Restaurant Workers' Comp: Tips, Payroll, Audits

A restaurant's workers' comp bill is built from payroll and a class code, so the two things to get right are how your payroll is counted and which class the insurer assigns. Tips, automatic gratuities and employee meals are counted differently from ordinary wages. You also usually inherit the seller's experience rating (a score built from past claims). You must report the ownership change to the insurer, within 90 days under NCCI-style policy wording. This guide is for new restaurant owners who want to understand the audit before a surprise bill arrives. Class codes vary by state and by rating bureau, and the insurer or bureau assigns yours.

The short answer

Premium is generally a rate per $100 of payroll for each class code, times payroll in that class, times your experience modification.
In the North Carolina edition of the National Council on Compensation Insurance (NCCI) manual, optional tips are left out of payroll, automatic gratuities and service charges received by employees are included, and meals given as part of pay are included. Other states can differ.
Under NCCI rules the seller's experience modification (the mod) usually follows the business to you when you take over its operations, in a stock deal or an asset deal, and forming a new LLC for the deal does not by itself reset it to 1.00 (the neutral score). A partial purchase, a small payroll below the state threshold and some states work differently.
The insurer can audit for up to three years after the policy ends, and in a stock deal a post-closing audit can bill the company you now own for pre-closing payroll.
Workers' comp is required in most states, but Texas lets most private employers choose, and in four states (North Dakota, Ohio, Washington and Wyoming) it is sold through a state fund rather than private insurers.

Which class code will my restaurant be in?

A class code describes the business, not each person's job. The manual classifies your business as a whole in each state, and the main class for your location covers the people who work there. In a restaurant, cooks, servers, counter staff and managers generally sit inside the restaurant class rather than being split.

In states that follow NCCI-style classifications, the manual typically has a small family of classes:

A class for a restaurant not otherwise classified.
A class for fast food.
A class for a bar, tavern or nightclub.

Some states list more than one possible restaurant class, and states such as New York, Pennsylvania, Delaware, Michigan and California use different numbers or structures, so which applies is a question for the bureau or insurer. Read the code on the declarations page, compare it with what the restaurant really does and ask the broker to confirm it against the state manual. Do not treat any number in a table online as your code.

Standard exception classes can sit beside the restaurant class when duties meet the definition, per the North Carolina edition of the manual. The two most relevant to a restaurant are:

Clerical office employees (code 8810), if the clerical area is separate from operating hazards.
Outside salespersons (code 8742), for example a catering salesperson who works off site.

Whether delivery drivers fall inside the restaurant class or are treated differently varies by state, so ask the bureau or your insurer how they are handled where you are. If the auditor finds the real work does not match the codes on the policy, the insurer assigns the right classes, which can change the final premium. See workers' comp class code corrections.

What counts as payroll for a restaurant, and what about tips?

The rule turns on who controls the payment. In the North Carolina edition of the NCCI Basic Manual, tips or other gratuities that a customer may decline are excluded from premium payroll, while service charges and automatic gratuities received by employees, such as a set percentage added for a large party, are included. The value of meals given to employees as part of pay is included when it shows in the insured's records. State rules vary, so ask your broker how your state's manual treats each item.

Restaurant payroll items and how the North Carolina edition of the manual treats them
Payroll item	In premium payroll?	What to check
Hourly wages and salaries	Yes	That each person is on the payroll report and in the right role
Optional tips left by guests	No	That your records show tips apart from wages
Automatic gratuity or service charge on large parties	Yes, to the extent received by employees	That the point-of-sale system and payroll tag them separately
Meals provided as part of pay	Yes, at their recorded value	That the value is in the records the auditor will see
Overtime pay	The extra premium portion is excluded only if records show overtime separately by employee	Payroll software that separates overtime hours and pay
Bonuses, vacation and sick pay	Yes	That bonus pay reaches the payroll report

Federal wage law separately limits what an employer or manager may do with employees' tips. That is a pay question, not a premium question. See inherited wage and hour exposure and our guide to restaurant coverage gaps for what a buyer inherits and whether insurance responds.

A hypothetical example. Assume a state manual that treats automatic charges like the North Carolina edition. A restaurant adds an automatic 18 percent service charge to parties of eight or more. The seller's payroll report treated those charges as optional tips and left them out. At the workers' comp audit, the auditor finds that the charges are set by the restaurant and paid out to staff, adds that portion to payroll and the final premium rises. The buyer who asked the broker how the charge would be classified before the first audit would have seen it coming.

Can I split payroll between the dining room, the bar and catering?

Under NCCI-style rules, usually not by estimate, and often not at all. In the North Carolina edition of the manual, a restaurant is classified as one business at one location, so the dining room and the bar staff generally fall in one class, and a separate class generally needs a truly separate operation, physically separated, with its own payroll records. In the same edition, one employee's pay can be split between two classes only if the records show the actual time and pay in each, and without those records all of that person's pay goes into the highest-rated class involved. Some states give bars and caterers their own classes, and how delivery drivers are classified varies, so ask the bureau or your insurer how each is treated where you are.

For a buyer, the practical step is to set up payroll before the first audit so the numbers are clean. Ask your payroll provider to record hours by area where the manual allows it, to separate overtime and to tag service charges. Under the North Carolina edition, estimates and percentage splits are not accepted, and other states' manuals may differ. Read payroll estimates and audit bills for how an audit works.

Contractors you hire can show up at audit too. If a musician, hood cleaner or contract cleaner has no workers' comp policy of their own and no certificate on file, the policy's premium base can reach what you paid them, and in the North Carolina edition of the manual the auditor classifies that pay as if they were your employees. Collect a certificate from every contractor before the first audit.

What changes when I buy the restaurant?

Usually, you inherit the seller's experience modification (the mod). Under NCCI rules, a stock purchase and an asset purchase where you take over operations both count as ownership changes, and forming a new company for the deal does not reset the mod to 1.00, the neutral score. Dropping the seller's experience is rare, and a partial purchase or a different state's rules can change the answer, so ask your broker before assuming a fresh start.

Report it. The policy requires you to report an ownership change to the insurer within 90 days, whether or not you currently have a mod. The rating organization decides how it affects the mod. Under current NCCI rules a revised mod generally applies back to the date of the change, and in New York the effective date depends on when you reported.
Small restaurants may have no mod. A business has to reach a state-set premium threshold to qualify for experience rating, and below it a 1.00 factor applies. Ask your broker where the line sits in your state.
Billing setup. If the seller paid premium as payroll runs (pay as you go), ask whether that arrangement continues. In a stock deal the entity's policy stays in place. In an asset deal the seller's policy or payroll account often ends at closing, so you need your own policy and billing in place at closing, and the old policy still gets a final audit. Payroll providers and carriers set their own terms.
Audits. The final premium is set after the policy ends from actual payroll and the correct classes, and the insurer can audit for up to three years after the policy ends. In a stock deal the company you now own owes its own audit balance, so a post-closing audit can bill it for pre-closing payroll. The purchase agreement decides who bears the cost, so ask counsel. Ask the seller for the last audit worksheet and see how tips, service charges and meals were counted before you repeat that treatment.
A professional employer organization (PEO). Joining or leaving one is not an ownership change, and a PEO's coverage does not automatically continue for a buyer's new entity. See PEO versus your own workers' comp after an acquisition.

For the mod itself, read how to review your experience mod for errors, and see what drives restaurant insurance cost for how the mod moves price.

Is workers' comp required for my restaurant, and are the owners covered?

The requirement is set by state law. Texas lets most private employers choose, and employers that opt out must report that status to the state. North Dakota, Ohio, Washington and Wyoming are state-fund states where private insurers do not sell the standard policy, and rules for self-insured or exempt employers differ, so ask your broker or the state fund what applies to your restaurant. Some other states use their own rating bureaus, so ask which system governs yours.

Owner coverage deserves its own question. The U.S. Bureau of Labor Statistics (BLS) reports that about 31 percent of food service managers are self-employed, so many restaurants are owner-run. Whether an owner or officer counts as an employee for premium depends on state rules and on how the business is organized, so ask: are the owners included or excluded on the policy, and what payroll figure is used for them? For the policy itself, see reviewing workers' compensation coverage, and for the first payroll setup see our guide to insurance after you buy a restaurant. Morrow can review the class, payroll and audit history you inherited. The rating organization and the carrier decide the result.

Keep reading

Frequently asked questions

Are tips included in workers' comp payroll for a restaurant?

It depends on the state manual. In the North Carolina edition of the NCCI manual, optional tips are excluded while automatic gratuities and service charges are included. Ask your broker how your state treats each, and keep records that separate them.

Does my new LLC start with a fresh experience mod?

Generally not. Under NCCI rules, an asset purchase where you take over operations is an ownership change and the seller's experience usually transfers to you. Report the change to your insurer within 90 days, and ask your broker how your state treats a partial purchase.

Which workers' comp code is my restaurant in, and can I check it?

The insurer or rating bureau assigns it, and codes differ by state and bureau. Many states have a small family of restaurant, fast food and bar classes. Compare the code on your declarations page with what you actually do, and ask your broker to confirm it against your state's manual.

Can the audit bill me for the seller's payroll?

In a stock or membership interest deal the company you now own owes its own audit balance, so a post-closing audit can include pre-closing payroll. In an asset deal it is usually the seller's policy. The purchase agreement decides who bears the cost, so ask counsel.

Can I put some employees in the clerical code?

Under the North Carolina edition of the NCCI manual, only if their duties meet the clerical definition and their work area is separate from operating hazards, and other states can differ. If someone also works in the kitchen or on the floor, they generally do not qualify. Ask your broker to confirm against your state manual.

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.

Restaurant Workers' Comp: Tips, Payroll and Audits for New Owners