company’s workers’ compensation premium. We found the manufacturer’s broker had simply used the acquired company’s payroll in its estimates without ever validating it. This led to all the extra pay for overtime hours being included in the premium calculation, when a portion of the overtime payroll could have been excluded.

After sharing our findings, the manufacturer agreed to name USI as their broker, and we worked with the insurance company to correct these payroll reporting mistakes. This allowed the manufacturer to reduce its premium by roughly 11%.

Most brokers don’t invest the time or resources necessary to conduct regular workers’ compensation classification reviews or to validate reported payroll, both of which can lead to increased premiums.