Triggers That Cause Workers Compensation Employee Reclassification

Our firm works a great deal of workers compensation employee misclassification cases. It can be an unfortunate and very costly situation for any employer faced with having their employees reclassified. As an independent work comp consulting firm we have a front row seat to the recurring circumstances identified as triggers for employee reclassification that often lead to additional premium due on the part of an employer. So we thought it might be a good idea to talk about a few of those recurring triggers.

When rating payroll of an employee is assigned to the wrong classification an error has occurred. This is considered as a misclassification. The incorrect class may be one that carries a higher or lower rate resulting in a higher or lower premium to be paid by the employer. Incorrect classifications throw the whole system off. Loss costs and rates are developed for specific classifications based on claim history gathered for those classifications and when an incorrect class is used it skews the whole rate making system.

Reasons for employee misclassifications may be broke down into two basic categories.

  • Intentional misclassification
  • Mistaken misclassification

Intentional misclassification crosses over into the arena of fraudulent activity. This occurs when an employer intentionally gives incorrect information about employees and their work duties with the goal of having a lower workers compensation premium. But don’t forget that the classification system is quite complicated and honest mistakes do happen. So let’s consider in our test case that our employer has a mistaken error in the classification of their employees. 

What are a few of the reasons that may have caused a mistaken error in classification?

  • The class code used at the inception of the policy was incorrect – This occurs with some frequency. The agent and/or insurance company underwriter may not have properly interpreted the duties of the employers worker. Or the employer may not have properly identified and communicated the work duties to the agent or underwriter.
  • The original classification may have been correct but the workers duties have changed – Another common situation. When the original policy was started the codes were correct but some time later the workers duties were changed causing a misclassification.
  • The employer has expanded or changed their operations – Another common situation. Where the employer has somehow changed their business operations, doing something different or in addition, that causes a misclassification.

What triggers will cause a discovery of an error leading to a reclassification of the worker?

  • The Audit Process – The workers compensation policy gives the insurance carrier the right to audit the policy. Typically the audit happens after the expiration of the policy and is where the insurance company will gather the actual rating payroll generated by the employer during the policy and compare that with how the original policy was set up and make adjustments. It is also the opportunity for the insurance company to “get a look” at what the employer is really doing and to gather fact about their actual operations.
  • Rating Bureau Inspection – Rating bureau or advisory organizations are tasked with making sure the classification system remains valid. They do this by conducting periodic site inspections of an employers work place. The inspection is to make sure the employer is properly classified and if an error is discovered the bureau will instruct the insurance carrier to correct the class codes on the policy.
  • Changing Insurance Carriers – Who would have thought that changing insurance carriers could trigger a reclassification of workers? Well it happens with some frequency. When an employer has been with the same insurance company for several years a sort of complacency takes over. The insurance company seems satisfied with the way the workers are classed and things stay the same. But when a new insurance company takes over the employer becomes subject to the scrutiny of the new business underwriting process. The new company may have a different interpretation of the class codes that apply to the employers operations.
  • Change in Auditors – If the same auditor has performed audits for the same employer for years you may find they become comfortable with the employer and their operations. They may not realize there has been a change. But when a new auditor works the account they will be focused on the work place details. It is common to find reclassification issues when there is a change in auditors.

The occurrence of any one of these triggers may cause a reinterpretation of the classifications used on an employer’s policy leading to the reclassification of a worker and assignment of their payroll.

Hope this helps you out and thanks for reading!

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