Regardless of your organization’s size or how much work-related risk your employees face, it’s important to get workers comp class codes right. The following information can help you get your classification codes back on track.
Decoding the Class Codes
Workers comp class codes were developed by the National Council on Compensation Insurance (NCCI) to help gauge how risky a business is to insure. Providers can then charge premiums based on business risk. This should fairly distribute workers compensation costs among employers – but only if the codes are applied correctly.
Each code has its own base rate for calculating premium on the workers compensation policy. Governing class codes help identify the type of work performed by the insured. They typically apply to the workers comp class codes that produce the most payroll. These classifications are more about the business of the employer and not the separate occupations of each employee. Some employers shift payroll around based on their interpretation of the tasks their employees perform. This might produce a base rate for premium calculation that is much lower (and more attractive) than the true rate of the governing class.
Underwriters tend to notice classification errors that end up costing them money. To get your coding right, partner with a broker who understands the NCCI Scopes Manual. They can help you identify your governing class and what payroll to pull out of the governing code (basic classification) and put into an exception code (standard classification). There are over 700 classifications and they can be overwhelming without proper guidance. While the internet might seem like a sufficient resource, it often leaves too much open to employer interpretation. Using an objective expert is your best bet.
Save Now, Pay Later
A common coding pitfall is to use classification strategies aimed at short-term pricing gains. We frequently see this with the misuse of code 8810 (a standard classification code defining clerical office workers). Code 8810 applies to employees who are physically separated by walls or doors and are not involved in any physical labor. If your employee greets clients, occasionally takes them out to lunch or visits other businesses, code 8810 is incorrect. They should be coded for inside / outside sales or something similar. If your employee spends time in a manufacturing environment, they are probably not clerical by definition. Keep in mind that this is not a ploy to collect more premium. The base rate per classification is calculated using a five-year loss experience by state. The rating methodology does take some circumstances into consideration (i.e., employees who only spend 10% of their time in higher hazard areas).
Aside from raising red flags with an underwriter, misclassifications can impact your experience modification (mod) factor. Your experience mod compares your loss experience to other employers of similar size and operation. The average experience mod is 1.0. If you exceed 1.0, your losses are worse than expected and you’ll have a debit mod (a surcharge will be added to your premium). If you are under 1.0, your losses are better than expected and you’ll receive a credit mod (premium credit).
Calculating your expected loss is simple. The NCCI provides experience modification worksheets that assign an expected loss ratio (ELR) to every class code for each state. Based on that, you would use the following formula: payroll ÷ 100 × ELR = expected losses. If you attempt to dodge premiums by using a less expensive class code, you could exceed the expected loss forecast. This would result in a debit mod. It’s important to note that your experience mod is based on a rolling three-year loss period. This means you’d be carrying the mod overage for three years, potentially costing you more in workers compensation premiums.
Correct Your Codes
Using incorrect workers comp class codes can be a costly mistake. We encourage you to review them with a broker and track your outcomes on an experience modification worksheet. Not only will this help ensure you have the right coverage, but it will likely promote risk management activities (i.e., loss control programs, safety training, employee engagement, etc.) to help control your experience mod. The risk management professionals at SilverStone Group are ready to help.
This article originally appeared in the 2019 | ISSUE TWO of the SilverLink magazine, under the title “Challenge Accepted | Managing Your Workers’ Comp Class Codes.” To receive a complimentary subscription to the SilverLink magazine, sign up here.