How payroll and class codes affect cost

The basic premium formula

Most workers' comp premiums start with a simple formula. The insurer takes your payroll for each type of job, divides it by 100, and multiplies it by the rate for that job's class code. Then it adjusts the total for your claims history and other factors.

• Payroll ÷ 100 × class rate = base (manual) premium.
• Base premium × experience mod = modified premium.
• Then insurers may apply schedule credits or debits, discounts for larger policies, and state fees.
• Example: $200,000 of carpentry payroll at a $6.00 rate is $12,000 before adjustments. With a 0.90 mod, it drops to $10,800.

Class codes describe the work

Class codes group businesses with similar injury risks. A roofer has a much higher rate than an office worker because roofing injuries happen more often and cost more. Your code should match the work you actually do, not the description with the lowest rate.

Most states use codes from the National Council on Compensation Insurance (NCCI). California, New York, Pennsylvania, Delaware, and a few other states run their own rating bureaus with their own codes. A code from one state may not mean the same thing in another.

Usually one main code per business

Under most rules, a business gets one main code that describes the whole operation, and most employees fall under it. A few "standard exception" codes, such as clerical office work and outside sales, can be split out only when those workers meet strict rules. For example, an office worker who also helps in the warehouse usually goes under the warehouse code.

A business that sells products and also installs them may not be classed like a store that only sells. Some truly separate operations can get their own code if your records support it. Ask your agent or insurer before you split payroll across codes.

What counts as payroll

Payroll for workers' comp is usually broader than base wages. It often includes:

• Wages, salaries, commissions, and bonuses.
• Holiday, vacation, and sick pay.
• The straight-time part of overtime. Many states let you leave out the extra overtime premium if your records show it separately.
• Payments to uninsured subcontractors, which the insurer may treat as your payroll.
• Owner or officer pay, often within a minimum and maximum set by the state.

Keep records for the audit

Your premium at the start of the year is based on an estimate. After the policy ends, the insurer audits your real payroll and adjusts the bill. You may owe more or get money back. Keep payroll registers, job descriptions, overtime records, and certificates of insurance from subcontractors. Our premium audit guide explains what to expect.

If you think your code is wrong

Start with your agent or the insurer's underwriter and explain the work your employees do. Each rating bureau has a dispute process. In California, for example, you can ask the WCIRB rating bureau to review your classification and then appeal to the Department of Insurance. Tell your insurer quickly when your business changes, so the codes stay accurate.