Class Code Verification is a process by which specific information is reviewed to determine the appropriate class code assignment.  It sounds easy enough, however simple oversights and misinterpretations can result in the failure to accurately apply the correct class code to a particular job resulting in erroneous bids, premium adjustments, false experience MOD promulgation, reinsurance exclusions, insurance cancellations, non-renewals, or denials.

The National Council on Compensation Insurance (NCCI) publishes a Scopes Manual listing all workers’ compensation codes as an aid to classifying specific jobs.  However, state exceptions, exclusions, operations covered or not covered, scope, and addendums can be easily be overlooked.  It can take years to develop a keen understanding and working knowledge of the Scopes Manual.

Why is class code verification important?

Temporary Staffing companies succeed or fail based on effectively managing their workers’ compensation mechanism.  Their profit margins are directly tied to their workers’ compensation premiums.  Verifying and applying the correct class code to temporary placements is critical to projecting accurate workers’ compensation premiums.

Temporary Staffing companies base their markups on the cost burden developed by certain factors including pay rates, state and federal taxes, employee benefit costs, and the workers’ compensation class code rates associated with positon being supplied to their client.  Take for instance a warehouse employee being placed with a retail clothing store in Florida.  Should this position be classified as 8018 with a $3.65 (2015 FL) rate or as 8008 with a $1.96 (2015 FL) rate?

There is a 54% difference in these rates.  Let’s assume that 10 full time employees were being placed with the client at $12.00/Per Hour rate resulting in a gross annual payroll of $249,600.  If class code 8018 were used, the workers’ compensation manual premium expense would be $9,110.40 and if class code 8008 were used, the resulting manual premium would be $4,892.16.

In the preceding example, $4,218.24 in manual premium is in question.  How can a competitive billing rate be developed by using numbers that may contain variances in the thousands?  The short answer is it can’t.

Adjustments

The insurance carrier has the right and obligation to correct misclassifications and apply the correct rate when they are discovered.  Most misclassifications are discovered by the workers’ compensation auditor during the final audit process.  However, discoveries can be made by underwriters, adjusters, NCCI inspectors, and even competing agents.

An adjustment means that a misclassification is corrected and the applicable rate is factored against the associated payrolls.  In some states, insurance carriers can retroactively apply corrections going back 3 years.  Whether the reclassification results in a return of premium or an additional premium, it is predicated on an error made in the initial classification.  Misclassifications can result in losing bids to your competitors or unexpected shrinkage of profit margins as a result of applying incorrect rates to your burdens.

Misclassifications can also adversely affect the accurate promulgation of experience modification factors.  Loss ratios are skewed by incorrect premiums and claims are skewed by applying incorrect class code ELR & D Ratios resulting in erroneous experience mods.

Insurance carrier underwriters tend to decline offering quotes when misclassifications are discovered during the underwriting process.  They do this because the information submitted is unreliable.  The premiums, loss ratios, and experience modification factors are all in question and cannot be relied upon to generate a true understanding of the exposures.

Understanding the Governing Class Code

Generally, the basic rule for classifying temporary employees is the placement either falls under the true definition of 8810 Office Clerical or the governing class code of the client in that state.  It is important to note that there are exceptions to this rule, and although rare, these exceptions can affect the proper classification of the temporary placement.

In short, the Governing Class Code represents the class code associated with the highest amount of payroll associated with the principal operation.

For instance, if a temporary employee was being placed as forklift driver in a warehouse environment and the clients governing class code was 8018 (STORE—WHOLESALE—NOC), the forklift driver would be assigned to 8018.  However, if a receptionist were being placed at the same client’s location, and will strictly work in an office environment, the employee would be assigned to 8810 (CLERICAL OFFICE EMPLOYEES NOC).  At the same time, if a temporary employee were being placed as a delivery driver with the same client, class code 7380 (DRIVERS, CHAUFFEURS, MESSENGERS, AND THEIR HELPERS NOC—COMMERCIAL) may be considered for this placement.

However, there are many nuances that must be considered.  Take for instance a temporary employee being placed as a receptionist with a health & fitness club. The clubs governing code might be 9063 and in most cases class code 8810 may not be used.

When should it be done?

A comprehensive class code verification should be performed prior to going to market for workers’ compensation renewals.  Governing Class Codes can change annually since they are affected by predominant payrolls, changes in operation, and even changes to the basic manual.

Class Code Verifications should also be performed when adding a new client, adding a new position with an existing client, or when adding a new location with an existing client.

Verifications should also be performed for any class codes that are changed by an auditor during the final audit process or adjuster following a claim.  Auditors, adjusters, and underwriters are not always right when it comes to class codes.  A good broker can help resolve any disputes regarding class code assignments.

Who does it?

Your insurance broker should take the lead by implementing a consistent, documented verification process.  The process should involve the staffing company, the broker, and the insurance program manager and/or carrier.  If needed, NCCI or the respective state rating bureau can be engaged to settle disputes.

The staffing company is responsible for supplying accurate information regarding their client and the type of placement being made.  Using the information provided, the insurance broker should research the appropriate code and communicate this information to the carrier through the proper channels.  The insurance carrier should review the information provided and make the final determination concerning the class code and provide a policy endorsement.

What information is needed?

The verification process should be well documented.  The client’s state, governing class code, final product or service, jobsite environment, and job duties, are considered when making a class code determination.  It is important to note that class code determinations are based upon the information provided by the staffing company.  If the information provided is not accurate or complete, the final determination may be affected.

At the minimum, the staffing company should provide their broker with:
  1. Client Company Legal Name
  2. Client Company D/B/A
  3. Client Website
  4. Client FEIN
  5. Client Corporate Physical Address
    1. Client Corporate Final Product or Service
    2. Client Corporate Description of Operations
  6. Client Jobsite Physical Address
  7. Client Jobsite Final Product or Service
    1. Client Jobsite Description of Operations
  8. Temporary Employee Job Title
  9. Temporary Employee Job Description/Duties
    1. Written Job Description
The Class Code Verification process is not subjective, but at the same time it is not black and white either.  It takes an experienced broker with an in depth understanding of the Scopes Manual, who will work with the insurance carrier and state rating bureaus to provide their clients with accurate class code determinations.

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