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Workers Comp Class Code Reclassification & Reallocation:
What You Need to Know
What Is Code Reclassification in Workers Compensation?
A reclassification occurs when a workers' compensation insurance company (normally the Auditor) determines that a customers' workers comp classification is incorrect.
Reclassifications (or correction of classifications) occur when duties of the employee or employees have not changed. They have consistently performed the same duties and no change in job functions has been initiated by the employer. This correction can happen during a policy period or after an audit, and it often results in a difference in premium — sometimes a significant one.
The difference between a reclassification and a reallocation (see below) is subtle but this consistency of job duties is important for distinguishing between them.
What Is Code Reallocation in Workers Compensation?
Payroll is reallocated when an employee or group of employees has changes in their normal job duties to activities that would fall under another class code already listed on the policy. This can happen when an employee wears multiple hats and spends portions of their time in activities that should be allocated to different codes. If not done properly, businesses may end up overpaying (or underpaying) for their coverage.
Real Example: The Shop Manager Reclassification
Let’s look at a real example that led one client to call us in frustration:
Insurance Company: "It appears that you have reported [Bob Smith's] payroll under the clerical class code 8810. The auditor moved his payroll to the Machinery Mfg. class because he has some shop exposure. This reclassification has generated an additional premium of $6,146."
Our Client: "Bob is clerical only. He spends nearly all his time in his office. He doesn’t use tools or work on equipment. He only enters the shop to check on progress or deliver change orders."
Auditor: "Given that the employee is a shop manager and supervising shop employees, Machinery Mfg. would be the proper workers comp code. In order to be classified in code 8810, you have to be separated from all operations 100% of the time."
Having to be separated from all operations 100% of the time isn't exactly true. But, despite the reasoning given after the fact, this reclassification was based solely on job title — "Shop Manager" — during a phone audit. It wasn’t based on a physical review of the employee’s actual job duties or the employer's physical premises.
With some effort were able to get this corrected for our client. We've worked with clients who have had entire departments reclassified in this manner. Think about the financial hit you'd take if a staff of 20 or more, say, engineers were reclassified into a manufacturing workers comp class code. The difference between codes can be dramatic. Moving an employee from a low-risk clerical code (like 8810) to a higher-rated class (like Machinery Mfg.) can cost many thousands of dollars in additional premium for a single employee
How to Prevent Work Comp Code Reclassification Problems
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Maintain detailed job descriptions
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Update job descriptions if they haven't been reviewed in a long time
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Use time-tracking if employees wear multiple hats
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Have a pre-audit review with a work comp specialist
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Educate internal staff on documentation and classification risks
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Does your website accurately reflect your services? Do you list some that you "could" perform but dont? This could cause confusion for a remote auditor who's reviewing your website
How Do Insurance Carriers Misclassify Employees?
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Relying on job titles, not job duties
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Discontinued practice of physical audits / over reliance on remote audits
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Using NOC (Not Otherwise Classified) codes without exploring more specific ones
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Conducting phone audits with limited understanding of the business
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Misinterpreting rules on supervisory personnel
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You have formal job descriptions that overstate what your employees actually do
What To Do If You’re Reclassified Into New WC Codes
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Request the "auditor’s worksheets" from the auditor and specifically say in your request that you want the "complete set of auditor's worksheets including the Description of Operations." Review DOS for justification of workers compensation class codes applied
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Prepare a clear description of the employees' duties
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Challenge the reclassification with the help of a specialist (recommended)
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File a dispute with the carrier or NCCI if it isn’t resolved
What Is Code Reallocation in Workers Compensation?
Payroll is reallocated when an employee or group of employees has changes in their normal job duties to activities that would fall under another class code already listed on the policy.
This can happen when an employee wears multiple hats and spends portions of their time in activities that should be allocated to different codes. If not done properly, businesses may end up overpaying (or underpaying) for their coverage.
For example: A Multi-Trade Construction Company
Let's say you're a construction company that performs the following types of work:
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Framing and rough carpentry that is classified as Carpentry 5645 – Construction of Residential Dwellings Not Exceeding Three Stories in Height – For employees performing framing and rough carpentry on qualifying residential projects.
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Concrete foundation work that is classified as Concrete Construction 5213 - For employees engaged in foundation forming, pouring, and finishing.
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Roofing installation classified as Roofing 5551 - For employees performing roof installation or tear-off.
You have employees who do different kinds of work — for example, some might spend part of their week on roofing crews, and part of their time doing framing or concrete work.
How Reallocation Of Workers Compensation Payroll Can Cost You Money
Unless you’re tracking their hours by the type of work they’re doing each day, the insurance company has to assume they’re doing the most dangerous job all the time — in this case it would mean roofing. The insurance company would reallocate the employees' payroll to the workers comp code for roofing; 5551.
On the other hand if an employee (or employees) perform all three of these operations independently at separate job sites and your company keeps accurate time records for each employee’s hours by job type, then you can allocate payroll among the various applicable wc codes taking of the lower rates.
To reallocate the payroll, there must be an allocation of payroll to that classification in the current policy term. Reallocation does not apply to classifications added to a policy on an "if any" basis. Also, disputing a reallocation of payroll is more difficult than fighting a workers comp code reclassification. Most states (not all), for example, will allow reallcation to at final audit although a few strictly forbid it.
FAQ: Workers Comp Code Reclassification
Q: Can I dispute a reclassification?
A: Yes. You have the right to challenge any change you disagree with and provide supporting documentation. In fact there is language in your policy giving you the right to a reaudit anytime within 3 years of the policy expiration date.
Q: Is reclassification common?
A: Very. Especially involving Standard Exception class codes like 8810 and 8742 as well as most of the construction-related classification codes. In fact, it's not only insurance companies who reclassify their customers. One of our most popular blog posts addresses the subject of NCCI's inspection and reclassification activity. Read What Everyone Ought To Know About NCCI Codes.
Q: Will reclassification affect my Experience Mod?
A: Yes. Your policy classification codes are supposed to match the workers comp codes on your Experience Modification Worksheets. The second you are reclassified your Experience Mod is wrong. Your insurance company could easily be double dipping on your account; more premium from more expensive classification codes and an Experience Mod that is higher than it should be.
Q: What if my auditor didn’t visit my site?
A: This increases the likelihood of errors and overcharges considerably in the form of misclassification and reclassification. Remote Audits and Phone Audits are common and on their way to being the norm in the industry. See my advice above under "What To Do If You’re Reclassified Into New WC Codes" above and follow the suggestion about requesting your auditor's worksheets.
Stuart Cytron ● stuart@cytrongroup.com ● 314.757.8079 ● Sitemap
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