Workers' comp class codes and why they matter

A workers' comp class code is a four-digit number that describes what your employees do and sets the rate you pay per $100 of payroll. Classification is usually the single largest driver of a comp premium, because rates for hazardous work such as roofing are many times the rate for office work. A wrong code can overcharge you for years or surface at audit as a large bill, so it is worth understanding how codes are assigned and how to challenge them.

What a class code is

The system is built on groups of similar employers. NCCI and the independent state bureaus publish classification manuals that describe each code in words, and the insurance department in each state approves the rates for those codes. Everyone assigned to the same code pays the same manual rate in that carrier's program, before the mod and other adjustments. The idea is that employers in the same class share roughly the same injury risk, so the class rate reflects their combined loss experience (class code).

Most states use the NCCI Basic Manual and Scopes Manual. Not all do. California, Delaware, Michigan, New Jersey, New York and Pennsylvania, among others, rely on their own bureaus or their own rating plans, and the four monopolistic states use state fund classification systems. A code that looks the same in two states may carry different wording and a different rate. See California for the WCIRB system and Michigan for the Compensation Advisory Organization of Michigan.

Governing classification

The basic idea is that the business as a whole is assigned to one governing classification that describes its principal operations, and all employees working in or around those operations take that code, even if some of their duties differ. A restaurant's cooks, servers and dishwashers share the restaurant code. A general contractor that frames houses is in a carpentry code, not a mix of codes for each task.

Two rules work around that:

• General inclusions. Operations that look like separate businesses but are part of every business, such as a cafeteria, store or day care run for employee use, are included in the governing class rather than classified separately. The exception under the rules is when those operations occur alongside construction, erection, lumbering or mining; there they are classified separately.
• General exclusions. Certain operations, such as new construction or alteration work, aircraft operation, stevedoring and sawmill operations, are excluded from the governing class and take their own code when the business performs them.

Standard exception classifications

Some jobs are common to every industry. The rules carve them out so a clerk or outside salesperson is not charged the roofing rate. State rule texts that adopt the NCCI manual list these standard exceptions, among others:

To use a standard exception, the employee's duties must meet the conditions in the rule. For clerical, those conditions limit duties to listed office tasks such as keeping records, phone work and data entry, and employees who also perform other work in the shop or on the job site generally do not qualify. Some states allow incidental non-clerical duties such as taking a bank deposit or picking up the mail without losing the clerical code. The code also does not apply where the governing class already includes clerical staff. Rules and conditions differ by state and are revised, so ask your agent which edition applies. A business that incorrectly claims 8810 for someone who works partly in the field is a leading cause of audit reclassification.

Examples of how the code shapes the bill

Illustrative codes under the NCCI system include 8810 for clerical office employees, 8742 for outside sales, 5551 for roofing, 5183 for plumbing, 5190 for electrical wiring and 5537 for heating or air conditioning installation and service. Restaurants and retail stores have their own codes, and a code description can be narrower than its name suggests. Check the manual wording rather than a "this looks right" feeling. The difference between codes can be enormous. In NCCI's training example the roofing rate was $63.171 per $100 of payroll versus $0.750 for clerical, a difference of about 84 times in that illustration. Those figures are examples from one document, not quotations for any state today. Browse General contractor insurance, Roofing contractor insurance, Restaurant insurance and Retail store insurance for the exposures typical of each trade.

Class also flows into the experience mod. NCCI's formula calculates each employer's expected losses from the expected loss rate for its classes, so assigning a more hazardous code raises expected losses and can lower your mod, while a cheaper code does the reverse. The two should not be traded against each other; the point is that the code touches both pricing and the mod (The experience modification rate (EMR) explained).

How classifications are checked

1. At quote. The agent or underwriter asks what your business does, which jobs exist and what share of payroll each carries.
2. By inspection. A carrier may send a loss control or classification inspector to see operations, and may require changes.
3. At audit. The premium auditor compares payroll records with the code, interviews you about duties and may move people to a different code (premium audits: how they work and how to prepare).
4. On the bureau side. Reclassification can be requested or disputed through the rating bureau. NCCI has a dispute resolution process for classification disagreements, usually after you have raised the issue with the carrier.

When to challenge a code

Raise the question if your operations changed, if the code wording does not describe your work, if the auditor split a role you believe belongs in the governing class, or if a similar business pays a different code. Gather evidence: job descriptions, photos, contracts, payroll by employee and by task, and a short written description of what the work involves. Ask the carrier to put the classification question in writing and to cite the manual rule. If you disagree, ask how to request a review by the rating bureau. State rules vary on deadlines, and a correction normally applies going forward, with limits on retroactive changes, so act at the first sign of a problem, not at the end of the policy.

Do not choose a code to make the quote cheaper. Deliberately misclassifying employees to cut premium is a form of premium fraud and can trigger penalties, cancellation and a surcharge (commercial insurance fraud: premium fraud and staged claims).

Checklist before you bind

1. Write down what each employee does in a normal week.
2. Match each job to a governing class or standard exception using the manual wording.
3. Ask for the code, rate and payroll estimate for each class in writing.
4. Separate payroll by class in your records.
5. Report new operations, such as installation or delivery, during the term.
6. Use the workers' comp premium calculator to test how a different payroll split changes the total, and read how workers' comp premiums are calculated for the full formula.

Key takeaways

• A class code sets your rate per $100 of payroll; it drives more of the premium than almost any other factor.
• A business takes one governing classification, with standard exceptions for clerical, outside sales and drivers under specific conditions.
• Some states use their own bureau codes and wording instead of NCCI's, so confirm for your state.
• Audits and inspections regularly reclassify employees; keep job descriptions and payroll by role.
• Correct a misclassification in writing with documentation, and never pick a code purely to cut price.