The Big Impact of Payroll & Class Codes on Your Experience Mod

When it comes to workers’ compensation costs, many employers focus on claims management, safety programs, and return-to-work initiatives. All of those are critical—but there’s another piece of the puzzle that’s just as essential:

Your payroll and class codes.

These two factors can dramatically influence your experience modification factor (mod) and ultimately how much you pay for workers’ comp insurance. Yet many employers don’t realize how big a role they play—or how costly mistakes in classification can be.

Let’s look at how payroll and class codes affect your mod, and how to keep them accurate to protect your bottom line.

What Is the Experience Mod?

Your experience mod is essentially your company’s credit score for workers’ compensation. It compares your actual losses to what’s expected for your industry and type of business.

• A mod of 1.00 means you’re exactly average for your industry.

• A mod below 1.00 means fewer-than-expected claims and lower premiums.

• A mod above 1.00 indicates higher-than-expected losses and higher premiums.

While claims are the most visible driver of your mod, your payroll and class codes set the stage for how your mod is calculated in the first place.

The Role of Class Codes

Workers’ compensation insurers use class codes to categorize the type of work your employees perform. Each code reflects the inherent level of risk in that job.

For example:

• An office clerk might be classified under a low-risk code like 8810 Clerical Office Employees.

• A roofer would fall under a higher-risk code, such as 5551 Roofing.

Each class code has its own rate, representing the cost of insurance per $100 of payroll for that job. High-risk jobs have higher rates because they’re more likely to result in injuries.

Class codes affect your mod in two critical ways:

1. They Determine Expected Losses.
   Your mod compares your actual losses to the losses expected for businesses like yours. Those expectations are tied to the class codes assigned to your employees. Riskier class codes come with higher expected losses.

2. They Influence Your Premium Basis.
   Class codes help insurers calculate your premium. Misclassifying workers into lower-risk categories might seem tempting—but it’s risky business. If your insurer discovers misclassification during an audit, you could face:

   • Retroactive premium adjustments

   • Fines or penalties

   • Increased scrutiny on future policies

How Payroll Fits In

Payroll is the other crucial piece of the mod puzzle. Here’s why:

• Your payroll multiplied by the rate for each class code determines your expected losses.

• Expected losses become the benchmark your actual losses are measured against.

In simple terms, higher payroll equals higher expected losses. If your claims remain low relative to those expectations, your mod stays low. But if your payroll drops and your losses stay the same, your mod can actually go up because your losses appear higher than expected.

Here’s how that works.

Why Lower Payroll Can Raise Your Mod

Imagine a manufacturing company with:

• $10 million in payroll

• $500,000 in actual claims losses

With $10 million in payroll, insurers might expect, say, $450,000 in losses for this type of business. The mod would be close to average.

But what if the company cuts payroll to $6 million—without reducing losses?

Now, the insurer might expect only $270,000 in losses. The same $500,000 in actual losses looks far worse compared to the new, lower expectation. The result: a higher mod.

This is why it’s a mistake to think lower payroll always means lower workers’ comp costs. When actual losses stay the same, reduced payroll can increase your mod and your premiums.

The Danger of Misclassification

Employers sometimes try to save money by classifying employees in lower-risk categories than they truly belong in. For instance:

• A warehouse worker might be coded as clerical staff.

• A driver might be labeled as a sales rep.

It might look like a way to reduce rates, but it’s a high-risk gamble. Auditors check job duties, not just job titles. If they find discrepancies:

• You’ll owe back premiums at the higher rates.

• Your mod may increase due to higher recalculated expected losses.

• Insurers may flag you as a higher-risk account.

It’s far better to classify employees accurately from the start.

Best Practices for Payroll and Class Codes

Here’s how to protect yourself:

Review job descriptions regularly.
Make sure your employees’ job duties match the class codes assigned.

Keep detailed records.
Documentation makes audits smoother and helps justify classifications.

Separate clerical staff physically.
If you have clerical employees, keep them in separate areas away from production to support their lower-risk classification.

Consult your broker or insurer.
If in doubt, ask for help classifying roles properly. It’s better to get it right upfront.

Understand your audit rights.
Know how audits work and what records you’re required to keep.

The Bottom Line

Your experience mod isn’t just driven by injuries and claims. It’s shaped by the foundation of your workers’ comp program: your payroll and your class codes.

Accurate reporting and proper classification:

• Keep your premiums fair.

• Protect you from costly audit surprises.

• Help maintain a healthy mod—and a competitive edge.

Don’t let a hidden mistake in class codes or payroll records drive up your costs. The details matter, and managing them wisely can save your company thousands—or even millions—in workers’ comp expenses.

Michael Stack, CEO of Amaxx LLC, is an expert in workers’ compensation cost containment systems and provides education, training, and consulting to help employers reduce their workers’ compensation costs by 20% to 50%. He is co-author of the #1 selling comprehensive training guide “Your Ultimate Guide to Mastering Workers’ Comp Costs: Reduce Costs 20% to 50%.” Stack is the creator of Injury Management Results (IMR) software and founder of Amaxx Workers’ Comp Training Center. WC Mastery Training teaching injury management best practices such as return to work, communication, claims best practices, medical management, and working with vendors. IMR software simplifies the implementation of these best practices for employers and ties results to a Critical Metrics Dashboard.

Contact: mstack@reduceyourworkerscomp.com.

Workers’ Comp Roundup Blog: http://blog.reduceyourworkerscomp.com/

Injury Management Results (IMR) Software: https://imrsoftware.com/

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