Earlier today a client presented an issue that comes up quite often with small businesses, especially contractors.  Confusion over how to classify employees for Workers’ Compensation policies.  Once businesses get beyond this first hurdle, it is often not clear as to how to accurately predict payroll for the upcoming year.  If you have these concerns, you are certainly not alone.

Many business owners want to be as clear and honest as possible to the insurance carrier so that the carrier understands their exposure; & to ascertain they are covered for the activities of their employees.  It is typically a good idea to look at the business from both a Macro & Micro Perspective, to make sure nothing is missed.

You want to define what you do as a business; & then specifically, how your employees execute those tasks.  Two businesses within the same industry will often have very different executions which can affect their Workers’ Comp dramatically.

For example, one Insurance Brokerage might work exclusively off of the phone, so their employees would only have a clerical exposure; whereas another might have salespeople driving around knocking on doors thereby having an expanded exposure.

While it is important to list & identify every activity performed by employees, some or many may not be listed as a class code on your policy.  Especially those that are ancillary to the main tasks performed by employees, also known as the Governing Class Code.  The Governing Class Code is typically the one that generates the most payroll.  Often times, other activities with no specific class of their own will be grouped in with the Governing Class Code.

This is OK!  Many times the Governing Class Code will have the letters NOC afterwords; this stands for Not Otherwise Classifiable.  The respective States have already imagined that your specific employee activity might not fit exactly how the codes are created & have this system to capture all of the payroll.

Once you subdivide your payroll by activity, you need to project annual payroll.  This is a pure guesstimate.  The carrier does not expect you to be able to accurately project the total dollar figure; nor do they limit you to the exposures listed on the policy – provided you were honest when you had your policy issued.

You give them your best guess.  In a years time they will audit the premium to ascertain the payroll & exposures were accurate.  In the event you had an added exposure i.e. you are a painter & you expanded into drywall, they will cover you for losses and will charge you for that exposure retroactively.

The takeaway is that you need to communicate truthfully and honestly to the best of your ability your projected exposures for the upcoming year.  Assuming you are working with a qualified professional, you need not be concerned, that there is not an exact matchup of class codes for each work category as the class code structure may group some of your employees (that you think are separate) into one category from a Workers’ Compensation exposure.