Water Damage Restoration Workers' Comp, Class Codes

For a restoration company, workers' compensation is priced by class code (the number that sorts a business by its kind of work) and payroll, and there is no single class code to look up for water damage restoration: the class depends on your state, your rating bureau and what the company's work actually is. The seller's experience rating generally follows the business, and under National Council on Compensation Insurance (NCCI) rules and many state manuals you must report the ownership change to the insurer within 90 days. This guide is for new owners who need to understand how the rules treat technicians, estimators, pack-out crews (who move customers' belongings to your warehouse) and rebuilders, keep payroll records an auditor will accept and check subcontractor coverage.

The short answer

The insurer and the rating bureau assign class codes. Under NCCI-style rules the default is one governing class for the business in a state, with standard exceptions such as clerical and outside sales when duties qualify. Do not assume the seller's codes fit the crews you now run.
A company can carry more than one basic class, or split one employee's pay between classes, only where the rules allow it and records show actual time and pay in each.
Uninsured subcontractors and 1099 labor can be charged to you at audit, and you can be responsible for their injured workers in some situations.
The seller's experience rating (the "mod") generally transfers, and most policies require ownership changes to be reported within 90 days, though state funds and some bureaus handle this differently.
Class rules, bureaus and state funds differ by state. Ask your broker to confirm each point for every state where crews work.

Which class code do my technicians, estimators and crews fall under?

A class code describes the business within a state, and the governing classification is the one that best fits the company's main operations there. Classes are set by your insurer under your state's rules, so ask your broker to confirm in writing which class applies to the business in each state where you work, and how each crew group below is treated. Several states, including California, Pennsylvania and Delaware, use classification systems that differ from NCCI's, and Massachusetts and others use their own bureaus, so rules and class wording vary.

Crew groups at a restoration company and the classification question for each (these are questions to ask, not separate classes)
Crew group	What they do	Question to ask the broker
Water technicians	Extraction, equipment placement, moisture monitoring, tear-out (removing wet drywall and flooring)	Which class does the bureau apply to emergency drying and tear-out in this state?
Project managers and estimators	Inspect damage and write the scope, often on site	Do they qualify for any separate class, or do they follow the crew's class because they work in damaged buildings?
Contents pack-out crews and drivers	Inventory, packing, transport, storage and return of customers' belongings	Is the warehouse work rated apart from field work, and how are drivers rated?
Reconstruction carpenters and finishers	Rebuild finished surfaces	Is rebuilding a separate construction class, and are subcontracted rebuilds counted?
Dispatch and on-call staff	Take calls and schedule crews, nights and weekends	Are they clerical, or do they do field work some days?
Outside sales and referral development	Visit property managers, agents and adjusters	Do their duties meet the definition of an outside salesperson?
Office staff	Billing, estimating software, bookkeeping	Is the office separated from operating hazards in the way the rules expect?

In Massachusetts, for example, the bureau's demolition class separates interior-only strip-out with no structural demolition from demolition that removes a wall, floor or roof. That text does not mention restoration, and other bureaus draw the lines differently, so ask how your bureau treats tear-out and do not copy a code from another state or a lookup site.

Where this guide quotes manual wording on splits, overtime and uninsured subcontractors, it uses the North Carolina edition of the NCCI manual because it is posted publicly. Your state's manual may word these rules differently.

Can one employee be split between classes, or put in a clerical code?

Only on the rules' terms. Standard exception classes such as clerical office employees and outside salespersons apply only if the person's duties meet the definition. An estimator or project manager who spends time in damaged buildings generally does not fit a clerical definition, though the answer is state and bureau specific, so confirm it.

A business can have more than one basic class only in situations the manual allows, such as construction or truly separate operations with separate payroll records. One employee's pay can be split between classes only if records show actual time and pay in each. Estimates and percentage splits are not allowed, and without records the pay goes to the highest-rated class involved. That is the NCCI wording, so other states may differ. For a company with mitigation, contents and rebuilding crews, expect any split and its records to be tested at audit. Keep timesheets by job type, not just by person.

How do payroll estimates and audits work for on-call crews?

The premium on a workers' compensation policy is an estimate. The final premium is set after the policy ends, using actual payroll and the correct class codes, and you pay the balance or receive a refund. The insurer can audit your records during the policy period and for up to three years after it ends, so keep payroll, tax and disbursement records for that long.

Restoration payroll is lumpy. A flood or storm can put overtime, temporary crews and extra subcontract labor on the books above the estimate. In the NCCI wording the extra portion of overtime pay is excluded only if your records show overtime separately by employee. Set the estimate from the staffing plan you expect, update it mid-term if the plan changes and ask whether a payment plan bills from actual payroll. See payroll estimates and audit bills, pay-as-you-go workers' comp and changing payroll providers without a coverage gap.

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

The policy's premium base includes pay to other persons engaged in work that could make the insurer liable, which is how an uninsured subcontractor lands on your bill. If you have no payroll records for them, the contract price can be used. Whether an uninsured one-person crew's pay lands on your audit depends on the policy and on your state's statutory employer rules. A subcontractor's certificate of insurance is the usual proof, though the real test is whether that person's employer lawfully secured coverage.

A hypothetical example. A restoration company hires a one-person crew for a weekend flood job at $20,000 for labor only, pays by 1099 and never collects a certificate. The crew member is hurt. At the next audit, under the NCCI wording, an uninsured subcontractor's charge is classified as if the workers were the company's own employees and, with no payroll records, a minimum of 90 percent of a labor-only price can be used. That would add $18,000 to the payroll the premium is charged on. The insurer then multiplies it by the class rate per $100 and the mod, before any injury claim. Other states and bureaus may differ.

Misclassification is a separate risk: the Department of Labor says misclassified workers may lose minimum wage and overtime protections. State tests differ, so take classification questions to employment counsel. See 1099 contractors and the workers' comp audit and inherited wage and hour exposure.

Does the seller's mod follow me if I bought through a new LLC?

The experience mod (experience modification factor) is a multiplier on your workers' comp premium. 1.00 is average, and it moves up or down with your claims history compared with similar companies. If you bought through a new LLC, do not assume you started at a clean 1.00. Under NCCI rules a stock purchase, an asset purchase, a merger and a successor entity are all ownership changes, and the seller's experience generally follows the business.

Report the change to the insurer within 90 days, whether or not you currently have a mod. Under NCCI rules a recalculated mod can apply back to the date of the change, up or down, so late reporting does not protect you from an increase. In New York the effective date depends on when you report, so confirm your state's rule. The rating organization decides the result, and small companies may fall below the premium threshold and get 1.00. The rules are covered in reviewing the mod for errors and the new owner review of workers' compensation.

For a restoration company, ask which claims sit in the mod and whether any are still open: a slip on a wet floor, a lifting injury during pack-out, a vehicle accident on an emergency call or a respiratory complaint after a sewage job each shows up differently on loss runs. Open claims on the worksheet can still move the number.

What changes by state, and what about owners and officers?

Whether owners and officers are included, excluded or optional depends on state law and the policy wording, so ask your broker to confirm in writing for each state, and what payroll the policy assumes for them.

Texas: most private employers may choose not to carry coverage in this NCCI state, so ask whether the seller carried it.
Washington: a buyer can become liable for the seller's unpaid amounts unless it gives the state agency written notice of the purchase and no assessment follows within 180 days. The statute also requires a buyer to hold back enough of the purchase price to cover the seller's unpaid amounts until the seller shows nothing is due, so raise it with deal counsel.
Ohio: successor rules can transfer a predecessor's rights and obligations. Ask the state fund about its rule before closing.
North Dakota, Ohio, Washington and Wyoming: coverage must come from the state fund, which usually does not include employer's liability, so ask about stop gap coverage.
Seller used a professional employer organization (PEO): see PEO versus your own workers' comp.

What should I do about workers' comp in the first 90 days?

Send the ownership change information to the insurer, and keep proof of the date. Reporting routes differ by state.
Get the class codes by state and the payroll assigned to each, then compare them with the crews you actually have.
Ask for the mod worksheet, open claims and the last audit, and look for errors.
Collect certificates from every subcontractor and flag any 1099 labor.
Ask the seller for the Occupational Safety and Health Administration (OSHA) injury logs, training records and the respiratory protection program, because a buyer inherits the program or its absence.
Confirm that owners and officers are included or excluded on purpose, since state rules and policy wording decide it.
Check whether a pay plan or payroll provider account ended at closing.

A Morrow review can help organize the class, payroll and certificate questions for a broker or carrier. Related reading: what drives insurance cost for a restoration company and what insurance a new restoration company owner needs.

Keep reading

Frequently asked questions

What workers' comp class code applies to a water damage restoration company?

There is no single code to quote. The insurer assigns classes under the rules of the rating bureau in each state, and a code from one state or from a lookup site does not carry to another. Ask your broker to confirm the class and the reasoning for each state, in writing.

Will the seller's experience mod follow me if I buy through a new LLC?

Generally yes. Under NCCI rules an asset purchase into a new company still counts as an ownership change, and the seller's experience usually transfers. Report the change within 90 days and let the rating organization make the decision.

Do I need workers' comp for subcontractors?

You need proof that each subcontractor's employer lawfully secured coverage, or the cost can be added to your premium base at audit. A certificate is the usual proof, and state law on statutory employers decides the rest.

Can my estimators be rated as clerical?

Only if their duties meet the clerical definition in your state's rules. An estimator who spends time in damaged buildings generally does not. Confirm the answer with your broker.

How long can an insurer audit my payroll?

Under the standard NCCI policy, the insurer can audit during the policy period and for up to three years after it ends. Rating organizations have the same right, so keep payroll and subcontractor records that long.

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.

Restoration Company Workers' Comp: Class Codes, Audits, 90-Day Notice