Workers Compensation Classifications
The pricing of workers compensation insurance is based on a system in which employers are categorized into groups called classifications. Each classification is assigned a rate. The rate for each classification varies from state to state. All employers located in one state that are assigned to a particular classification will pay the same rate.
About two-thirds of the states in the U.S. have adopted a classification and rating system developed by the NCCI. These states are called NCCI states. The remaining states (called independent states) have devised their own systems for classifying and rating employers.
In many respects, the classification systems used in the independent states are often similar to the NCCI's. Like the NCCI states, most independent states use a classification system based on four-digit codes. Moreover, certain classification descriptions and codes utilized by independent states may be similar (or even identical) to those used by the NCCI.
This article serves as an introduction to the NCCI classification system. It describes the purpose of the system and outlines basic terminology. Note that many of the terms discussed below are used by independent states.
The purpose of the NCCI classification system is to group employers with similar operations into a single classification. Workers employed by the same types of businesses are prone to the same types of injuries. For instance, individuals that perform roofing installation work are subject to injuries from falls, burns, sun exposure, and lifting heavy objects. The types of injuries these workers sustain are relatively consistent from one employer to another. Thus, all employers whose business consists of roofing installation (and no other operations) will be assigned to the same workers compensation classification.
The classification system ensures that the cost of workers compensation coverage is distributed equitably among employers. If a classification system did not exist, all employers would share the cost of claims equally. Employers operating businesses that had a low risk of worker injuries would subsidize those that had a higher risk.
The NCCI collects premium and loss data from insurersfor each classification. The agency uses that data to develop a state-specific loss cost (or rate) for each classification. The loss cost must be sufficient to cover benefits payments to workers as well as loss adjustment expenses.
The NCCI classification system consists of written descriptions of business operations and four-digit classification codes (or class codes). Your company is assigned a Basic Classification that describes the nature of your business. The basic classification is determined by the type of business you operate. It does not reflect the operations performed or functions served by individual employees.
For example, say that you own a company that manufactures hard candy. You employ two workers that perform janitorial work. You also employ sixteen workers who make, sort and package candy. Your business is candy manufacturing, not janitorial work. Thus, all of the eighteen workers are classified as Confection Manufacturing, code 2041.
Generally, the workers employed by your business are assigned the basic classification. However, some workers perform functions that are common to many types of businesses. These functions are assigned separate classifications called Standard Exceptions. Two examples of Standard Exceptions are clerical office workers (code 8810) and outside sales employees (code 8742). Because clerical and sales employees perform low-risk work, they are unlikely to be injured on the job. Thus, the rates assigned to the clerical and sales class codes are relatively low.
To be rated as clerical workers, employees must perform clerical duties only. An employee who spends half his work day filing and the remainder of the day boxing candy cannot be classified as a clerical worker. Also, clerical employees must be physically separated from other workers. This means that a clerical worker must be located in an office or behind a partition--not at a desk in the middle of the factory.
Workers are classified and rated as outside salespersons if they spend their work day making sales calls on customers. Workers may also be classified as outside salespersons if they spend a portion of their day in an office performing clerical duties.
The term Governing Classification refers to the classification, other than a Standard Exception, which generates the most payroll. For a small business, the Governing Classification may be the same as the Basic Classification.
What if all of your employees are classified as a Standard Exception (clerical or outside sales workers)? In that case, the Standard Exception classification is your Governing Classification.
The Governing Classification is used to classify workers that would otherwise be difficult to categorize. Examples are maintenance workers, local managers and certain executive officers.
Some operations present unique risks and are performed by a small minority of employers. Called General Exclusions, these activities are separately classified and rated.
Examples of General Exclusions are aviation, new construction or alterations, and sawmill operations. Also considered a General Exclusion is a daycare center run by the employer for the benefit of employees.
Some types of operations might appear to be separate but are included in the Basic Classification. Examples are an employee cafeteria and an on-site medical facility operated for employees. Employees that operate these facilities are assigned the Basic Classification.
Finally, while the NCCI states have adopted the NCCI's classification system, each has implemented certain state exceptions. An example of a state exception is a class description, a class code or an experience rating rule that differs from the NCCI's. Some states have developed their own endorsements that differ in some manner from the NCCI's. For instance, some states have devised their own endorsement for workers subject to the Longshore Act.