If your employees aren’t properly classified by the right Workers’ Compensation class codes, you could be losing out on a lot of money. In fact, you may be paying a higher premium than you need to for your Workers’ Comp Insurance.
Class Codes Determine Premium Rates
The process that goes into determining Workers’ Compensation rates isn’t the easiest or most accessible information for small-business owners to find. Because of this, many owners aren’t aware of how their premiums are determined or how worker classification can directly impact their budget. Here’s a quick overview to bring you up to speed:
Workers’ Compensation Insurance premiums are based on several factors, including…
- Employee classification codes. More than 700 class codes account for specific professions’ injury rates. They determine a base premium rate based on an employee’s class.
- The business’s experience modifier. This is a representation of your business’s claims history compared to the rest of your industry. This modifier can increase or decrease your base rate.
- The business’s payroll. Your payroll is multiplied by the base rate and experience modifier to calculate a final premium.
Insurers consider all this information and then determine how much your business should pay. The good news is that IT businesses usually enjoy low rates to begin with, and most of their employees fall into low-risk class codes.
But what if there’s a mistake in the calculations? Who makes these classification codes, anyway? Where does this information come from? And how do you know if your worker is misclassified?
What Are Workers’ Comp Class Codes?
Workers’ compensation classification codes are created by independent rating bureaus or advisory organizations. These organizations compile and analyze workers’ compensation data, which insurers then use to calculate how much premium to charge for certain types of workers and businesses. A class code is a way of categorizing this data.
The National Council on Compensation Insurance, or NCCI, is the most well-known of these advisory organizations and provides class codes for the majority of US states. Its Scopes Manual is the industry standard for workers’ compensation class codes – but you have to purchase it if you want a peek.
Some states use their own classification systems. California, New Jersey, New York, Delaware, and Pennsylvania all have unique class codes, and Texas has significant variations from the NCCI system. Other states often have special classifications outside of the standard NCCI codes. But wherever your business is, your insurer uses some type of class code to calculate employee risk.
When and How You Should Change Your Workers’ Codes
If you think your insurance agency has misclassified your workers or your employees take on new job duties, this could potentially change their proper classification code and affect their Workers’ Comp rate.
The only problem is that it’s difficult for the average business owner to make heads or tails of class codes, and that’s if they can get this information in the first place. If you have questions or concerns, the best options available to you are contacting…
- Your insurance agent. Your agent likely set up your Workers’ Comp policy to begin with, so they should be the first person you go to for questions.
- A Workers’ Compensation consultant. An independent consultant with experience in NCCI class codes can help you make proper classifications for your business.
- Your state Workers’ Comp authority. Every state has a department or office dedicated to Workers’ Comp matters. Contact yours if you can’t get information elsewhere.
If you can get your employees properly classified, you may end up saving money from your Workers’ Comp premiums – unless your employees move into a clearly more dangerous (and expensive) class code. If you’re curious about the general cost you might pay, check out “What Is the Cost of Workers’ Compensation Insurance for a Small Business?”
Lastly, we should mention something every business owner should keep in mind: don’t misclassify employees as independent contractors in an attempt to save on your Workers’ Comp cost. If you do, you could be charged and fined by state law and have to pay the outstanding amount that you should have been paying, once the right premium is recalculated.