Buying a Contractor? Workers' Comp, Mod, Audits

For a general contracting company, workers' compensation is rated by the work your people actually do, so field crews, supervisors and office staff can land in different class codes (the categories that set the rate per $100 of payroll). Your payroll records decide whether that split holds up at audit. You also usually inherit the seller's experience mod, a multiplier on your premium that compares past claims with similar businesses. The rating rules in NCCI states and several others ask you to report the ownership change to your insurer within 90 days, and uninsured subcontractors can add to your bill. This guide is for buyers of a general contracting company, wherever it works. Rules vary by state and by rating bureau, so use the examples below as questions to ask, not answers about your policy.

The short answer

Class codes classify the business and the work, not job titles. A general contractor can have more than one class, but one employee's pay can be split only if records show actual time and pay in each class.
Without proper records, an employee's pay goes to the highest-rated class involved, which is why job-by-job payroll records are a diligence item.
The seller's mod usually follows the business, even in an asset purchase into a new company. Report the change to your insurer within 90 days where your policy or state rules ask for it, and ask your broker whether yours do. The rating organization decides the result.
Subcontractors do not remove you from the picture: an uninsured sub's payroll can be charged to your policy at audit, and some states make the contractor responsible for the sub's injured workers.

How do a contractor's employees map to class codes?

A general contractor does not have one natural class code. The codes that fit depend on the work performed, the building type and the state. The Massachusetts rating bureau, an independent bureau whose wording can differ from the National Council on Compensation Insurance (NCCI), publishes scopes that show how the logic works. Use them as an illustration and ask your broker which bureau and wording apply to you. California, Pennsylvania and Delaware use classification systems that differ from NCCI's.

How duties can map to classes, using Massachusetts bureau text as an example
Employee group	What the group does	Example of how the Massachusetts bureau treats it
Carpenters on residential dwellings up to three stories	Framing, siding, doors, windows, stairs, decks, trim	Code 5645, when a single contractor responsible for the whole project does the work
Carpenters on commercial or larger residential buildings	Carpentry not otherwise classified, wooden decks and bridges	Code 5403, with concrete forming, fences and building raising sent to other codes
Project managers and superintendents	Split time between office and sites	Code 5606, only if duties qualify. Anyone directly in charge of or doing construction goes in the class for that work
Clerical and bookkeeping staff	Bookkeeping, scheduling, office support	Code 8810 only if the work area is separated from operating hazards by walls, partitions or counters
Estimators and outside salespeople	Price work, sell, meet customers, often visiting sites	Code 8742 only if duties fit; estimators who visit job sites may fit neither 8810 nor 8742, so ask how the bureau rates them

Under the Massachusetts text, anyone directly in charge of or doing construction work goes in the class for that work. Ask your insurer how your state treats foremen.

How do payroll estimates and audits work for a contractor?

The premium starts as an estimate. After the policy ends, the insurer sets the final premium from actual payroll and the correct classes, and you pay any balance or receive a refund. The standard policy lets the insurer audit your records during the policy period and for up to three years after it ends. Examples below come from the NCCI Basic Manual as published by the North Carolina Rate Bureau, which we call "the manual". Other states differ.

What counts as payroll. Payroll generally includes wages, commissions and bonuses; the extra overtime portion is excluded only if records show it separately.

Whose audit is it? In a stock or membership interest purchase the company that holds the policy stays the same, so the next audit can include payroll and subcontract costs from before closing. In an asset purchase the audit on the seller's policy is normally the seller's, and policy rights cannot be transferred without the insurer's written consent, so your new company needs its own policy. The purchase agreement decides who bears the cost. Some state fund states, including Ohio and Washington, have successor rules that can reach a buyer for the seller's unpaid premium, so do not rely on the default without counsel. Ask deal counsel, and ask the seller for the last audit and any open audit balance.

If crews cross state lines, ask your insurer where payroll is reported, because bureaus differ.

See workers' comp payroll estimates and audit bills and premium audit.

What happens when a subcontractor or a 1099 crew has no coverage?

The standard policy bases premium on what you pay your own people and on what you pay anyone else doing work that could make the insurer liable, such as a sub with no workers' comp of its own. With no payroll records for them, the contract price may be used as the premium basis, unless you show the sub's employer lawfully secured workers' comp, usually with a certificate of insurance. Whether a sub's workers could make your insurer liable depends on your state's statutory employer law.

In the manual, an uninsured sub's charge is classified as if its workers were your employees, and your mod applies. With no payroll records, the share of the contract price treated as payroll is:

90 percent of price for labor only
50 percent for labor and materials
33 and one third percent for mobile equipment with operators
100 percent for piecework

Other bureaus may differ, and some states make the contractor responsible for an uninsured sub's injured workers.

A hypothetical example. A framing sub your company has used for years lets its workers' comp policy lapse, and one of its workers falls from a second-floor deck. Two weeks later your own auditor asks for that sub's certificate. Does your file show the lapse, can you be liable for the worker's benefits in your state, and how will your audit treat the sub's payroll? The answers depend on the state and the paper in your file, so collect current certificates before each sub starts, not after an injury.

Worker classification adds a second risk. Massachusetts presumes a person performing a service is an employee unless three conditions are met, and New York's labor department states the same three conditions for its Construction Industry Fair Play Act. The test that decides who counts for workers' comp premium differs by state, so ask your insurer and take the employee-or-contractor question to your employment attorney. See 1099 contractors and workers' comp audits for a new owner and workers' comp for 1099 contractors.

What happens to the mod and the rating when ownership changes?

When a business changes hands, its past payroll and claims usually follow it. Under NCCI rules a change in ownership includes buying stock or membership interests, buying assets and taking over operations, a merger, and forming a successor entity. So a new limited liability company (LLC) formed to buy all of the seller's operations generally does not start with a clean 1.00 mod. Buying only part of the operations works differently (see the FAQ), and independent bureaus can differ.

Report it within 90 days where your policy asks. In NCCI states and several bureau states, the policy or its ownership endorsement asks you to tell the insurer, whether or not a mod applies now. The report usually goes through the rating organization's ownership form, online tool or a signed letter, and some bureaus use their own route, so ask your insurer which applies.
Expect the bureau to decide. A recalculated mod applies back to the date of the change under current NCCI rules, up or down. For a contractor the stakes are higher, because most payroll sits in high-rated field classes, so one bad year can weigh heavily on a mod that is recalculated back to the closing date.
Do not count on exclusion or late reporting. Dropping the seller's experience is rare and needs a near-complete change of owners, a large change in operations and a change in work process and hazards. NCCI manuals say failing to report may be treated as mod evasion, leading to corrected, possibly retroactive, mods.

State structures differ:

Independent bureaus set their own classifications and many rules. Indiana, Massachusetts and North Carolina use NCCI's experience rating plan.
North Dakota, Ohio, Washington and Wyoming run state funds that private insurers cannot replace (Wyoming's rules differ by industry). Employers there usually add stop-gap employers liability coverage separately.
Texas is an NCCI state, but most private employers there may choose not to carry workers' comp.

For payroll providers and professional employer organizations (PEOs), see pay-as-you-go workers' comp and PEO vs your own workers' comp. See reviewing an experience mod for errors and experience modification rate.

As the owner, do I have to be covered?

It depends on your state, so ask your broker for the rule in writing. Officers' payroll is part of the premium base under the standard policy, so assume it is rated unless your state and insurer confirm an exclusion. Put three questions to the broker:

Is my own pay in the premium base in my state, or can it be excluded?
How is it rated if I work in the field part of the week?
Does my lender, surety or customer contract require owner coverage regardless?

In some states the answer also touches the contractor license. In California, a licensee must keep either a certificate of workers' comp coverage or a valid exemption on file with the licensing board, and a lapse suspends the license. An exemption is generally not available if the company employs anyone subject to the law, and some classifications (for example roofing and concrete) must carry coverage even with no employees. Confirm with the board.

The license and bond are a separate track: contracts, licenses and bonds for a general contracting company. For the first-month checklist, see what insurance you need after you buy a general contracting company.

What should you ask the broker and the insurer?

Which rating bureau applies in each state where we work, and are any served by a state fund?
Which class codes are on the policy, why, and what wording does the bureau use for each?
What records do you need to split an employee's pay between classes?
How will our audit treat subcontract payments, and what proof do you want for each sub?
When was the ownership change reported, who filed it, and what did the bureau say?
Is there an open or pending audit on the seller's policy, and which entity owes it?

Ask for answers in writing. Neither Morrow nor any broker can promise a mod outcome. The rating organization decides.

Keep reading

Frequently asked questions

What class code does a general contractor use for workers' comp?

There is no single general contractor code. The codes depend on the work, the building type and the state, and the insurer assigns them. Ask your broker which codes your policy uses and why.

Can I split one employee's pay between class codes?

Only if your records show the actual time and pay in each class. Percentage estimates are not allowed under the NCCI basic manual as published for North Carolina, and other states may differ. Without records all of that employee's pay goes to the highest-rated class.

Do I inherit the seller's experience mod?

Usually yes. Under NCCI rules the seller's experience generally transfers to the buyer who takes over the operations, in a stock or asset purchase, and a new LLC does not reset it. If you buy only part of the operations, it depends on whether the seller's insurer can separate that part's experience. The rating organization decides, and exclusion is rare.

Am I liable for a subcontractor's injured worker?

It depends on your state and on whether the sub has workers' comp. Some states make the contractor responsible for an uninsured sub's employees, and an audit can charge you for that payroll. Collect current certificates and ask your attorney or broker.

When do I have to report the change in ownership?

In NCCI states and several bureau states, the policy or its ownership endorsement requires notice to your insurer within 90 days of a change in ownership. Confirm your state, report even if you have no current mod, and keep a copy of what was sent.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

Workers' Comp, Payroll and Class Codes for a General Contracting Company