Class Code Verification is when specific information gets reviewed to determine the appropriate class code assignment. It sounds easy enough, but simple oversights and misinterpretations can fail to apply the correct class code to a particular job accurately. It can result in erroneous bids, premium adjustments, false experience MOD promulgation, reinsurance exclusions, insurance cancellations, non-renewals, or denials.
The National Council on Compensation Insurance (NCCI) publishes a Scopes Manual listing all workers’ compensation codes to classify specific jobs. However, state exceptions, exclusions, operations covered or not covered, scope, and appendices can get overlooked. It can take years to develop a keen understanding and working knowledge of the Scopes Manual.
Why is Class Code Verification Important?
Temporary Staffing companies succeed or fail based on effectively managing their workers’ compensation mechanism. Their profit margins tie in directly to their workers’ compensation premiums. Verifying and applying the correct class code to temporary placements is critical to projecting accurate workers’ compensation premiums.
Temporary Staffing companies base their markups on the cost burden developed by certain factors, including pay rates, state and federal taxes, employee benefit costs, and the workers’ compensation class code rates
associated with the position supplied to their client. For instance, a warehouse employee getting placed with a retail clothing store in Florida. Should this position be classified as 8018 with a $3.65 (2015 FL) rate or 8008 with a $1.96 (2015 FL) rate?
There is a 54% difference in these rates. Let’s assume that ten full-time employees were getting placed with the client at a $12.00/Per Hour rate resulting in a gross annual payroll of $249,600. If class code 8018 were used, the workers’ compensation manual premium expense would be $9,110.40, and if class code 8008 were used, the resulting manual premium would be $4,892.16.
In the preceding example, $4,218.24 in manual premium is in question. How can a competitive billing rate be developed using numbers that may contain variances in the thousands? The short answer is it can’t.
Adjustments
The insurance carrier has the right and obligation to correct misclassifications and apply the correct rate when they get discovered.
Most misclassifications get discovered by the workers’ compensation auditor during the final audit process.
However, underwriters, adjusters, NCCI inspectors, and even competing agents can make discoveries.
An adjustment means that misclassification is corrected, and the applicable rate gets factored against the associated payrolls. Insurance carriers can retroactively apply corrections in some states going back three years. The initial
classification determines whether the reclassification results in a return of premium or an additional premium.
Misclassifications can result in losing bids to your competitors or unexpected shrinkage of profit margins due to applying incorrect rates to your burdens.
Misclassifications can also adversely affect the accurate promulgation of experience modification factors. Incorrect premiums skew loss ratios, and claims are skewed by applying incorrect class code ELR & D Ratios resulting in erroneous experience mods.
Insurance carrier underwriters tend to decline offering quotes when misclassifications get discovered during the underwriting process.
They do this because the information submitted is unreliable. The premiums, loss ratios, and experience modification factors are all in question and cannot be relied upon to understand the exposures properly.
Understanding the Governing Class Code
Generally, the basic rule for classifying temporary employees is the placement either falls under the true definition of 8810 Office Clerical or the governing class code of the client in that state. It is important to note that there are exceptions to this rule, and although rare, these exceptions can affect the proper classification of the temporary placement.
In short, the Governing Class Code represents the class code associated with the highest amount of payroll related to the principal operation.
For instance, if a temporary employee started as a forklift driver in a warehouse environment and the clients governing class code was 8018 (STORE—WHOLESALE—NOC), the forklift driver would get 8018. However, if a receptionist started at the same client’s location and strictly worked in an office environment, the employee would be assigned to 8810 (CLERICAL OFFICE EMPLOYEES NOC). At the same time, if a temporary employee began as a delivery driver with the same client, class code 7380 (DRIVERS, CHAUFFEURS, MESSENGERS, AND THEIR HELPERS NOC—COMMERCIAL) would get consideration for this placement.
However, the agency must consider many nuances.
For instance, a temporary employee could start as a health & fitness club receptionist. The club’s governing code might be 9063, and in most cases, class code 8810 may not get used.
When Should It Be Done?
A comprehensive class code verification should get performed before going to market for workers’ compensation renewals.
Governing Class Codes can change annually since they are affected by predominant payrolls, operation changes, and even fundamental manual changes.
Class Code Verifications should also be performed when adding a new client, adding a new position with an existing client, or adding a new location with an existing client.
Verifications should also be performed for any class codes that an auditor changes during the final audit process or adjuster following a claim. Auditors, adjusters, and underwriters are not always right regarding class codes.
A good broker can help resolve any disputes regarding class code assignments.
Who does it?
Your insurance broker should take the lead by implementing a consistent, documented verification process. The process should involve the staffing company, the broker, the insurance program manager, and the carrier. If needed, NCCI or the respective state rating bureau can settle disputes.
The staffing company is responsible for supplying accurate information regarding their client and the type of placement.
Using the information provided, the insurance broker should research the appropriate code and communicate this information to the carrier through the proper channels. The insurance carrier should review the information provided, make the final determination concerning the class code, and give a policy endorsement.
What information is needed?
The verification process should receive proper documentation. The client’s state, governing class code, final product or service, job site
environment, and job duties receive consideration when making a class code determination. It is important to note that class code determinations are provided based on the staffing company’s information. If the information provided is not accurate or complete, the final decision may be affected.
At the minimum, the staffing company should provide their broker with:
- Client Company Legal Name
- Client Company D/B/A
- Client Website]
- Client FEIN
- Client Corporate Physical Address
- Client Corporate Final Product or Service
- Client Corporate Description of Operations.
- Client Jobsite Physical Address
- Client Jobsite Final Product or Service
- Client Jobsite Description of Operations
- Temporary Employee Job Title
- Temporary Employee Job Description and Duties
- Written Job Description
The Class Code Verification process is not subjective, but at the same time, it is not black and white either. It takes an experienced broker with an in-depth understanding of the Scopes Manual. He will work with the insurance carrier and state rating bureaus to provide accurate class code determinations to their clients.