This series of articles will provide clarity on what independent premium auditors evaluate, with practical insights to help you navigate the complexities of workers’ compensation premium audits.
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Payroll Information
A critical step in any premium audit is the review of an employer’s payroll. Payroll serves as a primary measure of the employer’s exposure to potential workplace injury and thus significantly impacts premium costs. It is crucial to segregate payroll accurately by the correct classification codes.
This post is one in a 3-part series:
A common and costly mistake employers make is overlooking allowable payroll deductions. Not recognizing and applying eligible deductions—such as the premium portions of overtime, double-time wages, and severance pay—can inflate payroll numbers unnecessarily, driving premiums higher.
- For instance, the “premium portion” of overtime refers to the pay rate exceeding the employee’s standard hourly wage. Suppose an employee typically earns $10 per hour but receives $15 for overtime work. The premium portion, $5 per hour, should be excluded from payroll calculations for workers’ compensation premium purposes. Accurate payroll accounting reflecting these deductions helps maintain appropriate premium charges aligned with actual exposure to injury risk.
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Employer Classification
Classifying employers properly is the cornerstone of accurate premium assessment. Workers’ compensation relies heavily on correct employer classification to reflect an accurate risk exposure. Each business receives a classification code designed to group similar workplaces based on the types of activities they conduct and the related exposure to injury.
These classification codes, numbering approximately 800 in NCCI states, can be complex and nuanced. Errors often occur when employers fail to recognize the proper class or when they misapply a standard exception. For example, the payroll of janitorial employees working for a jewelry manufacturer should be classified under the jewelry manufacturing code rather than a janitorial services code.
Understanding classification rules is essential to prevent costly mistakes. A clear example of a common error involves standard exceptions such as clerical, sales, or drivers. Employees classified under these exceptions must exclusively perform tasks within their specific categories; any deviation—even minimal or infrequent—could lead to reclassification under a higher-rated code, significantly increasing premium costs.
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Standard Exceptions
While businesses generally use a primary classification code based on their main operations, certain employee categories fall under standard exceptions. Occupations regularly subject to these exceptions include:
- Clerical office and telecommuter employees
- Outside salespersons
- Collectors
- Messengers and their helpers
- Drivers and chauffeurs, along with their helpers
- Drafting employees
These roles are common across various industries and typically present lower risks of workplace injuries. Standard exceptions are classified separately from the primary classification of the employer’s main operations, reducing premium charges. However, strict rules apply. Employers must maintain detailed, accurate records of tasks performed and hours worked to ensure payroll is correctly attributed.
For example, an employee performing machine operation for thirty hours per week and driving deliveries for ten hours must have their payroll divided accordingly. It is crucial to note, though, that payroll for clerical or outside sales staff often cannot be divided.
Next Steps:
In part two of this series, we will dive deeper into additional categories audited during an independent premium audit, including General Inclusions, General Exclusions, and the complexities of Multiple Classifications. Stay tuned for essential insights that will empower your business to manage and control your workers’ compensation costs effectively.
Contact: mstack@reduceyourworkerscomp.com.
Workers’ Comp Roundup Blog: http://blog.reduceyourworkerscomp.com/
Injury Management Results (IMR) Software: https://imrsoftware.com/
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Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.
