Payroll Classification and Experience Rating

Job Classifications and the Payroll Basis

Workers compensation premium is based primarily on payroll assigned to job classifications, with applicable rates and rating adjustments. The National Council on Compensation Insurance (NCCI) or an independent state rating organization maintains workers compensation classification codes where its system is used. Workers compensation classifications generally describe an employer's business operations, although applicable rules classify certain occupations, such as qualifying clerical office employees, separately. Each classification has an applicable manual rate reflecting the expected cost of insuring that type of work, and these rates can vary by state and insurer.

Higher risk job classifications carry higher premium rates per unit of payroll than lower risk classifications. For example, clerical office employees typically receive a low-hazard classification code with a low manual rate. In contrast, roofers, loggers, and structural steel workers carry high-hazard classification codes with high manual rates because their daily duties expose them to much greater injury hazards.

Under NCCI rules, the governing classification generally is the applicable classification with the largest payroll, excluding standard exceptions. Standard exceptions are specified occupations that may be classified separately from the employer's governing classification when the rating rules permit. Qualifying clerical office employees and outside salespersons are common standard exceptions, while drivers are classified separately only when the applicable rules permit. General exclusions are operations, such as aviation or new construction, that applicable rating rules require to be classified separately from the governing classification.

Employers must keep accurate records of employees' duties and payroll so remuneration can be assigned to the correct classifications. If an employer cannot document how payroll is divided among applicable classifications, rating rules may require assigning the entire unallocated payroll to the highest-rated applicable classification, which significantly increases premium costs.