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Construction Workers Comp Codes
Separation Of Payroll - Why Contractors Should Be Familiar With Construction Workers Comp Codes
It's always important to properly classify your business' operations. But construction firms, in particular, can benefit from the ability to separate individual workers' payroll into multiple workers comp class codes.
A construction worker is allowed to have his/her payroll separated and applied to more than one workers comp class code. This can be a valuable tool to control workers compensation insurance costs if done correctly.
The responsibility is the employer's for keeping proper payroll records to separate between different workers comp codes; not the insurance company auditor's. If the employer's records are not sufficient to properly separate payroll among the appropriate workers comp class codes, the auditor will apply the highest rated (most expensive) workers comp class code applicable.
But, this can be a very valuable activity. Just scroll down to the Table of Construction Codes at the bottom of this page and search "Carpentry" or "Concrete" to see the different codes that appear. These codes can have surprisingly different rates.
Example: Let's say you are a home builder who self-performs some of the work on your projects. And, you have a crew that does exterior carpentry and drywall.
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The carpentry work is would be classified as workers comp code 5645 and $13.28/$100 payroll.
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The drywall work would be classified as work comp code 5445 and priced at $5.93/$100 payroll.
If you keep proper payroll records, you can separate your crew's payroll between these 2 activities and pay the corresponding rate for each activity. However, if you don't keep the proper payroll records, your insurance company auditor is supposed to apply the higher rated workers comp class code ( 5645 - $13.28) to 100% of the crew's payroll. In this example you'd be overpaying your workers compensation insurance company more than double for the time your workers spend on drywalling!!!!!
Blog Post You May Find Interesting:
What Everyone Ought To Know About NCCI Codes
Complexity Of Construction Workers Comp Classification
To give you one example of many: In 2021 NCCI reported that Construction Workers Comp Code 0042 Landscape Gardening was the most misclassified workers comp code. And, it reported that 0042 was most frequently misapplied in place of workers comp code 9102 Lawn Maintenance.
On the surface it doesn't appear that there may be much distinguishing the 2 workers comp codes from one another. And, in fact, there does seem to be some overlap in the definition ("scope") of both work comp codes.
However, 9102 Lawn Maintenance is NOT a "construction workers comp code." The difference in pricing is substantial in most states. So, any business classified as 0042 that should be 9102 is paying a much higher rate that it should.
Contractor's Credit Premium Adjustment Program
Also, in states that offer a Contractor's Credit Premium Adjustment Program (CCPAP) for the construction industry, classification code errors can prevent you from receiving substantial discounts.
Qualification for a CCPAP credit is normally dependent on paying your workers more than your state's average hourly wage. These credits can be substantial as your wages increase above the average.
Take the example above though, if you were misclassified as 9102 Lawn Maintenance when 0042 Landscape Gardening is the proper work comp code for your operations, you wouldn't have a chance to apply for this credit much less even know it exists.
Workers' Compensation insurance companies are required to send you CCPAP applications when your policy is written with a construction workers comp code. If no construction work comp class codes, then you receive no application.
Contractor's Workers Comp Loss Costs Inflated
Another peculiarity of workers comp class codes occurs in states that offer a Contractor's Credit Premium Adjustment Program (CCPAP) for the construction industry. Construction workers comp rates are higher than they otherwise should be in these states.
I found this language in a Missouri filing with NCCI. Missouri modified the language in some of their CCPAP rules, and this was NCCI's opinion about any possible premium impact the changes could have.
“It is expected that there will be no statewide premium impact as a result of the proposed changes to the Missouri CCPAP since the contracting classification loss costs are offset by the average amount of the credit in order to maintain premium neutrality. The premium impact to individual risks will vary depending on the portion of that risk’s premium that is subject to this program. The amount of premium collected from contracting policies that are either not eligible for the program or have small credits may generally see a slight increase in order to offset the reduced premium collected from policies receiving larger credits under this legislative change.”
Loss costs are the starting point for rate determination. NCCI will report how much insurance companies may expect to pay in claims for every $100 of payroll per class code. Then, insurance companies determine their rates by building on top of the loss costs their individual pricing elements like overhead, marketing costs, underwriting profit, etc.
So the rating bureau inflates the loss costs for construction codes to account for the discounts carriers must award in the form of Contractor's Credits. And, at least in one case, loss costs don't just consist of losses.
Even Construction firms who receive CCPAP credits are paying the same inflated rates. There isn't anything we can do about this other than conducting due diligence, having a premium audit performed periodically, and ensuring you're not overpaying in areas you can control.
Construction Work Comp Class Codes And Your Experience Modification Rate
Keep in mind that if your Workers Compensation class codes are wrong, your experience modification rate is wrong too. Misclassifications can dramatically skew your EMR.
Stuart Cytron • stuart@cytrongroup.com • LinkedIn • (314) 757-8079 t