Wrong Workers' Comp Class Code? How to Get It Fixed

You can ask your insurer to correct a workers' comp class code that does not match what your company actually does. The class code is the code that describes your business and sets the rate charged per $100 of payroll, so a wrong code means the wrong price on every dollar in it. The same goes for office and sales staff who qualify for lower-rated codes but sit in the main code. A request backed by payroll and operations records works best, and a correction can also raise premium if a code was too low. This guide is for new owners whose inherited policy may still describe the company the seller started, not the one you bought.

The short answer

Premium is generally the rate for each class code, per $100 of payroll in that code, added up and then multiplied by the experience mod.
Codes describe the business, not each person's job. A few standard exception codes, mainly clerical office employees (8810) and outside salespeople (8742), can sit alongside the main code when duties fit the definition (NCCI code numbers; some states number them differently).
Under NCCI rules, one employee's pay can be split between codes only with records of actual time and pay in each; estimates and percentages are not accepted.
To request a correction, send the insurer a description of operations, payroll by employee and job, time records and supporting documents through your broker. The insurer issues an endorsement if it agrees.
Rules differ by state. California, Pennsylvania and Delaware use their own classification systems, and Ohio, Washington, North Dakota and Wyoming sell workers' comp only through state funds. Washington's fund charges per hour worked, not per $100 of payroll.

How does a class code set what you pay?

Workers' comp premium is built from a state-approved rate for each class code, applied to the payroll in that code and then adjusted by the experience modification factor (the mod, which reflects the company's own claims history). Rates differ a great deal between codes, because they reflect how often and how badly people in that kind of business get hurt.

Under the rules of the National Council on Compensation Insurance (NCCI), which handles ratemaking data in most states, codes classify the business in each state, not each employee's job title. The code meant to describe the company's main operation, called the governing class, usually covers most employees, from technicians to helpers to supervisors. A few standard exception codes can sit alongside it for employees whose duties fit the definition:

8810, clerical office employees: only where the main code does not already include clerical work and the office is separated from the operating hazards.
8871, clerical telecommuters, who work from home on clerical duties.
8742, outside salespeople, whose duties are sales away from the premises.

A company can have more than one basic code only in specific situations, such as construction, farming, some mercantile operations, or truly separate operations that are physically separated and keep separate payroll records. Separate legal entities are classified separately.

State differences matter. Eleven states have independent rating bureaus that publish their own manuals, and California, Pennsylvania and Delaware use classification systems that differ from NCCI's, so a code number from NCCI material may not exist there. In Ohio, Washington, North Dakota and Wyoming, workers' comp comes only from the state fund, which sets its own classifications, and Washington's rates are charged per worker hour rather than per $100 of payroll. Check your state before comparing codes.

Where do owner-run businesses get misclassified?

Misclassification is rarely anyone's fault. Owner-run businesses change over the years, and the policy description often does not keep up. These are the patterns to look for in an inherited policy.

Common class code problems in acquired businesses
Situation	What often goes wrong	What to check
The business drifted	The code still describes the original work, such as residential service, after the mix moved to commercial installation or light fabrication	Revenue by service line against the code's description in your state's manual
Office staff in the main code	Bookkeepers, dispatchers and estimators rated at the field rate	Whether their duties are purely clerical, done in an office physically separated from operations (walls, floors, partitions or counters), with no field visits, job site measuring or direct supervision of crews. An estimator who measures on site generally does not qualify for 8810 or 8742.
Outside sales in the main code	Salespeople who never touch the operations rated with the crews	Job descriptions, travel and duties
Mixed duties with no time records	A worker who splits time between two kinds of work has all pay put in the higher-rated code	Whether timesheets track hours by type of work
Owners and officers	Owner pay included at the field rate, or excluded when the new owner actually wants coverage	Your state's rules on including or excluding officers and members. Officers are generally classified by their actual duties, and in NCCI states an executive officer's payroll counts within state-set minimum and maximum amounts, not at actual salary.
An add-on rated in the parent's code	A different business with different hazards classified as if it were the parent	Each entity's operations; separate entities are classified separately
The wrong state's system	An NCCI code used in a state with its own system	The state's own classification manual

The error can run in either direction. A code that is too low means you are underpaying now and may get an audit bill when the auditor assigns the right code. Better to find that yourself in the first months than at the audit. For the full workers' comp review, see the new owner review of workers' compensation.

When can you split one employee's payroll between codes?

Only with records. Under the NCCI rules, an employee's pay can be divided between two codes only if your records show the actual hours and pay in each type of work. Estimates, percentages or a manager's best guess are not accepted, and without proper records, all of that employee's pay goes into the highest-rated code involved. Oregon has a similar records requirement with the same highest-rated default, and other states, including California, have their own versions; check your state's manual.

Some pay cannot be split at all. Pay in the standard exception codes (clerical, clerical telecommuter, outside sales) cannot be divided this way: someone who does any work that falls outside the clerical definition generally does not belong in 8810. Holiday, vacation, sick and overtime pay is assigned to the code where the employee has the most payroll.

If your business genuinely has mixed duties, set up time tracking by type of work from your first payroll. It is the difference between a valid split and an argument with the auditor. Payroll providers can often add job or class codes to timecards; ask yours.

What documents support a class code correction?

Insurers decide classification on facts, so the stronger your file, the faster the answer. Gather:

A one-page description of operations: what the company does, for whom, with what equipment, and the share of revenue from each type of work.
A payroll register by employee, with job titles and duties.
Time records by type of work for any employee whose pay you want split.
For clerical employees, a floor plan or photos showing the office is separated from the operations.
Job descriptions for outside salespeople, showing their work is away from the premises.
The policy's information page, the last three audit reports and any inspection report the insurer prepared.
For an add-on, the entity's own operations and payroll, kept separately.

These are the same records an auditor will ask for. Under the standard policy, the insurer can audit during the policy period and for up to three years after it ends, so keeping them organized pays off twice. See the premium audit guide.

How do you request a correction?

Compare. Put the codes on the information page next to what each group of employees actually does, using your state's classification descriptions.
Model both directions. Ask your broker to estimate the premium under the corrected codes, including any code that would go up.
Submit in writing. Your broker sends the underwriter the request with your documents. Be specific: which employees, which code, why.
Expect an inspection. The insurer may send someone to look at the operations or interview you.
Get the endorsement. If the insurer agrees, it issues an endorsement changing the codes. Under the standard policy, codes are based on an estimate of exposures, and the insurer assigns the proper codes and rates when the actual work differs.
Ask about timing, and do not wait. When a correction takes effect, and how long you have to ask, depends on your state; the North Carolina edition of the NCCI rules is summarized below the list. Other states and bureaus set their own rules, so ask your broker which apply to you.
If you disagree. Rating organizations and state regulators have processes for classification disputes. The route and deadlines differ by state, so ask your broker which applies before the deadline passes.
Update payroll. Make sure your payroll provider maps employees to the corrected codes, especially if you pay as you go.

When a class code correction applies (NCCI rules, North Carolina edition)
Situation	When it applies
Correction lowers premium	Back to the start of the current policy
Correction raises premium, made in the first 120 days	Back to the start of the current policy
Correction raises premium, made after day 120	Generally from the date the insurer finds the cause; in the last 90 days, only at renewal
Request sent to the rate bureau to change a classification	Considered only during the policy term or within 12 months after it ends

Exceptions apply if the insured gave wrong information. The timing limits also do not apply to some operations, such as construction, or to the standard exception codes such as clerical and outside sales, which can be assigned at any time during the policy or at audit. And moving payroll between codes already on the policy is not treated as a correction at all.

Morrow can compare your codes with your operations, prepare the request with you and send it to the carrier. The insurer and, in disputes, the rating organization decide the outcome.

What could a correction be worth?

A hypothetical example. A buyer acquires a specialty distributor whose policy puts all $2.4 million of payroll in the warehouse code. Six employees (bookkeepers, customer service staff and buyers) work in a separate office upstairs, earning $400,000 together, and two outside salespeople earn $200,000. Using illustrative rates of $5.00 per $100 for the warehouse code, $0.25 for clerical and $0.40 for outside sales, here is the change before the mod:

Illustrative premium before and after the correction (mod of 1.00)
Group	Payroll	At warehouse rate	At corrected rate	Saving
Clerical	$400,000	$20,000	$1,000	$19,000
Outside sales	$200,000	$10,000	$800	$9,200
Total	$600,000	$30,000	$1,800	about $28,200 a year

The same review finds that the warehouse supervisor, whom the buyer first assumed belonged in the clerical code, spends half of each day on the floor. That pay stays in the warehouse code, where an auditor would likely have put it back anyway. These rates are made up for the example; real rates depend on the state, the carrier and the year.

The lesson is not that every policy is overcharged. It is that the code is the biggest single input you can check yourself, and both overcharges and undercharges get more expensive the longer they run.

Can fixing class codes backfire?

It can if you push codes that do not fit. Choosing a code because it is cheaper rather than because it describes the work leads to back premium at audit, and deliberate misclassification can have other consequences under state law. Officer exclusions can also leave an owner without workers' comp benefits if they get hurt, so weigh that with your broker before removing anyone.

A correction may also change your experience mod over time, because the expected losses in the mod formula depend on payroll by code. And if you are in the middle of an ownership change report or a mod review, coordinate the timing; see how to check your experience mod for errors. Class code fixes are one of 12 ways to lower premium without cutting coverage, and they work best alongside current payroll estimates.

Keep reading

Frequently asked questions

How do I know if my workers' comp class code is wrong?

Compare the code's description in your state's classification manual with what your employees actually do and where your revenue comes from. Warning signs include office or sales staff rated with field crews, a code describing work the company stopped doing, and audit reports that keep reclassifying payroll.

Can I put my office manager in the clerical code?

Only if their duties are clerical and the office is separated from the operations, and only if the business's main code does not already include clerical work. Someone who also loads trucks, runs jobs or works on the shop floor generally does not qualify.

Can I split an employee's pay between two class codes?

Only if your records show the actual hours and pay for each type of work. Estimates and percentages are not accepted, and without records the pay usually goes into the highest-rated code involved.

Will I get a refund for past years if my code was wrong?

It depends on the insurer and your state's rules. The current policy period is usually settled at audit with the correct codes. Ask in writing whether earlier periods can be revisited, and keep the records that support your request. There can be a deadline. In North Carolina, for example, the rate bureau considers a request to change a classification only if it is submitted during the policy term or within 12 months after it ends.

Who decides the correct class code?

The insurer assigns codes based on the state's classification rules and the facts, often after an inspection. If you disagree, rating organizations and state regulators have dispute processes, which differ by state.

Do class code rules work the same in every state?

No. NCCI handles ratemaking data in most states, but 11 states have independent rating bureaus with their own manuals. California, Pennsylvania and Delaware use distinctly different classification systems. Ohio, Washington, North Dakota and Wyoming sell workers' comp only through state funds with their own rules, and Washington's fund charges per hour worked rather than per $100 of payroll.

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 Class Code Corrections: Fixing a Common Overpayment