Staffing Company Class Code Assignments: A shot in the dark?




For a staffing company, determining the correct workers’ compensation class codes for their clients and applying the valid class code for their employees working at their client’s location could mean profit and loss, remaining in business, and closing your doors. Ultimately, the staffing company is held responsible and will have to pay for the difference between the correct class code/rate and the class code/rate used.

What Does This Really Mean? 

In 2006, I received a phone call from a staffing company owner in California. The owner was desperate. He explained that his company had recently received a workers’ compensation audit bill from the state workers’ compensation fund for over $80,000 and a policy cancellation notice if they had not paid the audit within 10 days.

The staffing company had used an incorrect class code for their largest client, a company that distributed small electronics. The staffing company provided employees who worked in their client’s warehouse and performed picking, packing, shipping, receiving, and forklift duties. The staffing company used class code 3681 – TELEVISION, RADIO, TELEPHONE, OR TELECOMMUNICATION DEVICE MFG. NOC for their employees working for this client. At the time, the rate for this code in California was just over $2.00. Additionally, employees used this number to develop the pricing for their clients.

During the audit, the findings revealed that the correct class code for the staffing company client was 8292 – Warehouses—General Merchandise—NOC with a rate of over $11.50, a difference of about $9.00. As a result, the insurance carrier reclassified all the payroll for this client’s location and demanded payment in full. Subsequently, the staffing company went out of business. They couldn’t pay the $80K. Also, they couldn’t move their workers’ compensation to another carrier without disclosing unpaid premiums to their past carrier. And they couldn’t go back to the client and adjust their pricing. And they couldn’t continue to base their pricing on a $2.00 rate and pay a rate over $11.50.

When I asked the staffing company owner why they used class code 3681, he explained that was the code the client told them. Unfortunately, that’s not how it works – ‘it’s not how any of this works’!

In 2008, I received a call from a staffing company in Texas. The staffing company worked primarily for the energy industry with mobile welders that worked on oil pumping stations. The company was loss-free, had a credit mod, and was very profitable. The owner explained that she had purchased the company from the prior owner, making no changes to their operation or the preceding owner’s class codes.

When an employee reported an eye injury, the owner sent the employee to the clinic. The employee received treatment for their injuries, and the clinicians released them for full duty. Although it was a minor injury, the bill from the clinic was under $200.00. The owner submitted the first report of injury to the insurance carrier. Upon receiving the FROI, the adjuster processed the claim as a ‘report only.’

However, upon review, the adjuster questioned why an office clerical (8810) employee performed welding duties? The prior owner had misclassified their largest client, so the company seemed to be so profitable.

The carrier performed a mid-term audit, reclassified the entire account, and applied the correct classification. Again this forced the staffing company out of business. Again, that’s not how it works – ‘it’s not how any of this works’!

So How Does It Work?

In short, the staffing company is ultimately responsible for applying the correct class codes for employees placed at their client’s locations.

Every business entity is assigned a class code that reflects its operations. The rate charged for that code reflects the exposures to loss common to their operations. Unfortunately, there may not be a class code that explicitly describes every type of business. In this situation, an entity would deliver classifications that closely reflect that business’s operations.

What’s the Classification Rule for Staffing Companies?

Most staffing companies don’t understand that when they place an employee at a client location, they must either assign them under the governing class code for that client in that location or, as the rules apply, to Office Clerical (8810). There are exceptions to this rule, but very few.

What is Needed to Determine the Correct Classification?

At a minimum, the staffing company should obtain the following information about their client and engage their insurance agent and workers’ compensation underwriter.

The insurance carrier/underwriter will assign a class based on the information provided. However, the carrier can change the class code to avoid misclassification when they obtain additional information. Auditors are notorious for reclassifying codes which can cost your company additional premiums and skew the pricing to your client.

  • Company Legal Name
  • Federal Employee Identification Number (FEIN)
  • Company Physical Address
  • Jobsite Physical Address
  • Description of Operations, including Final Service or Product

Your agent should research this information before forwarding it to the underwriter. It might include analyzing the information provided on the company, state workers’ compensation and rating bureau websites, business entity websites such as Manta, Facebook pages, LinkedIn, and insurance industry-specific sites. The more information provided at the time of the inquiry, the less of a chance for an adjustment by the insurance carrier during or at the end of the policy period.

What Other Information is Helpful?

  • Rating Bureau ID (NCCI or State Rating Bureau)
  • Company Website
  • NAICS Classification (North American Industry Classification System)
  • SIC Classification (Standard Industrial Classification)
  • Job/Position Descriptions (Not to be confused with Work Orders or PO’s)
  • Brochures or other company literature
  • Parent Company Legal Name
  • Parent Company Federal Employee Identification Number (FEIN)
  • Parent Company Physical Address

Don’t confuse obtaining a classification/class code with approval for that classification/class code from your insurance carrier?

Just because you know the correct class code doesn’t mean your insurance carrier will approve using that code. It could be because there is a reinsurance exclusion for that code. Or it might be due to a review of the client’s loss or OSHA history. Or simply because the insurance carrier excludes that class of business altogether. Your carrier has the right to exclude any classification from your policy.

Each carrier has its own procedures for endorsing class codes to a policy. Some carriers require that all new clients get approved before placing any temporary employee at that location. Others let the staffing company use any code not explicitly excluded. Some request 941’s quarterly throughout the policy period and adjust premiums based on the principles approved. It is important to remember that the workers’ compensation auditor can make any necessary corrections/adjustments to the policy period based on the information at their disposal.

Therefore, it is imperative that all class codes get approved by the insurance carrier and endorsed to the policy before making the temporary placement. In addition to the information above, the insurance carrier should receive the following information.

  • Job/Position Description
  • Detailed Description of the Duties/Tasks the Employee(s) will be performing at or from the Jobsite location
  • Detailed Description of any unusual tasks, airborne exposures, or any other potential hazards to which your employees (Temps) might get exposed at the job site location
  • Number of Employees provided.
  • Length or Job Assignment Term
  • Average hourly payroll rate for this placement
  • Gross Payroll for the Term

Once a staffing company submits the information to the insurance carrier, it should take less than 24 hours for approval. Your insurance agent should oversee this process to ensure that they agree with the assigned code based on the information provided.