Payroll And Workmans Comp / CLASSIFYING RISK Part 1

fez-head

Well I got hit with a $5,500 work comp audit this quarter along with a $7,000 payroll liability deficit (we tried to do our own payroll)


We have hired a new accountant that is redoing our QB's from scratch and I have also been searching for ways reduce our work comp. In doing so I remembered reading a thread about someone separating all of their time cards by the classification codes in QB's - but could not find the proper thread.

I did find a few good articles though and will post them below. If anyone remembers the thread mentioned above I would sure appreciate you pointing me in the right direction.

Thanks,
Jesse

COVERING CONTRACTORS Understanding payroll helps agents understand contractors' codes

By Linda D. Ferguson


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First in a three-part series


It was a dark and stormy night. Our family was watching Home Improvement. As the storm became stronger, the children asked if they should head for the basement. Suddenly, BANG--glass broke, the dog ran under the desk and the kids headed to the basement as my husband discovered our neighbor's metal porch had flown into our dining room. This was our introduction to a number of contractors. The claim came in under $5,000 but we had to work with a roofing contractor (the porch split with part coming through the roof and part through the window and wall), siding contractor, window installer, floor refinisher and painting contractor.

Contractors come in many sizes and take on many roles, but most are like the men we met after our claim: hard-working individuals who are interested in doing the best job they can for their customers, whom they meet only once or twice and often in very trying situations. They must work efficiently and guard their time jealously because their time is truly their money. How then can we best serve them and make sure we provide the best coverage at the most equitable cost? The first step is understanding their classification and cost basis.

While many contractors can fit into specialized BOP products, starting with ISO continues to be the best bet. This is a neutral starting place for understanding the risk. Using the ISO payroll and receipts definitions can help when analyzing the offerings from the various BOP companies. The more accurate the receipts and payroll, the easier it is to understand the differences in plans and guide clients to the best plan for their circumstances.

The contractors class is an extremely broad category with no limitation on size or payroll. However, there are some consistencies. Almost all contractors' codes are based on payroll, which makes it is very important to understand who is included in the payroll.

As usual, all clerical and drivers are excluded.

Sole proprietors, copartners, executive officers and managers of limited liability companies are subject to a payroll limitation. This limitation is by state and can impact premium dramatically. As an example, if the sole proprietor has an actual payroll of $50,000 but the state exception limits the payroll to $24,000, the insured has received a considerable savings. This rule recognizes the fact that the compensation of sole proprietors, officers and managers is different from that of an employee. If there are multiple employees, these individuals will be operating in a more supervisory capacity. If there are no other employees, a large amount of time will be devoted to clerical and other functions. Many companies have filed payroll limitations that vary from the ISO standard. This subtle change can dramatically impact the premium for a small contractor.

Since the limitation is an annual figure, ISO has developed a formula for seasonal or part-time businesses. It states that the annual limitation may be reduced by 2% for each full calendar week in excess of 12 during which the risk performs no operations. Therefore if the limitation is $24,000 but the insured only works three months, the actual limitation would be computed as follows:

Out of 52 weeks, 12 weeks the insured works + 12 weeks before the ISO exception begins = 24 weeks. The 24 weeks of downtime is multiplied by .02 to give .48 reduction. The reduction is a multiple by the state limitation and becomes $24,000 x .48 = $11,520. The insured would report a payroll of only $11,520 instead of the annual limitation of $24,000.

Contractors with employees who have just started out in the contractor industry may include a tool purchase plan as part of the hiring process. The employer will require that the employees have certain tools of their own and help them buy the tools over the course of employment. In addition, some employees own mobile equipment that will be useful to the employer. The employee is then paid for his or her labor plus the cost of the equipment. This cost of equipment usage is considered with the payroll.

Contractors also must travel from job to job. While many can stay in one place, there are times when travel is a requirement and cost is less to stay on location than travel back and forth. The cost of renting a home or other lodging must be included in the payroll for an employee. If the home is owned by the insured and the insured provides the home free of charge to the employee, the fair rental value of that home must be considered payroll.

The away-from-home employee may be given additional incentives to make life more pleasant. All of these incentives are considered to be part of the remuneration for that employee. This is not limited to food alone but could include store certificates, merchandise and more.

Mobile equipment operators and their helpers' payrolls must be included. If the equipment is hired and the breakdown between equipment and payroll is not known, then one-third of the hire of the equipment is used.

Many contractors have found that leasing employees can be more attractive than hiring employees. This arrangement can be helpful to all parties due to the seasonal nature of the operations. When this direction is chosen, the insured has two options for showing payroll. First, the leased employees can be shown as the same as a comparable employee on the insured payroll. The second option is to use 100% of the total cost of the contract for the leased employees. However if the contract is broken down to show the payroll for a special employee, that payroll may be used.

An important item for any firm that uses leasing firms is that the employee fee is considered remuneration and must be included in the payroll.

Next month we will explore the proper classification and the important discussion: When does a subcontractor become an employee? *

The author

Linda D. Ferguson, CPCU, has 30 years of underwriting experience with national commercial lines carriers. She now operates a consulting business, Pleasant Street Consulting Company, in West Union, Ohio.

fez-head

COVERING CONTRACTORS--PART TWO

Defining scope of general and independent contractors helps determine correct classification

By Linda D. Ferguson


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The porch through the dining room, mentioned in last month's column, caused a situation that had to be repaired. Because of the damages, it would be necessary to use five different contractors. It was up to my husband and me to either hire a general contractor to bring all of the work together, or we could be our own general contractors. Because the job was small, options for contractors willing to do the work were limited. We had the flexibility to be at home when the contractors could come, so we chose to be our own general contractor. Had the circumstances been different, a general contractor would have been the only logical choice.

There are two distinct types of general contractor. One type, sometimes called a paper contractor, never actually supplies any of the physical labor. His responsibility is to work with the customer to determine what is needed and then line up the people to finish the job to the satisfaction of that customer. His price includes the cost of the subcontractors and his fee for services. A good general contractor is worth every penny he is paid because he knows the abilities of the subcontractors with whom he works, as well as how to coordinate projects so that jobs can be finished in a timely manner.

The second type of general contractor actually does part of the work. Often, the "general" supplies the carpentry and then subs out all of the remaining work. This allows for more direct contact with the work, and the customer can see the person working at the site.

Both of these types of contractors start with the same classification--Contractors - Executive Supervisors or Executive Superintendents - 91580. The footnotes make it very clear that if there is day-to-day supervision or on-the-job-site supervision, the risk must be classified based on a more direct classification. Another note is that no one can have split payroll. Therefore, if you have Contractor - Executive Supervisor who also is performing physical labor, all payroll must go to the most applicable class. It may not be split between the two.

In addition, the general contractor must pay premium based on the cost of the work that is subcontracted. There are nine classifications from 91581 to 91589. Each code starts with the words "Contractors - subcontracted work" followed by a description of the type of work the subcontractors are doing for the general contractor. The premium charge is low in comparison to the exposure because the general contractor's policy operates under the assumption that the independent contractors all supply certificates of insurance and have valid policies.

In a perfect world, the independent contractor is truly independent, with his or her own insurance. Unfortunately, some general contractors are really full contractors because the "subcontractors" are actually employees operating in disguise. It is important to be able to take off the disguises BEFORE the policy is issued, rather than after the claim or premium audit.

Many court decisions have been rendered concerning when a person is a contractor and when he or she is an employee; yet confusion continues. The confusion, however, doesn't seem to take over until someone falls off a roof or causes an explosion. Suddenly that independent contractor amazingly remembers that he was actually an employee. Even the insured can have a change of heart, depending on the loss. Here are a few questions that might help point everyone in the same direction.

1. Who determines the starting time and ending time of the job? An employer dictates time and place of employment. An independent contractor sets his or her own hours.

2. Who determines the working conditions? An employer is the one who oversees the work environment and establishes policies on what is and is not permitted. An independent contractor establishes his or her own working conditions.

3. Who determines the dress code? An employer establishes an expectation of working dress even to the point of providing uniforms in some circumstances. An independent contractor chooses his or her own dress.

4. Who supplies the tools for the worker to use? Employers normally supply tools to the employee while independent contractors always supply their own tools.

As you read the above questions, think about the "paper contractor" who is coordinating jobs. He very well may be setting a starting time but only because one job must be completed before another can start. In many states, the paper contractor also is responsible for maintaining a safe work environment on a job site. Because of the need for many independent contractors to work at the same place, the paper contractor may dictate safety rules that all workers are expected to keep. The paper contractor may have a dress code for jobs for security purposes at certain job sites.

The biggest safety net a general contractor can have is a solid certificate of insurance program. If an independent contractor is working on a job and does not provide the necessary certificate, the premium audit is required to treat the contractor as an employee. Even more important, if the independent contractor causes a loss, the paper contractor will be picking up that loss with little chance of subrogation if the insurance is not in place. The discipline of keeping certificates current is vital for the general contractor. There never should be an independent contractor working without a current certificate.

If a general contractor uses an independent contractor on a fairly regular basis, a good contract will solve many problems. The contract should clearly outline their relationship and set the requirements for insurance including the requirement that the general contractors be named as an additional insured on the independent contractor's policy. The contract should state the type of insurance required, including the limits of insurance. Remember, the higher the limits, the less chance of the general contractor's policy being called into play.

In last month's column we discussed the need for proper classification and payroll determination. This month, we have reviewed the important Executive Supervisor code and the problems associated with the general contractor/independent contractor role. In next month's column we will look at the contractors classifications and footnotes as a guide to pick the correct class. *

The author

Linda D. Ferguson, CPCU, has 30 years of underwriting experience with national commercial lines carriers. She now operates a consulting business, Pleasant Street Consulting Company, in West Union, Ohio.

fez-head

COVERING CONTRACTORS--PART THREE

One $5,000 loss to residence calls for contractors' work tied to nine different classification codes

By Linda D. Ferguson, CPCU


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Third of a three-part series


In the last two columns we illustrated the exposures of various contractors by using as an example the contractors who made repairs to our house following a recent windstorm loss. In the first column (August Rough Notes) we discussed payroll definitions and in the second (September Rough Notes) we discussed the role of the general contractors. In this concluding column, we will discuss the proper classification of the contractor and proper separation of payroll in order to gain a fair and equitable price based on exposure.

The contractors who were needed to repair our house all had at least one thing in common, but there were also a lot of differences. The common point was that they were contractors. As such they didn't sell a product but instead sold a service. They were all prepared to repair the damage that had been done. Any materials they used would be of their own choosing, with very little consultation with us. As their customer, we would trust their judgment and expertise in making those choices. As a customer, we were really paying more for their accumulated knowledge and ability than for the physical cost of materials.

Since we had a hole in the roof, the first contractor we wanted to locate was a roofer. ISO classifies roofers as either residential (98678) or commercial (98677) and provides no footnotes of explanation for either classification. Both codes are based on payroll. If the individual handled both commercial and residential, he would have two choices. Either lump the payroll together and pay based on the highest rated code or keep track of payroll by type of job and use the two codes. While the choice may seem obvious, for some operations keeping the payroll separate would result in higher bookkeeping costs than would be saved in insurance premium.

The contractor we used was a "disaster expert," or at least that was what his advertisement said. He specialized in the emergencies of life and could handle not only the exterior repairs but also the interior. As such, he could qualify for multiple codes. First, he had to do some carpentry work to fix the hole in the roof. If there had been additional carpentry work needed, he had the tools and the knowledge to handle it. There are five carpentry codes provided by ISO, but only Carpentry NOC (not otherwise classified) (91342) would have fit this individual, based on the footnotes provided. Next, he had to check the electrical because water had penetrated the roof and shorted out the overhead light. This could be classified as Electrical Work in Buildings (92478). Then he had the roofing job itself to complete.

Water had hit the dining room walls, but the wallboard was not damaged. If that had happened, he could have repaired the damage and then have put that payroll in class Dry Wall or Wall Board Installation (92338). Once the roof was finished, we did need to have the walls repainted. He could also supply that service and therefore could have classified that payroll as Painting - Interior--Building or Structure (98305).

We had siding put on the house and new windows installed about a year before the accident, so we called that firm to repair the damage to the siding and the windows. The primary classification for that work would be Siding Installation (98967), but the windows would be classified as Door, Window or Assembled Millwork-Installation--Metal (91746). If the siding or the windows had been wooden, as opposed to metal, the Carpentry NOC (91342) code would have been the appropriate classification.

The final part of the reconstruction process was the floor. The dining room had been carpeted, so our first thought was to purchase new carpeting and have it installed. The carpet would be purchased at either a furniture store or a floor covering store, and the store would arrange for installation. The installation would be classified separately from the floor-covering sale. The installation is classified as Floor Covering Installation--Not Ceramic or Tile (94569).

However, we had a second choice. When we removed the carpet, we discovered a beautiful hardwood floor. We chose to have it refinished rather than carpeted. The refinishing code is Carpentry - Interior (91341).

In order to properly classify the contractors who handled a very small situation we have reviewed nine different codes. The ways in which these classifications are used will determine the final premium for the contractor. These contractors were like all of us, doing the best job they could in the work environment they had. The one thing they didn't need to worry about was the insurance they were buying and the price they were paying. That was the job they were paying their insurance agent to handle. Just as the contractor carefully picks the right material and tools for the job, the agent needs to pick the correct classification and payroll to provide the correct premium.

I was pleased with the reconstruction these individuals did. When I watched them, I could tell they were doing the best they could and were trying to please the customer with service and quality. The roof never leaked, the window worked well, the floor was beautiful. Everything they promised was delivered.

As part of the industry that provides the "disaster relief" to these individuals, I hope we respond with the same concern for quality and precision in our line of work as they gave to me in their line of work. The contractor is paying not just for the paper and computer time but is really paying for our knowledge and our ability to choose on his behalf. Taking the time to search a little in the classification manual can make life a little easier for your new client. *

The author

Linda D. Ferguson, CPCU, has 30 years of underwriting experience
with national commercial lines carrieres. She now operates a consulting business, Pleasant
Street Consulting Company, in
Newtonsville, Ohio. She can be reached at ldfcpcu@hotmail.com.

Grumpy

That was probably me who spoke abotu multi-classification of workers. You better check with your WC carrier before tryign this as it is my understanding not all allow you to multi classify an employee. If I have an employee roofing one day and framing the next, the classifications are obviously different. We have created seperate accounts in quickbooks under labor, and when entering the time cards into quickbooks, we simply make sure each wage goes into the proper account.

fez-head

Very good, thank you Grump.

I was actually going to email the thread to both my new work comp agent and my new accountant. I will search for the term "multi-classification of workers" and see what comes up.

My agent said that when the estimator is working in the office we can list him under clerical instead of carpentry - which as you know saves a bundle.

The search continues - Thanks again,
Jesse

BirmanBuilders

Don't pay the audit! The insurance company will bend over backwards to keep you if you are a pretty good customer. Talk to your agent, explain the situation, bull**** a bit more and make them move. I know guys who have saved thousands by talking with the insurance co, crying poverty, they should move, especially if you've had no claims.

__________________
If at first you don't succeed hit it harder!

fez-head

Never had a claim but it is through Travelers I have already paid $1,300 for the first months instalment but am going to have the audit looked over again. The young auditor asked no questions which makes me nervous.

The new company looked at my audit and quoted $2,000 less per year for the exact same coverage.

world llc

travelers sucks... i have been fighting with them a few months now over a 3600 audit that is unfounded....

Tcreyn

As a discussion point, many W/C carriers and agents refer to this practice as "split coding". Naturally, not all codes can be split. It is also VERY important to maintain accurate supporting documentation .Rest assured it will be requested upon your quarterly or annual audit. Also, please confirm your state allows the practice of "split coding". In addition, depending on your state, you may be eligible for a "FCCPAP" credit (if you are in FL). Not all agents or companies proactively discuss this credit. If you are interested in lowering W/C premiums, you could also investigate dividend, deductible or retro plans (depending on your premium and experience). In addition, you may find outsourcing to a PEO (employee leasing company) another option.

kauser667

We track our wc on qb its great!

Any time the worker does a different task/class for each job they write down on the time card.

Once entering the time for the person look at the classification and charge it to that job/wc class.

Some times it can be tedious if the worker does many different jobs during the week but it pretty easy once you have a system in place.

But each state is different about mixing classifications