Figure 1. The differences in rates from one trade to another are sizable. That's why it's important to classify each job and worker individually. It may be worthwhile to split employees between classifications if you keep good records and your state and insurance carrier allow it.

As the business owner, I classify myself as a salesperson. Why don't I take myself off workers' comp and just carry a disability policy instead? Because under the sales classification, I pay next to nothing -- certainly less than the cost of a disability policy. (Nonetheless, I also carry a disability policy because it covers me if I'm injured away from the job or become seriously ill, which workers' comp doesn't cover.)

Primary functions. Years ago, we broke down our employee classifications by percentage of exposure -- if an employee spent 40% of the year roofing and 60% of the year painting, we'd report that, and our insurer adjusted the rates. That worked for a couple of years, but eventually, our insurer disallowed mixed classifications and arbitrarily reclassified my entire company under general carpentry.

That was my wake-up call. Determined to classify each of my employees properly, I contacted my state's insurance regulatory bureau and requested a list of possible classifications within a residential remodeling business. The bureau sent excerpts from the Scopes Manual, and I compared my employees' functions against them. Then I contacted the NCCI to get the payroll rates for our area per $100 for the respective classifications.

Classifying an employee under an inappropriate category is illegal, but to classify a worker who performs a range of tasks under his or her primary capacity is generally accepted. For example, an employee who is primarily a carpenter may install a minor amount of roofing without being forced into the costly roofing classification. And, as a salesperson, I can take a fall from a roof during a sales inspection and still have my injuries and downtime legitimately covered by workers' comp. But if an employee installs roofing 60% of the time, roofing is the appropriate classification for that person. We subcontract all of our roofing for that reason.

Check Those Certificates of Insurance
Any subcontractor or trade contractor who works for us has to provide us with a current (annual) Certificate of Insurance -- one that covers the dates they're actually working for us. At first, we dutifully collected certificates but didn't really look them over. There are two boxes on a standard Certificate of Insurance, one for Workers' Compensation, the other for Employers' Liability (Figure 2).


Figure 2. When you get a Certificate of Insurance from a subcontractor, make sure the box next to Workers' Compensation is filled in. Otherwise, you may become liable for paying that sub's comp premiums. Aggregate coverage should be at least $500,000 per incident.

We were caught with our pants down on that one. It turned out that the employer liability certificates were meaningless to the workers' comp auditor. As a result, we paid on every uninsured sub's invoice for services rendered to my company during the past year. Although it cost us hundreds, not thousands, of dollars, it was an entirely avoidable and unpleasant surprise. Make sure that the Workers' Compensation box is checked and that the aggregate coverage is at least $500,000 per incident.

Make Sure Subs Itemize Labor
In one instance, we hired a solo roofer who couldn't provide a Certificate of Insurance. The problem was, the bill he turned in wasn't itemized by labor and materials; it was a lump sum invoice for $9,000. At the audit, we had no way to substantiate that nearly half of the invoice reflected material costs. Auditors don't argue, and they don't make judgment calls. If your records only show a lump sum amount, you'll end up paying on that total. Now we always make sure that our records and our subcontractor invoices itemize labor and materials.

After reviewing your subcontracted labor, the auditor will want to see your 941 quarterly payroll report, the form you use to pay your payroll tax. Because I want to control my employee category selection, I supply the auditor with a list that identifies each employee in his or her respective category. Individual employee earning reports are a simple menu choice in our Peachtree accounting program or can be taken directly from form 941.

Lowering Risk
Your insurance may be provided through your state's assigned-risk pool, which means that your insurer considers your company a poor risk. To get out of that pool, you first have to find out why you've been assigned to it. Your company may simply perform the kind of high-risk work that triggers a high experience rating. Maybe you should be hiring self-insured subcontractors to perform your riskiest tasks, like roofing.

If your company shows a significant accident and claims rate, your rates are likely to be higher the following year, and for years to come. A single $10,000 claim settlement is less likely to trigger a high rating than a half-dozen minor incidents.

Prevention still the best cure. Look at your company's past claims history and consider whether you've taken proper corrective actions. Institute and maintain a company safety program. It may take a few accident-free years to prove that your risk rating should be lowered again, but it's certainly a worthwhile exercise. Showing proactive concern for your employees' safety goes a long way toward eliminating lingering resentment if an accident should occur. Remember, everyone looks good in safety glasses.

To File or Not to File
That may be a question you'll ask yourself when an employee suffers an apparently minor injury. Rather than see your rates increase following a few stitches or a broken bone, you might be tempted to cover the medical costs and recuperative time out of pocket. Be careful. If you don't report the injury when it occurs and complications from that same injury arise later, the carrier will decline coverage. You may also be in violation of state law. Your company's assets could then be left wide open to a costly lawsuit, bound to be far more expensive than even a long-term rate hike.

By Robert Criner

This article has been provided by www.jlconline.com. JLC-Online is produced by the editors and publishers of The Journal of Light Construction, a monthly magazine serving residential and light-commercial builders, remodelers, designers, and other trade professionals.