Restaurant owners who are just now beginning to reopen need to be prepared and pay close attention as to how changes they may have made in their normal pre-covid 19 operations may affect their workers compensation premium at audit time.
The Issue: Restaurant owners who were forced to modify their daily operations from sit down table service to delivery due to covid 19.
The Problem: Potential additional workers compensation premium will be due at audit because of a shift of payroll from restaurant NOC code 9082 to delivery (drivers) code 7380.
The Discussion: Most employers, those who have workers compensation insurance, have been through a workers compensation audit sometime in the past. Workers comp audits should be completed every year just after the policy in question has expired. The audit is the process where the insurance company examines your accounting records, takes the payroll information that you provide and uses that information to create your final premium for the policy period in question. The audit is a contract condition found within the workers compensation policy. You, the employer, agree to comply with the audit process when you buy a workers compensation policy.
In addition to gathering correct rating payroll or remuneration data from the employer the audit is also the opportunity for a workers compensation insurance company to examine the business operations and, when appropriate, make adjustments to the classification of the business. Under certain circumstances the insurance company can add classification codes and/or shift rating payroll between classification codes in order to develop the proper premium for exposure to work hazards identified and present in the employers business operations.
Restaurant owners, who under normal operating conditions provide table service for their patrons through the use of a wait staff, will find their business classified under code 9082, restaurant NOC. As we are all aware during the year of Covid-19, otherwise known as 2020, most sit down and fine dining restaurants were forced to modify the way they served their patrons. Sadly, many restaurants just up and closed down, some after years of serving their local communities. Those who were fortunate enough to have survived by changing from sit down dining to some form of delivery, curb side pick up or even take out need to pay attention as to how their modification in business operations will affect the premium they pay.
Restaurant employers who moved from sit down and or fine dining to curb side pick up and take out will more than likely not experience a change in the classification codes used on their policy. However, those restaurant employers who moved from sit down dining to delivery need to be aware that at audit they may be subject to having delivery, code 7380 added to their policy and if they are not careful suffer additional premium because rating payroll is shifted from 9082 to 7380.
Lets take a closer look at how this shift in payroll from restaurant NOC to delivery may affect the premium an employer pays.
Here’s a sampling of the difference in 2020 assigned risk rates per 100 of payroll by State between these two classifications:
State 9082 Restaurant NOC 7082 Delivery
AR .90 3.27
AZ 1.58 4.82
GA 5.42 17.01
IL 2.48 13.71
MO 2.69 10.34
Keep in mind these are state specific assigned risk rates and may not represent the rates your company may be subject. Many restaurant businesses purchase their workers compensation insurance from standard market insurers who will use their own rates. However this sampling does show the relationship between rates charged for the restaurant NOC class code and the rates charged for the drivers class code.
Let’s take a look at a simplified rating example using the Arizona rates shown above.
In our example we’ll assume the restaurant in question, under normal business operations, this sit down fine dining restaurant had an annual payroll of $200,000. Please keep in mind that workers compensation premium calculations are a bit complicated. For purposes of this post I’ve simplified the calculation process. While it’s not correct, it will give you a good idea of how changes will effect premium. Here’s what their simplified workers compensation premium calculation would look like:
- Payroll = $200,000
- Rate = $1.58/100 of payroll
- Simplified Premium Calculation: $200,000/100 X 1.58 = $3,160
Now lets assume that ½ of their normal staff were laid off due to Covid-19 so their payroll for 2020 ended up being $100,000. Out of that $100,000, $50,000 is for kitchen staff and $50,000 is for delivery staff. Here’s what their simplified workers compensation premium calculation may now look like:
- Payroll = $100,000
- Kitchen Staff Payroll (still classed as 9082) = $50,000/100 x 1.58 = $790
- Delivery Staff Payroll (now classed as 7380) = $50,000/100 x 4.82 = $2,410
- Total Premium = $3,200
Analysis: Under normal operations this restaurant would pay $3,160 in workers compensation premium. Due the shift in normal operations away from sit down dining to delivery, even though the rating payroll was cut in half, this restaurant will pay a little more than what they would have normally paid before Covid-19.
That’s not such a drastic difference. Mostly due to the fact that the Arizona rates for sit down dining and delivery or drivers are somewhat close.
Now let’s take a look at Illinois and use the exact same example as above. Here’s what the premium calculation would look like:
- Payroll = $200,000
- Rate = $2.48/100 of payroll
- Simplified Premium Calculation: $200,000/100 x 2.48 = $4,950
Now we’ll apply the same modifications:
- Payroll = $100,000
- Kitchen Staff Payroll (still classes as 9082) = $50,000/100 x 2.48 = $1,240
- Delivery Staff Payroll (now classed as 7380) = $50,000/100 x 13.71 = $6,855
- Total Premium = $8,095
Analysis: Under normal operations this Illinois restaurant would pay $4,950 in premium. However, due to the shift in operations from sit down to delivery, even though there was a significant 50% cut in payroll, the move into delivery may increase this restaurants premium to $8,095!
Now you’re beginning to see the potential for large additional premium increases at audit for restaurant operations.
Something you need to know, code 7380 is what’s known as a “Standard Exception Code.” This is the only standard exception code that allows for division of payroll. In other words, the rules allow for separation of payroll between this code and another non-standard exception or governing code when proper records are maintained that can prove how many hours an employee spent of their time working in each class code and when the governing code description does not include drivers.
The Take Away: If you own or operate a sit down or fine dining restaurant and you have modified your operations to delivery or you have added a delivery component to your operations you should:
- Be sure you keep accurate payroll records for use at audit time;
- If you have an employee who works in the restaurant and also spends time delivering be sure you keep records of the hours they spend and payroll they earn for doing both. CAUTION! Do not use percentages to try and separate the restaurant work from delivery. That will NOT WORK! You MUST keep records in HOURS worked.
- Keep in mind that workers compensation is State specific! While the situation described in this post may apply to you and your business it may not apply to a similar business in different states.
- Be sure you ask your insurance agent about how your delivery operations may affect your specific business!
Hope this helps you out!
Stay safe and thanks for reading!