Staffing Company Class Code Assignments: A shot in the dark?

By Rob Schild

For a staffing company, determining the correct workers’ compensation class codes for their clients and applying the correct class code for their employees working at their client’s location could mean the difference between profit and loss, remaining in business and closing your doors. Ultimately it is the staffing company that is held responsible and will have to pay for the difference between the correct class code/rate and the class code/rate that was used.

What does this really mean?

In 2006, I received a phone call from a staffing company owner in California. The owner was desperate. He explained that his company had recently received a workers’ compensation audit bill from the state workers’ compensation fund for over $80,000 as well as a policy cancellation notice if the audit was not paid within 10 days.

The staffing company had used an incorrect class code for their largest client, a company that distributed small electronics. The staffing company provided employees who worked in their client’s warehouse and performed picking, packing, shipping, receiving, and forklift duties. The staffing company used class code 3681 – TELEVISION, RADIO, TELEPHONE OR TELECOMMUNICATION DEVICE MFG. NOC for their employees working for this client. At the time the rate for this code in California was just over $2.00 and this number was used to develop the pricing for their client.

During the audit, it was determined that the correct class code for the staffing company client was 8292 – Warehouses—General Merchandise—NOC with a rate of over $11.50, a difference of about $9.00. As a result, the insurance carrier reclassified all the payroll for this client’s location and demanded payment in full. Subsequently, the staffing company was forced out of business. They couldn’t pay the $80K. They couldn’t move their workers’ compensation to another carrier without disclosing that they owed unpaid premiums to their past carrier. And they couldn’t go back to the client and adjust their pricing. And they couldn’t continue to base their pricing on a $2.00 rate and pay a rate over $11.50.

When I asked the staffing company owner why they used class code 3681 he explained that was the code they were told to use by their client. Unfortunately, that’s not the way it works – ‘it’s not how any of this works’!

In 2008, I received a call from a staffing company in Texas. The staffing company worked primarily for the energy industry with mobile welders that worked on oil pumping stations. The company was loss free, had a credit mod, and was very profitable. The owner explained that she had purchased the company from the prior owner, making no changes to their operation or the class codes the prior owner had been using.

When an employee reported an eye injury, the owner sent the employee to the clinic where he was treated and released for full duty. It was a very minor injury and the bill from the clinic was under $200.00. As required, the owner submitted the first report of injury to the insurance carrier. Upon receiving the FROI and adjuster processed the claim as a ‘report only’.

However, upon review the adjuster questioned why an office clerical (8810) employee was performing welding duties? It seems that the prior owner had misclassified their largest client and that’s why the company seemed to be so profitable.

Long story short, the carrier performed a mid-term audit and reclassified the entire account and applied the correct classification going back 3 years. Again this forced the staffing company out of business. Again, that’s not the way it works – ‘it’s not how any of this works’!

So how does it work?

In short, the staffing company is ultimately responsible for applying the correct class codes for employees placed at their client’s locations.

Every business entity is assigned a class code that reflects its operations. The rate charged for that code reflects the exposures to loss common for their operations. Unfortunately, there may not be a class code that specifically describes every type of business. In this situation classifications are assigned that most ‘closely’ reflect that businesses operations.

What’s the classification rule for staffing companies?

What most staffing companies don’t understand is in most circumstances any employee being placed at a client location must either be assigned under the governing class code for that client in that location or as the rules apply, be assigned to Office Clerical (8810). There are exceptions to this rule, but very few.

What is needed to determine the correct classification?

At a minimum, the staffing company should obtain the following information about their client and engage their insurance agent and workers’ compensation underwriter.

The insurance carrier/underwriter will assign a class based upon the information provided. However, the class code can be changed at any time additional information is obtained to avoid misclassification. Auditors are notorious for reclassifying codes which can cost your company additional premiums and skew the pricing to your client.

  • Company Legal Name
  • Federal Employee Identification Number (FEIN)
  • Company Physical Address
  • Jobsite Physical Address
  • Description of Operations including Final Service or Product

Using this information, your agent should do a little research before forwarding it to the underwriter. This might include researching the information provided on company, state workers’ compensation and rating bureau websites, business entity websites such as Manta, Facebook pages, LinkedIn, as well as insurance industry specific sites. The more information provided at the time of inquiry, the less of a chance there is for an adjustment by the insurance carrier during or at the end of the policy period.

What other information is helpful?

  • Rating Bureau ID (NCCI or State Rating Bureau)
  • Company Website
  • NAICS Classification (North American Industry Classification System)
  • SIC Classification (Standard Industrial Classification)
  • Job/Position Descriptions (Not to be confused with Work Orders or PO’s)
  • Brochures or other company literature
  • Parent Company Legal Name
  • Parent Company Federal Employee Identification Number (FEIN)
  • Parent Company Physical Address

Don’t confuse obtaining classification/class code with an approval for that classification/class code from your insurance carrier?

Just because you know the correct class code doesn’t mean your insurance carrier will approve the use of that code. The reason for this could might be because there is a reinsurance exclusion for that code. Or it might be due to a review of the client’s loss or OSHA history. Or simply because the insurance carrier excludes that class of business altogether. Your carrier has the right to exclude any classification from your policy.

Each carrier has its own procedures for endorsing class codes to a policy. Some carriers require that all new clients be approved prior to placing any temporary employee at that location. Others let the staffing company use any code not specifically excluded. Some simply request 941’s on a quarterly basis throughout the policy period and make premium adjusted based upon the codes approved at policy inception. What is important to remember is that the workers’ compensation auditor has the right to make any necessary corrections/adjustments to at the end of the policy period based upon the information at their disposal.

Therefore, it is imperative that all class codes are approved by the insurance carrier and endorsed to the policy prior to making the temporary placement. In addition to the information above, the insurance carrier should be provided the following information.

  • Job/Position Description
  • Detailed Description of the Duties/Tasks the Employee(s) will be performing at or from the Jobsite location
  • Detailed Description of any unusual tasks, airborne exposures, or any other potential hazards to which your employees (Temps) might be exposed at the jobsite location
  • Number of Employees being provided
  • Length or Job Assignment Term
  • Average hourly payroll rate for this placement
  • Gross Payroll for the Term

Once this information is submitted to the insurance carrier, it should take less than 24 hours for approval. Your insurance agent should oversee this process to make sure that they agree with the assigned code based upon the information provided.

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Rob Schild