Getting Job Classifications Right: A Smart Way to Reduce Workers’ Compensation Costs

OCTOBER 7, 2025

When it comes to managing workers’ compensation insurance (guaranteed-cost programs in particular), one of the most overlooked cost-saving strategies is also one of the simplest. A classification review can help save up to 30% on premiums.

It might sound like a minor detail, but misclassifying employees — whether by job function, industry, or business activity — can lead to significant financial consequences. While classification impacts several types of insurance, such as general liability and commercial auto, this article focuses specifically on workers’ compensation, where the stakes are especially high.

Why Job Classification Matters

Workers’ compensation premiums are calculated based on the level of risk associated with each job role. High-risk roles (like roofing or heavy construction) carry higher premiums, while low-risk roles (like clerical work or interior design) are charged less.

When job roles are misclassified, companies may end up paying far more than necessary — or worse, find themselves underinsured when a claim arises. Class codes also impact experience modification (e-mod) calculations, and for certain industries such as construction, higher experience mods may negatively impact bid offers.

Here are some common misclassification issues:

• Incorrect job roles: For example, coding a clerical worker under a construction classification.
• Outdated classifications: Businesses evolve, but insurance codes don’t always keep up.
• Payroll errors: Including executive payroll in premium calculations when it exceeds the allowable cap.

The Consequences of Misclassification

Misclassifying job roles can lead to:

• Overpayment of premiums: Especially when low-risk jobs are coded as high-risk. This can inflate costs by 10% to 30%.
• Underpayment and coverage gaps: High-risk jobs coded as low-risk may result in denied claims or insufficient coverage.
• Regulatory fines and penalties: Remote work and the gig economy have increased enforcement, leading to more penalties and retroactive charges.

In short, classification errors can quietly drain your budget and expose your organization to unnecessary risk.

Case Study: How USI Saved a Carpentry Company 22%

Let’s look at a case study that illustrates the impact of a proper classification review.

A mid-sized carpentry firm was facing steep workers’ compensation premiums due to its classification under the National Council on Compensation Insurance (NCCI) code 5403: "Carpentry — Not Otherwise Classified, All Operations to Completion.” This is considered a high-risk category. However, the company’s work had gradually shifted to a shop setting without field installation or erection work — making them a lower risk.

The appropriate classification for their operations was NCCI code 2802 (“Carpentry – Shop Only & Driver”), which carries a much lower rate compared to code 5403. Unfortunately, the business lacked the internal resources to regularly audit its insurance classifications or payroll reporting. As a result, they were overpaying and missing opportunities to optimize their coverage.

Here’s how USI’s classification review changed the game:

1. Classification audit — An analysis of job roles revealed that 80% of the company’s work involved a shop setting, not field installation. This lower-risk classification significantly reduced their premium rate.
2. Payroll analysis — The review uncovered that executive payroll had been mistakenly included in premium calculations, exceeding the state’s allowable cap. Correcting this error led to a refund.
3. Carrier negotiation — With accurate classification data in hand, USI was able to negotiate better rateswith the company’s insurance carrier.

The Results