The Small-Business Owner's Guide to Workers' Compensation Insurance

Chapter 2: How Workers' Comp Insurance Works
Part 1: Demystifying the Policy: The Inner Workings of Workers' Comp

B. What Are Workers' Comp Classification Codes?

Workers' Comp class codes are three- or four-digit codes created by the NCCI New browser window icon., an organization that gathers data and prepares objective Workers' Comp Insurance rates. In order to provide objective rates, the NCCI created a standard classification system for more than 700 industries.

These 700+ codes not only distinguish different job duties performed by employees, they also denote the amount of risk and type of hazard each job or work environment may entail. Each class code assigns a certain "value" based on these conditions. Your insurance provider then uses these classifications to price your Workers' Compensation Insurance.

There are more than 700 NCCI Workers' Compensation Classification codes.

Most employers have two or more class codes on their policy. For example, a construction business may have its roofers categorized under class code 5551. But it might also have a couple of employees classified under 8810, the code for clerical work.

As you might have guessed, the clerical work code denotes less work risk, and it usually costs less to insure these types of employees. On the other hand, construction work is almost always considered high-risk, and its code assigns a higher rate.

Do All States Use NCCI Class Codes?

Though most states do use the NCCI classification system, not all do. The following states use their own class codes:

  • California.
  • New Jersey.
  • New York.
  • Delaware.
  • Pennsylvania.
  • Texas (for certain classifications).

Additionally, some states create special classifications that may vary from the NCCI standard codes. The best way to ensure you're using the correct codes is to check out your state's Department of Insurance New browser window icon. and look for information about Workers' Compensation.

You can also purchase the Scopes Manual New browser window icon., the NCCI's classification codebook, which includes each state's special Workers' Comp codes.

When to Reclassify Employees

When your employees take on new jobs or their job duties expand, they might need to be reclassified. Even a temporary shift in work duties may require a new or split code (usually used when employees perform dual roles). Sometimes small details can make a big difference in your rates and premium.

For example, if a clerical employee's role now requires them to leave the office to make sales calls, they are exposed to a slew of new risks. Depending on how much time they spend away from the office, you may have to use a split code (one for clerical work and another for outside sales).

The High Cost of Misclassifying Employees

Though it may be tempting to misclassify employees to reduce your Workers' Comp premiums, know that this dirty deed will surely be caught in an annual premium audit. The audit (sometimes called the "payroll audit") is used to give an accurate Workers' Comp premium for your policy period.

If you do accidentally make a classification error, you'll be responsible for paying the outstanding amount you owe once the premium has been recalculated. Not to mention, if you inadvertently misclassify employees, you may end up spending more on premiums than you need to.

For example, if you go through your nonprofit's payroll and classify all of your employees under the same code, you could miss the chance to take advantage of other lower-risk codes. Though your annual audit will catch the error, you could save yourself some money upfront by taking the time to properly classify your employees from the start.

Also, be aware that classifying your employees as independent contractors to try to reduce your premiums is illegal. Depending on where you live, you could face a misdemeanor or felony charge (with possible jail time). Plus, you'll have to pay serious fines and penalties.

In Missouri New browser window icon., for example, knowingly misclassifying employees as independent contractors means an employer could face penalties of $50 to $1,000 per day per misclassified worker and up to six months in jail per violation.

Next: Part 2: When Do Small Businesses Need Workers' Comp?

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