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Audits.
California "Dual Wage" Classifications in Workers Comp
Insurance
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One of the more unique aspects of the California
Workers Compensation insurance system is the use of
so-called "dual wage" classifications. No other
state uses this particular classification
methodology.
 
Under this unique rating system, certain kinds of
construction and erection work are split into two
possible classifications, based on the average
hourly wage of the construction workers.
Higher wage workers generally are available to be
assigned to a significantly less expensive class,
while workers who don't meet a certain threshold
hourly wage get assigned to a more expensive class,
even though they're doing the same kind of work.
It can be a trap, though, for California
contractors. Take a look at this
blog entry regarding one such case of ours.
The rating bureau for California, the WCIRB,
explains the situation here.
The particular hourly
wage "threshold" that qualifies for the (almost
always) cheaper classification
gets adjusted regularly, but the principle
remains the same: if the employer can properly
document that workers are paid at least much, or
more, as the threshold hourly wage, the payroll for
those workers gets assigned to the cheaper "high
wage" classification.
It sounds like
this should be a useful thing for California
contractor-type companies. But in practice, it often
turns into a painful and expensive trap--because
in actual practice, insurers often play a bit of a
sleight-of-hand game with the use of these dual wage
classifications.
Here's how the
trap works
When the employer purchases the policy, all the
construction payroll is assigned to the cheaper
"high wage" classification. The more expensive "low
wage" classification is listed on the policy,
typically with little or no payroll assigned, so it
has little or no impact on the policy's initial
estimated premium.
But after the policy ends, and the audit is done,
suddenly the well-trained auditor is very, very
persnickety about the record keeping rules that
pertain to actually being eligible for that cheaper
high wage classification.
Those rules get enforced
by insurers, at the audit, with the most extreme and
nit-picking care, in our experience.
Here's how it worked for a recent client of ours, a
small plumbing contractor in Los Angeles. When the
policy was written, all the non-clerical payroll was
placed into Code 5187, the plumbing classification
used when workers are paid $26.00 per hour or more.
This class had a rate of 5.21 per hundred dollars of
payroll.
Also on the policy was Class 5183, for workers paid
less than $26.00 per hour. That class had a rate of
$10.41 per hundred dollars of payroll. But that
class had no payroll shown, just "IF ANY", so since
there was zero payroll in that class it generated
zero premium--at
least, zero
initial estimated premium, on
the original policy that
was sold to this plumber.
But of course, the initial estimated premium on the
policy isn't the actual cost for the insurance. After
the policy ends,
the insurer normally wants to determine what the
actual payroll was for the policy period--after all,
premiums for Workers Comp insurance are based on
payroll.
But audits often do more than just adjust payroll.
In this case, the audit did a classic Shock Audit
switcheroo--the audit, unlike the original policy,
placed all non-clerical payroll into the $10.41
classification, and none into the $5.21 class.
Presto, change-o--this plumber's insurance
rate just doubled, after the policy was ended
and it was too late to do anything about it.
And all perfectly according to Hoyle, or rather,
according to the self-serving rules the insurance
industry has created.
Those self-serving rules require that daily records
be kept, records which record start time, stop time,
start and stop time for unpaid meal breaks, and
total hours for the day.
These records can't be reconstructed retroactively
or deduced from other records--the employer has to
keep contemporaneous time records that capture all
this information. Without those daily
records, it doesn't matter if the employer
can show the workers met the high wage threshold.
Without that, the payroll
gets tossed into the more expensive, low wage class.
Now, WCIRB rules
say that, for salaried workers, you don't need to
keep such detailed daily records. But we've seen
some insurers insist, on the audit, that without the
daily records, capturing each piece of information,
everyone goes into the more expensive class.
And WCIRB rules also state that, when push comes to
shove, an employer really only needs to keep those
daily time records for those workers who go into the
cheaper high wage class.
But we see insurers sometimes conveniently
forgetting these particular aspects of the rules.
A lot of
California contracting companies have learned this
lesson the hard way. But we regularly and routinely
hear from California companies who have been
ambushed by this.
Nowadays, there are smartphone apps
that can be used to capture the needed time data, or
apps for tablets like an ipad that a supervisor can
use to record down the needed data for multiple
workers at a job.
But we recommend checking first with your
particular insurer to get verification that your
insurer will find a particular app acceptable for
this purpose.
Given how we've seen some insurers use any and every
possible excuse to exclude certain time records,
it's best to get in writing, if possible, an
insurer's agreement regarding the acceptability of a
particular time keeping method.
 
     
All of the above is offered for information purposes
only. Advanced Insurance Management LLC is not a
law firm, so if you have any question regarding
Workers' Compensation law you should contact appropriate
legal counsel.
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