An Incorrect Workers Compensation Audit – Payroll Separation Not Allowed

Under certain circumstances an employer is allowed to separate payroll between workers comp class codes for individual employees. Limited to certain specific industries, payroll separation can drastically reduce an employers overall insurance cost. Let’s take a look at what’s required and why proper separation is sometimes overlooked.

For NCCI states payroll separation is allowed on construction risks. A construction employer may have different crews on their staff who perform totally different work operations. For example one service an employer may provide is that of residential framing carpentry work where his crew goes to a work site and frames the structure of a home.  The typical code used for this type of work is 5645 which carries a fairly high workers comp rate. Many times we’ll work a case where the employer not only provides the framing work but also works on the interior of the home installing cabinets, doors, trim work and flooring, recognized under the code 5437, a much lower rate than 5645. The problem comes when the same contractor performs both of these jobs on the same project in which case separation of payroll is not allowed. (It’s guided by the class code descriptions.) So in this case, where there are two similar but distinct types of work processes involved, both work processes are included under the higher cost code of 5645. But if this employer sends his interior work crew to another job, one where his employees did not perform any framing duties, the lower rated code would be appropriate.

Now lets say this employer still provides residential framing but also has a crew that provides carpentry services not contemplated under 5645 such as some commercial related carpentry type operation. Maybe they build commercially operated turkey barns, more than likely found under 5403 carpentry NOC, generally a lower rate class than 5645. Half of the payroll is generated framing homes and half building turkey barns. Now for the kicker lets say the turkey barn building part of the employers operation just started this past year, and the employer forgot to tell his workers compensation insurance agent. 

Now for the question…

Will the employer have to pay the higher rate for his entire payroll for the past year? Maybe…maybe not! It generally depends on how he kept his payroll records. You see this is a simple example of payroll separation. To qualify for payroll separation these two things must be met:

  • Separation of payroll must be allowed as directed by the manual rules and code descriptions;
  • Employer must maintain proper payroll records that show the actual payroll by classification by each employee.

Typically, proper payroll records:

  • Must show the actual time an employee spent working in each job classification. Think time cards showing each hour an employee worked on each job! Estimations or percentages are not allowed!
  • Must show that an average hourly wage that’s comparable in the employers industry for employees working those type of jobs, was paid;

If the payroll records do not show the actual pay for each classification as outlined above then the entire payroll is assigned to the highest rated classification. Ouch!

A word of caution! Do not assume you can take advantage of payroll separation for your business! But if you can, make sure you ask for help in setting up your payroll records. Your records must show the actual hours worked by classification.

Lesson Learned: If you are allowed to separate payroll, have the means and ability to do so, your workers compensation premium may be significantly reduced! Be sure to ask your agent if you can take advantage of payroll separation and if they can’t help you contact our office for help!

Oh, by the way, the employer I used in the above example was allowed to separate his payroll, had proper records and saved over $30,000 in premium! You just have to know the rules.

Hope this helps you out!