Class codes, also called classification codes or workers’ comp classification codes, are three- or four-digit codes that insurance companies use to estimate rates. Codes are based on the risks associated with each type of work an employee performs.
Some states have their own series of workers’ compensation class codes, but many states use the codes established by the National Council on Compensation Insurance (NCCI). The NCCI is an independent organization that gathers and analyzes data on workers’ compensation insurance. This handy NCCI State Map shows which states have designated NCCI as their licensed rating and statistical organization.
But how exactly do class codes work? And how do you know which compensation rates are associated with each code? Keep reading for all the answers.
Insurance providers use class codes to estimate the level of risk associated with a job. Every code describes a particular job and the potential hazards connected to it. That said, workers’ compensation classification codes are an important factor in determining compensation rates.
Riskier jobs carry higher premiums. For example, a clerical employee who works at a computer (class code 8810) is at less risk of injury than a carpenter who works on upper levels of buildings (class code 5403).
As there is less hazard associated with a desk job compared to a construction site job, it costs a company less to insure the clerical worker. In this case, class code 8810 is associated with a less expensive rate than class code 5403.
The workers’ compensation rate equation can have multiple variables, but there are three basic factors used for the calculation.
The workers’ comp class code describes the type of work performed. As previously mentioned, this code is associated with a level of risk that then determines the compensation rate.
When determining your worker’s comp rate, the insurer will use the corresponding class code to decide on a base rate for that particular type of work. Then, the insurer will adjust your rate depending on whether your company has a greater or lesser risk than the industry average.
Your workers’ comp cost also depends on the size of your workforce and, more specifically, your annual payroll. It is important to report your payroll accurately because the declared amount directly affects your workers’ comp insurance rate.
Typically, the insurer responsible for providing your workers’ comp rate asks for an estimate of your payroll for the coming year. They then use that number to calculate your estimated premium.
Underestimating or overestimating payroll can greatly impact the cash flow of your business at the time of your annual premium audit. Insurance companies use an audit to ensure your estimated policy premium was accurate.
Payroll includes categories such as wages, salaries, bonuses, and overtime. It typically excludes categories like tips, gratuities, employee savings plans, and employee discounts. If you need clarification on what factors are included in payroll for workers’ comp, consult NCCI for a comprehensive list.
When you shop for workers’ comp insurance for your small business, use an average of your monthly payroll for the estimate. Keep track of any payroll changes throughout the year, such as promotions or new hires, to ensure your compensation coverage is always accurate and updated.
Workers’ comp insurers also consider your history of claims. They use what is called an “experience modification factor” or “experience mod” when determining your workers’ comp insurance rate. This factor is a reflection of your workplace safety compared to other similar businesses and it must be included (by law) in defining your rate.
An experience mod of 1.0 is considered the industry average. An experience mod of more than 1.0 is called a debit mod. This means your losses are greater than the average and you will likely pay more for insurance. If your experience mod is less than 1.0 it is called a credit mod, which means your losses are less than the average. This should result in a discounted premium.
If you’re starting a new business, you won’t have a workers’ comp claim history. Until you have an experience mod that can be factored into the equation, you’ll likely pay more for workers’ comp insurance. Over time, your business will establish a track record and your insurer can re-evaluate your premium.
By promoting and practicing workplace safety, you can influence your experience mod and your rates considerably. The fewer claims you have, the better your experience mod—and the greater chance that you’ll qualify for a lower premium.
Each of the above three factors will help determine your workers’ compensation insurance rate, which can range anywhere from $0.57 in Texas to $2.32 in Alaska per $100 of covered payroll. Learn more about how each factor impacts your workers’ comp costs.
Now that you understand what class codes are and how they impact compensation rates, the next step is to find the correct workers’ comp classification codes for each employee’s role.
Visit this helpful directory to find the right workers’ compensation classification code(s) for your small business. This directory provides both numerical and alphabetical lists of class codes, plus a Workers Compensation Classification Guide to offer even more information.
If figuring out workers’ compensation insurance seems overwhelming, you’re not alone. Pie Insurance can help. We’ve taken the guesswork out of the process and we’re passionate about providing workers’ comp insurance for small businesses across the country.
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Thanks for reading! Please note that this content is intended for educational purposes only. As laws change regularly, you should refer to your state legislation and/or an advisor for specific legal counsel. If you’re a small business owner, learn more about workers’ compensation insurance or check your current rate in 3 minutes.