Towing Company Workers' Comp: Class Codes and Audits

Your workers' comp premium on a towing company starts as an estimate and is trued up at audit, so the payroll records you keep decide whether the bill surprises you. A buyer usually inherits the seller's experience mod (the factor that raises or lowers premium based on past claims), and the insurer assigns the class code. This guide is for new owners of towing and recovery companies who need clean payroll records, a plan for overflow operators and the ownership change report filed on time.

The short answer

No single class code number fits towing everywhere. Massachusetts uses one number in its own manual, a North Carolina notice of national classifications shows another, and some states run their own systems. The insurer assigns the code.
A company that tows and also repairs vehicles or runs roadside assistance can see its payroll split between classes. Splits need records of actual time and pay.
Uninsured overflow operators paid as contractors can land in the audit at your class and mod. Collect certificates, or ask counsel about payroll.
Report the ownership change to the insurer, generally within 90 days. A late report can be treated as experience rating modification evasion, and a recalculated mod can reach back to the date of the change.
Whether you must cover yourself as an owner depends on your state and entity.

Which class code will your tow company get?

A class code classifies the business, not each employee's job, so most of a tow company's payroll often falls under one governing code, with a few exceptions. Codes vary by state and by rating bureau, the insurer assigns the code, and nothing here tells you which one applies to you.

The number depends on your state's rating system, and class numbers are not portable between systems. Massachusetts is an independent bureau state with its own manual, and its bureau assigns towing companies to class 7219, "Automobile Towing Cos and Drivers," and puts impound lots run by towing companies in the same class. A North Carolina Rate Bureau notice of national classifications shows that, effective April 1, 2018, local and long distance automobile towing moved to class 7225, "Automobile Towing and Drivers," while 7219 there means general trucking. Class wording changes over time, so do not copy a number from a neighbor or an old policy, and check the current National Council on Compensation Insurance (NCCI) or bureau wording for your state. Ask your insurer for the code on your policy, its written description and the audit basis. See workers' comp class codes and class code corrections.

Tow company roles and the workers' comp questions they raise
Role	Class question to ask the insurer	Records to keep
Tow operator or driver	Governing towing class for the state	Hours, pay type, overtime, bonus pay
Dispatcher	Whether the duties qualify as clerical or fall under the towing class	Written duties and time spent away from the desk
Yard or storage attendant	Whether yard work follows the towing class	Separate pay records by task
Office staff	Clerical exception if duties meet the class definition	Job descriptions and a physical separation from operations

What if the company also repairs vehicles or runs roadside assistance?

Mixed businesses are where classification fights start. Massachusetts applies a 50 percent test, separately at each location, to decide whether towing or automobile mechanical services and roadside assistance governs. The exact wording, including which side of the line sends all operations to one class, is set in the bureau's manual, so do not rely on a summary. Ask the insurer to show you the rule it applies at each location.

Under the NCCI Basic Manual as published for North Carolina (Oregon and California have similar records rules), splitting one employee's pay between two class codes requires records of actual time and pay in each class. Estimates and percentage splits are not allowed, and without records all of that employee's pay generally goes into the highest rated class involved. Ask the seller for the last two audits and classification worksheets, and ask the insurer how tow, yard and shop payroll are treated.

Can a dispatcher count as clerical?

In NCCI states, a few standard exception classes can apply alongside the main class, mainly clerical office employees (8810) and outside salespersons (8742), but only if the employee's duties meet the class definition. Other bureaus and states use different systems. A dispatcher who sits at a desk and does nothing else may fit a clerical definition in some states. One who also helps in the yard or hooks a vehicle on a busy night may not. Write the duties down and keep operating work off the dispatcher's job. The insurer decides at audit.

How do payroll estimates and audits work for a tow company?

The premium on a workers' comp policy is an estimate. The final premium is set after the policy ends using actual payroll and the correct class codes, and you pay any balance or get a refund. The insurer can audit your records during the policy period and for up to three years after it ends. In the North Carolina edition of the NCCI Basic Manual, payroll for premium includes wages, commissions, bonuses, holiday, vacation and sick pay, and excludes items such as optional tips and qualifying expense reimbursements. State rules vary.

Many tow operators are paid per tow, by commission or with overtime and on-call pay. Ask the insurer how each pay type is counted under your state's rules, and keep payroll reports that show each type separately by operator. Compare the policy estimate with your plan for the year, not the seller's last year, using what drives towing insurance cost and payroll estimates and surprise audit bills. If the seller paid as you go, you need your own setup at closing (see pay-as-you-go workers' comp).

What about overflow operators and contract drivers?

Tow companies often use outside operators on busy nights. If those operators have no workers' comp of their own, the audit can count what you paid them as your payroll, at your class code and your mod. Without payroll records for them, the auditor uses minimum percentages of the subcontract price. In the North Carolina edition of the NCCI Basic Manual they run from 33 1/3 percent for mobile equipment with operators to 90 percent for labor only and 100 percent for piecework, and other states may differ. Which one fits an operator who brings a truck is a question for the insurer.

Whether an operator is an employee or a contractor, and how overtime rules apply, are legal questions for employment counsel. The Department of Labor fact sheet on the Motor Carrier Act overtime exemption covers motor carrier employees whose duties affect vehicle safety in interstate commerce, does not mention tow trucks, and says the exemption does not apply in a workweek that includes work on vehicles of 10,000 pounds or less.

A hypothetical example. At audit, a buyer learns that $60,000 was paid by 1099 to overflow operators who carried no workers' comp of their own during the seller's last year. The auditor adds some or all of it to the premium base at the company's class and mod, depending on the records and the manual's minimum percentages. The buyer asks for the operators' agreements and certificates, checks who bears the audit balance under the purchase agreement and decides, with counsel, whether they belong on payroll. See 1099 contractors and the workers' comp audit bill and the overflow row in the coverage gaps guide.

Do you keep the seller's experience mod?

Usually yes, if the company has one. Under NCCI rules, a change in ownership includes buying the stock, buying the assets and taking over operations, a merger and forming a new entity that acts as the successor. Dropping the seller's experience is rare and takes a near-complete change in owners, operations and hazards. Small employers below a state-set premium threshold may have no mod and are rated at 1.00. For a tow company the practical question is what sits in the loss runs behind the mod, such as a crew member struck at a roadside recovery or hurt on a winch, so ask the seller for the runs and the last two audits before you model year one.

In NCCI states and several bureau states the policy requires you to report the change to the insurer within 90 days, so check the rule for your state. Failing to report may be considered experience rating modification evasion, and the rating organization can then correct the mod. Under current NCCI rules, a recalculated mod applies retroactively to the date of the change, whether it goes up or down, and some states, such as New York, tie the effective date to when you reported. See how to check your experience mod and the glossary entry on the experience modification rate.

The policy itself does not simply transfer. In an asset deal you need your own policy at closing. In a stock deal the acquired company usually still owes the audit balance, which can include pre-closing payroll, so ask your lawyer to say in the purchase agreement who pays it. If the seller's crew was on a professional employer organization (PEO) policy, that coverage does not automatically extend to your new entity.

Do you need to cover yourself as the owner?

Whether an owner, partner, LLC member or corporate officer counts as an employee for workers' comp, and whether you can elect in or out, depends on your state and on the entity you bought through. An owner who hooks vehicles is exposed like any operator. Ask your insurer in writing how you and any other owners are treated on the policy and the audit, because it changes the payroll base and who is protected if you are hurt. A lender, customer or agency may ask for coverage even where state law does not. Confirm the legal treatment with your attorney.

What if your state does not require workers' comp, or runs a state fund?

In some states, such as Texas, most private employers may choose not to carry workers' comp. If yours does, it is still a decision to make with your lender and your attorney, because a lender, customer or regulator may ask for coverage anyway, and an injured operator you have not covered is a bigger problem than a premium. Four states (North Dakota, Ohio, Washington and Wyoming) work the other way: workers' comp is bought from the state fund instead of a private insurer, employers there usually add stop gap coverage for employers liability, and the NCCI class and mod rules above do not apply as written. Washington and Ohio also have successor rules that can reach a buyer for the seller's unpaid state fund amounts, so ask counsel before closing. Roadside crews work beside traffic, so ask your insurer what safety training it values. For the full first-weeks list, see insurance after you buy a towing company. If you want help reading the seller's last two audits and class worksheets, Morrow can review them, and any new terms depend on carrier underwriting.

Keep reading

Frequently asked questions

What workers' comp class code applies to a towing company?

It depends on the state and the rating bureau, and the insurer assigns it. Massachusetts uses 7219 for towing in its own manual, and a 2018 North Carolina notice of national classifications shows 7225 for towing, where 7219 is general trucking. Do not copy either number. Ask your insurer which code is on your policy and how it is described.

Do I inherit the seller's experience mod?

Usually yes, if the company has one. When a business changes hands, past payroll and claims history usually follows the business, including in an asset deal where the buyer takes over all of the seller's operations. Dropping the seller's experience is rare.

Do I have to pay workers' comp for 1099 tow operators?

Possibly. An audit can treat pay to uninsured subcontractors as your payroll at your class and mod. Whether the worker is an employee is a legal question, so ask employment counsel and collect certificates.

How long do I have to report a change of ownership?

The workers' comp policy generally requires reporting within 90 days. NCCI states use its ownership form or online tool, and some states use their own routes. A late report can be treated as evasion, and a recalculated mod can reach back to the date of the change.

Does my dispatcher need the same class code as my drivers?

Not necessarily. A clerical exception can apply if the dispatcher's duties meet the class definition and are separated from operating hazards. A dispatcher who also works in the yard may not qualify. The insurer decides at audit.

Do I have to cover myself as an owner?

It depends on your state and your entity type. Ask your insurer in writing how owners are treated on the policy and the audit, and confirm the legal rule with your attorney.

References

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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 Towing Company