Chapter 2 | Classification Procedures

Table of Contents

  Educational Objectives
  Classification Procedures
  Basic Classification
  Standard Exceptions
  General Inclusions
  General Exclusions
  Governing Classification
  Principal Business
  Classification Wording
  Assignment of Classifications
  Classification of Separate Legal Entities
  Business Not Described by a Manual Classification
  Assignment of Additional Basic Classification
  Additional Basic Classifications
  Classifications Limited to Separate Businesses
  Standard Exceptions
  Business Described By a Standard Exception Classification
  Construction or Erection Operations
  Contracting Classifications - Insured Subcontractors
  Contracting Classifications - Uninsured Subcontractors
  Employee Leasing, Labor Contractors and Temporary Labor Services
  Farm Operations
  Mercantile Businesses
  Repair Operations
  Recycling Operations
  Payroll Assignment - Multiple Classifications
      Miscellaneous Employees
      Interchange of Labor
      Clarifying the Difference Between a Miscellaneous Employee and Interchange of Labor
      Changes or Corrections in Classifications
      Example of Governing Classification
      Example of Miscellaneous Employee
      Example of Single Employee’s Payroll Assigned to Highest Rated Class

Educational Objectives
Upon completion of this section, you should be able to:

1. (a) Define and explain the use of: Standard Exceptions, General Inclusions, General Exclusions; Governing Class.
    (b) Clarify those situations when the above categories do not apply.

Define the following standard Exceptions: clerical telecommuting employees; drafting employees; telecommuter drafting employees; drivers, chauffeurs and their helpers; salespersons, collectors or messengers; and automobile salespersons.

3. Interpret the meaning and use of the captions, notes and words and phrases used in the manual classification phraseologies.

4. Understand the procedures for classifying separate legal entities; businesses not described by a manual classification; additional basic classification; classifications limited to separate businesses; Standard Exceptions and General Exclusion Operations; a business described by a Standard Exception Classification; construction or erection operations; mercantile businesses; and farm operations.

5. Define and explain the classification procedures for Miscellaneous Employees and those employees governed by the Interchange of Labor rule.

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CLASSIFICATION PROCEDURES
The rules for the classification procedure of the National Council on Compensation Basic Manual are found under Rule 1. The other state manuals also have sections devoted to classification procedures. The object of the classification procedure is to assign the one basic classification which best describes the business of the employer within a state, subject to certain exceptions discussed later in this chapter. The classifications in the manual are listed in alphabetical order. It should be pointed out that all notes following a classification are part of that classification. When state exceptions are known to exist they are referenced by footnotes to the chapter notes at the end of the chapter.

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BASIC CLASSIFICATION
There are approximately 600 classifications in the Manual. All of these classifications are basic classifications other than those referred to as the standard exception classifications. Each basic classification describes a particular business of an employer, such as:

Business

Manufacture of a Product
A Process
Construction or Erection
A General Type or Character of Business
A Service

Classification

Clothing Manufacturing
Electroplating
Carpentry
Hardware Store
Barber Shop

The basic classification is often referred to as the governing classification although that term is relevant only when additional basic classifications are permitted.

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STANDARD EXCEPTIONS
The payroll for those operations referred to as standard exceptions is separated from that contained in the basic classification unless the phraseology of the basic classification specifically includes these employees. The occupations that are known as standard exceptions are those which are common to many businesses.

The following are the standard exceptions described in the Basic Manual:

  • Clerical Office Employees
  • Clerical Telecommuter Employees
  • Drafting Employees
  • Telecommuting Drafting Employees
  • Drivers, Chauffeurs, Messengers, and Their Helpers NOC–Commercial
  • Salespersons or Collectors - Outside
  • Automobile Salespersons

Before examining the standard exceptions classifications, it may be helpful to review a sampling of those classification phraseologies that would include employees who might otherwise be included in one of the Standard Exception classifications:

Painting - Shop Only & drivers - 9501

Laundry NOC & route supervisors, drivers - 2585

When the terms "all employees" or all operations" are used in a classification wording, the phrases do not include the Standard Exceptions. The following examples illustrate this:

Packing House - All Operations - 2089

Clerical office employees, salespersons and drivers will be separately rated. They will not be included in this class.

Religious Organization:

Professional Employees & Clerical - 8868
All other employees - 9101

Class 8868 includes Clerical Employees because their inclusion is specifically provided for in the Basic Manual classification wording.

Class 9101 does not include Drivers and Salespersons because they are not specifically included. The general phrase "all other employees" does not include Standard Exceptions.

The following are the Standard Exceptions as described in the Basic Manual:

Clerical Office Employees - Code 8810
Clerical Office Employees - Code 8810 - are employees engaged exclusively in bookkeeping, in record-keeping, in correspondence, or in other office work where books and other records are kept or correspondence is conducted. This classification applies only to employees who work in areas physically separated from other operations by structural partitions and in which work of clerical office employees as defined in this rule is performed exclusively. If such an employee has any other duty, the total payroll of that employee shall be assigned to the highest rated classification of operations to which the employee is exposed.

Clerical Office Employees - Code 8810 - not specifically included in descriptions of other classes assigned to the policy, and not included by other special rules, may qualify for inclusion in standard exception code 8810 provided (1) the definition of clerical office duties and (2) the definition of clerical office are both met.

1) Clerical Office Duties
The duties of a clerical office employee include creation or maintenance of financial or other employer records, handling correspondence, computer composition, technical drafting, and telephone duties, including sales by phone. The clerical office classification continues to apply to a qualified clerical office employee who performs a duty outside of a qualified office area when that duty does not involve direct supervision or physical labor and is directly related to that employee’s duties in the office. These duties do not exclude the depositing of funds at the bank, purchase of office supplies, and pickup or delivery of mail provided they are incidental and directly related to that employee’s duties in the office. However, for purposes of this rule, the definition of clerical duties excludes outside sales or outside representatives; any work exposed to the operative hazards of the business; and any work, such as a stock or tally clerk, which is necessary, incidental, or related to any operations of the business other than a clerical office.

It is not unusual for an employee to have clerical duties but be exposed to an operating hazard. For instance, a clerk checking a manifest as packages are being loaded on a truck would not be considered a clerical employee for two reasons: 1) the area is not physically separate, and 2) the clerk is exposed to the loading hazard.

2) Clerical Office
A clerical office is a work area separated and distinguishable from all other work areas and hazards of the employer by floors, walls, partitions, counters, or other physical barriers. A clerical office excludes work or service areas where inventory is located, products are displayed for sale, or to which the purchaser customarily brings the product from another area for payment.

Clerical Telecommuter Employees - Code 8871
The duties of a clerical telecommuter employee are the same as a clerical employee with the exception that the clerical telecommuter works in a residence office more than 50% of the time.

A Residence Office is defined as a clerical work area located within the dwelling of the clerical employee. For the purposes of this code, the dwelling of the clerical employee must be separate and distinct from the location of the employer.

Drafting Employees - Code 8810
Drafting Employees are defined as clerical office employees who are engaged exclusively in drafting and confined to office work as described in the rule for clerical office employees (see above). If any drafting person is exposed to any operative hazard of the business, their entire payroll shall be assigned to the highest rated classification of work to which there is exposure.

Telecommuting Drafting Employees - Code 8871
Telecommuting drafting employees are employees engaged exclusively in drafting and confined to a residence office as described above.

Drivers, Chauffeurs, Messengers, and Their Helpers NOC–Commercial - Code 7380
Drivers, Chauffeurs, Messengers, and Their Helpers are defined as those employees engaged in such duties on or in connection with a vehicle. This classification also includes garage employees and employees using bicycles in their operations.

Example 1:
An employee was hired by a delicatessen as a chauffeur. This required the employee to spend only about 25% of the time making deliveries. The remainder of the employee’s time (75%) was spent in the store. The entire amount of this employee’s payroll would be assigned to the higher rated of the two classifications, provided a payroll breakdown is not available.

Example 2:
An employee who is normally a clerk spends 75% of the time at clerical duties and 25% of the time transporting executives from place to place in the company station wagon or making/picking up deliveries at/from various locations. In this case, the clerk’s payroll would be assigned to the Drivers classification. As the rule states, an employee’s payroll cannot be split between the clerical classification and another classification, even if the insured has a payroll breakdown.

Salespersons or Collectors - Outside - Code 8742
Salespersons or Collectors - Outside are defined as those employees engaged in such duties away from the premises of the employer. It does not apply to any such employee whose duties include the delivery of any merchandise handled, treated or sold. Such employees whose duties include delivery, even though they may also collect or solicit, shall be rated:

  • As Drivers if they use motor vehicles or bicycles.
  • Under the governing classification if they use public means of transportation or walk.

The statement of payroll shall include the entire payroll of all outside salespersons, collectors or messengers, including those whose duties take them outside the home state of the insured.

Although the definition seems clear, some amplification may be appropriate with regard to delivery by outside salespersons. Any salesperson whose duties include occasional courtesy delivery of a nominal quantity of the merchandise sold shall be classified as a salesperson. This is a National Council interpretation.

Insureds sometimes take the position that commission salespersons are not reported for Social Security or Federal Withholding Tax and, therefore, are not employees. These factors do not always govern. It is suggested that the rulings for the state or states involved be reviewed.

The following is a guide to the assignment of a salesperson’s payroll to a state of operation:

  • Salespersons who are paid and controlled from the state of hire. Assign payroll to the state of hire. This would apply to salespersons who are operating out of the headquarters state.
  • Salespersons who are permanently transferred from their state of hire. Assign payroll to the state of residence. This would apply to salespersons who operate out of their homes rather than from a headquarters.

Automobile Salespersons - Code 8748
Employees engaged in such duties on and away from the employer’s premises are subject to the rules and interpretations of code 8742, but are assigned to code 8748.

The preceding classifications are the basic operations referred to as STANDARD EXCEPTIONS. It is important to remember that this rule, also indicates that Standard Exceptions are subject to divisions of payroll in connection with all classifications, unless the operation described is specifically included in the classification phraseology. Particular attention should be given to those classification phraseologies which include the term "all".

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GENERAL INCLUSIONS
These are operations that may, at first glance, appear to be separate and distinct businesses on their own. Unless the operations listed are specifically excluded in the classification phraseology, they are all included within the scope of all classifications, other than the standard exception classifications. The following operations are general inclusions:

a. Cafeterias and restaurants for the insured’s employees. Such operations shall be assigned to a separate classification if conducted in connection with construction, erection, lumbering or mining operations.

This includes employees of cafeterias or restaurants which are incidental to the classification. This does not apply to cafeterias and restaurants in connection with construction, erection, lumbering or mining operations. Such cafeterias or restaurants would be separately rated using the appropriate restaurant classification.

b. Manufacture of containers such as bags, barrels, bottles, boxes, cans, cartons or packing cases by the employer for use in the operations insured by the policy.

This is included in the Governing Classification unless conducted as a separate and distinct enterprise having no relation to the operations described by any other classification applicable to the risk.

c. Hospitals or medical facilities operated by the insured for its employees.

The payroll of employees of plant hospitals and dispensaries is included in the Governing Classification describing the risk. This includes payroll of doctors and nurses or first-aid attendants.

d. Maintenance or repair of the insured’s buildings or equipment by the insured’s employees.

Maintenance or ordinary repair includes items such as painting or cleaning the interior or exterior of buildings and replacing or repairing worn or deteriorated sections including walls, roofs, interior partitions, etc. where no new construction or structural alteration is involved. It also includes repairs to machinery and installation of new machinery in a operating plant.

For example, an insured operating a textile plant has employees install new machinery rather than repair the old machinery. This is a general inclusion and the payroll of the employees installing the new machinery is assigned to the appropriate textile manufacturing classification.

In another example, the same insured buys a vacant plant with all of the existing machinery. The machinery is in need of repair. The insured employs a crew to repair the machinery. Under these circumstances the payroll of the crew will be assigned to the millwright classification up until the time the plant is put in operation. The footnote under the millwright class would not be applicable prior to the time the plant began operating. After the plant began operating, the payroll of the machinery repair crew would be assigned to the appropriate textile manufacturing classification. The purpose of this last example has been to point out that a General Inclusion shall be subject to a division of payroll if conducted at a non-operating plant as a separate and distinct enterprise.

e. Printing or lithographing by the insured on its own products.

The payroll of printers and lithographers when incidental to another operation shall be included in the governing classification.

An operation known as a General Inclusion can be separately classified only when:

1) Such operation constitutes a separate and distinct business of the insured as provided in Rule 1.D of the Basic Manual, or

2) If it is specifically excluded by the classification wording, or

3) The principal business is described by a standard exception classification.

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GENERAL EXCLUSIONS
All classifications, including standard exceptions, exclude the following operations referred to as general exclusions unless specifically included by the language of the Manual classification. Operations described by general exclusions shall require division of payroll notwithstanding that the classification wording may include the term all as in such phrases as "all employees," "all operations," etc.:

a. Aviation Operations - all members of the flying crew and ground crews. This means that anyone who pilots or is a member of the crew must be separately classified.

b. All new construction or alteration work done by an insured’s employees - if performed by contractors and all new construction or alteration work whether done by insured’s employees or by contractors.

Although this exclusion is clear, the following is provided to help understand its intent.

The following types of work, whether done by the insured’s temporary or regular employees or by contractors, will be separately classified according to the type of work:

1. New Construction work includes the erection of new buildings or additions to existing buildings.

2. Alterations of existing buildings would include structural changes, erection, or removal of interior partitions, store fronts and similar operations.

3. Extraordinary repairs includes the installation and replacement of air conditioning and heating systems, plumbing or electrical systems.

4. Premises not previously occupied or operated by the insured, the installation of machinery, equipment or fixtures.

5. Painting done in connection with any of the forgoing items.

c. Stevedoring and tallying and/or checking clerks incidental to stevedoring, whether done by the insured’s employees or by contractors.

Talliers or checking clerks connected with a warehousing or freight handling enterprise would be included in those classifications.

d. Sawmill operations. Sawmill operations are defined as the sawing of logs into lumber by the use of circular carriage or band carriage saws, including operations incidental to the sawmill.

Sawmills are listed as a General Exclusion but logging operations are separately rated. It is not unusual for paper mills, furniture manufactures and sawmills to conduct their own logging operations.

e. Employer operated day care centers.

Exclusions are, of course, the exact opposite of the inclusions mentioned previously. Unless the "exclusions" are specifically mentioned in the language of a Manual classification, the payroll of the "exclusions" must be segregated and classified separately under an appropriate classification for the type of operations which is involved.

Note that general exclusions are to be segregated and separately classified, even though a Manual classification may include the word all as in "all employees," "all operations," etc.

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GOVERNING CLASSIFICATION
The governing classification is that classification at a specific job or location, other than a standard exception classification, which produces the largest amount of payroll. In arriving at the Governing Class, an auditor must assign to the classifications applicable to a risk the payrolls directly assignable to each classification. When this has been done, it is readily apparent which classification has the largest amount of payroll. It is necessary to determine the governing classification for the assignment of miscellaneous employees. In instances where no basic classification is applicable, the governing classification is the standard exception classification that produces the greatest amount of payroll.

It has been further ruled by NCCI that the payroll of miscellaneous employees on construction jobs shall be assigned to the governing classification as determined by the job within the policy period.

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PRINCIPAL BUSINESS
The business with the greatest amount of payroll excluding the standard exceptions and general exclusions operations is known as the principal business.

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CLASSIFICATION WORDING
Major emphasis was given to using clearer and more easily understood wording when the NCCI revised the Basic Manual. Some important points to remember in this area are:

1) Captions - precede related classifications and are part of the classification wording.

2) Notes - wording following the classification are part of the classification and control its use.

The following example from the NCCI Basic Manual illustrates the use of captions and notes in classification phraseology:

STORE:
    Fruit or Vegetable - retail
        No handling of fresh meats.

Store which is the caption, and No handling of fresh meats, which is the note, are both part of the classification wording.

Words and Phrases
Certain words, phrases and abbreviations will appear frequently in the Basic Manual. The following is a clarification of those items as they appear:

a. All Employees, All other Employees, All Operations, or All Operations to Completion:

If a classification includes any of these phrases, no other classification shall be assigned to that risk unless specifically directed by classification wording, even though some operations or employees are at a separate location in the same state.

Exceptions:
(1) Operations described by 8227 - Construction/Erection Permanent Yard and 5606 - Contractors Executive Supervisor.

(2) Classifications describing a standard exception or general exclusion operation shall apply.

(3) Separate and distinct businesses meeting the conditions of Manual Rule 1-D-3.C shall be separately classified.

Examples:
(1) Code 9186 - Circus, carnival, or amusement device operator - Traveling - All Employees & drivers.

All employees of such a risk shall be assigned to this classification. Since standard exceptions are separately rated, drivers must be specifically mentioned to be included in 9186. All other standard exceptions must be separately rated.

(2) Code 8385 - Bus Company - Garage employees and Code 7382 - Bus Company - All Other Employees & drivers

All employees, other than garage employees, shall be assigned to Code 7382 in such a risk.

(3) Code 5402 - Greenhouse Erection - All Operations

All work for erection of a greenhouse shall be assigned to Code 5402.

(4) Code 6005 - Jetty or Breakwater Construction - All Operations to Completion & drivers

All work for the construction of a jetty from beginning to end of the project shall be assigned to Code 6005.

These examples are subject to Exceptions (1), (2) and (3) above.

b. Clerical means clerical office employees and drafting employees as defined in the Manual.

c. Drivers means drivers, chauffeurs, messengers, and their helpers as defined in the Manual.

d. Includes or &:

If a classification contains "Includes" or "&," the operations or employees which are so designated shall not be assigned to a separate classification even though such operations or employees are described by another classification or are at a separate location.

Example:
Code 5138 - Boiler or Steam Pipe insulating & drivers - Includes shop.

This classification also applies to shop operations and drivers.

Note: If an insured’s operations are assigned to more than one basic classification, an employee’s payroll may be allocated among codes assigned to each operation. This procedure is provided under the interchange of labor rule, 2-G.

e. Local Manger is an employee in direct charge of the operative procedure in a yard and is correctly assigned to the governing classification even if the employee has a title of manager.

f. No or Not:

A classification which includes a restrictive phrase beginning with "no" or "not" shall not apply to any risk which conducts any operation described in the restrictive phrase.

Exceptions:
(1) For mercantile businesses, such as dealers or stores, or for mining businesses, this rule applies to each location.

(2) For construction operations, this rule applies to each job or location.

Example:
Code 8106 - Steel Merchant - not applicable to junk dealers or iron or steel scrap dealers. This classification shall not be assigned to a steel merchant which also deals in junk. That risk shall be assigned to Code 8263 - Junk Dealers.

g. NOC means not otherwise classified. A classification designated "NOC" shall apply only if no other classification more specifically describes the insured’s business.

h. Or: "Or" also means "and."

Example:
Code 2586 - Cleaning or dyeing also means cleaning and dyeing.

i. Salespersons means salespersons, collectors and messengers as defined in the Manual.

j. Story in Height is defined as being fifteen feet in height.

k. To Be Separately Rated:

If a classification requires operations or employees "to be separately rated," all such operations or employees shall be separately classified when the conditions of Rule 1-D-3 in the Basic Manual exist.

Example:
Code 4131 - Mirror Mfg. of glass, frames, backs, or handles to be separately rated.

If a risk which makes mirrors, the work of producing glass, or fabricating frames, backs or handles shall be separately rated.

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ASSIGNMENT OF CLASSIFICATIONS
As stated in the Basic Manual, "The object of the classification procedure is to assign the one basic classification that best describes the business of the employer within a state. Subject to certain exceptions described in this rule, each classification includes all the various types of labor found in a business. It is the business that is classified, not the individual employments, occupations or operations within a business."

Each basic classification contemplates operations that are necessary in the conduct of the insured’s business. An example would be a manufacturer that employs janitors, warehouse employees or maintenance employees performing minor carpentry repair work. These various types of labor have specific classifications shown in the Basic Manual. Should we separately classify such employees? No, because Rule 1-D clearly states we are classifying the business, not the individual employments. These and other activities which are commonly found in many businesses are contemplated within the scope of the basic classification and would not be separately rated.

If a risk consists of a single operation or a number of separate operations which normally prevail in the business described by a single manual classification, that single classification which most accurately describes the entire enterprise shall be applied. Division of payroll shall be made with respect to standard exceptions and general exclusions. No division of payroll shall be permitted with respect to any other operation, even though such operation may be specifically described by some other classification or may be conducted at a separate location within the state.

In applying this rule, the auditor should not confuse "Operations frequently conducted in connection with a business" with "Operations which normally prevail in the business." For example, assembled millwork manufacturing operations do not normally prevail in connection with the operation of a lumberyard, but lumberyards frequently do have an assembled millwork manufacturing department which is conducted as a separate enterprise. The owner usually recognizes the two distinct enterprises in the wording used to advertise the business, which generally would read "Building Materials and Millwork." In effect, the insured is operating more than one business.

Other than standard exceptions, general exclusions, mercantile business, construction or erection operations, repair operations and farm risks, it makes no difference how many separate operations or locations are involved as long as the total operation is described by a single manual classification. It is this one classification which applies to the total operation.

Additional classifications shall be assigned as follows:

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CLASSIFICATION OF SEPARATE LEGAL ENTITIES
Each separate legal entity insured under a policy shall be assigned to the basic classification that describes its entire business within a state. This assignment procedure applies even if the business is conducted at more than one location. For example:

Joe Shady is the sole owner of the Shady Lanes Bowling Alley and for three adjacent retail premises he owns 66 2/3% interest in each. The annual payroll for each business is as follows:

Shady Lanes Bowling Alley

Joe’s Shady Pro Shop

Made In The Shade Cocktail Lounge

Shady Joe’s Billiards

 

$55,000

35,000

30,000

25,000

In this case, although each of these businesses can be combined for insurance coverage on one policy, they must be separately classified by legal entity even though the related businesses might be considered as incidental operations to the bowling alley classification.

Several important notes should be made regarding the above rule:

1. Many of the independent bureaus treat the concept differently. Briefly, they would combine all risks with common ownership for the purpose of establishing the basic classification.

2. There are special classification procedures applicable to executive officers of multiple corporate enterprises. These will be discussed later when we deal specifically with the special conditions applicable to executive officers.

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BUSINESS NOT DESCRIBED BY A MANUAL CLASSIFICATION
It is obvious that it is practically impossible to develop a manual classification for every different type of business that exists. If there is no classification which describes the business, the classification which most closely describes the business shall be assigned. The classification code number that describes the business should be followed by the wording that describes the business.

For example:
An insured manufactures lamp shades out of fabric. There is no classification phraseology that includes lamp shade manufacturing. The classification that would be assigned by analogy is 2501 - Furnishing Goods Mfg. The policy should list the classification as; Lamp Shade Mfg. - from textiles - 2501.

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ASSIGNMENT OF ADDITIONAL BASIC CLASSIFICATION
Rule 1-D.3 describes conditions under which more than one basic classification may be assigned to an individual insured. An additional basic classification may be added if: the classification wording requires specific operations or employees to be separately rated; the insured engages in construction, erection, farm, repair or mercantile operations; or the employer operates more than one business within a state. An insured is operating more than one business in a state if portions of the insured’s total business operations are separate undertakings or enterprises. To qualify as a separate undertaking or enterprise, the portion of the insured’s business to be separately rated must be:

1. An operation that is ordinarily not within the scope of the insured’s principal business.

2. An operation that could still exist as a separate business if the insured’s other operations in a state ceased to exist.

Further, an additional basic classification can be assigned if all three of the following conditions are met:

1. Separate financial records are maintained for each business,

2. Each business is physically separated by structural partitions.

3. The assignment of the separate classification is not prohibited by wording of that classification or any other classification assigned to the policy.

If all of the above conditions do not exist:

  • All employees shall be assigned to the classification applicable to the principal business if the classification for the principal business carries a rate which is the same or higher than that for the classification of the secondary business.
  • The secondary business shall be assigned to the classification which describes that business if such classification carries a rate higher than that applicable to the principal business.

The following examples illustrate proper classification assignment when the required conditions are not met:

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ADDITIONAL BASIC CLASSIFICATIONS
For the two examples below, assume that there are two separate businesses being conducted under the same roof with no physical separation:

Hunting Bow Manufacturing

Rate: $3.00

Music Stand Manufacturing  

Rate: $2.00

Example 1 - Assume that Hunting Bow Manufacturing is the principal business:

All employees would be assigned to the Hunting Bow Manufacturing classification; it has the higher rate.

Example 2 - Assume that Music Stand Manufacturing is the principal business:

Two classifications can be used since the secondary business carries a higher rate.

A risk, such as in example 2, may have employees that work in connection with each of the several classifications. Payroll assignment for such employees is subject to National Council Manual Rule 1-E.1 and will be discussed later.

Some states vary in the procedure for the assignment of basic classifications. Please be aware that the rules mentioned above are for NCCI states. (In New York, for example, Rule 1-C.1 does not apply. All entities under common majority ownership are treated as a unit for classification purposes, even if covered by separate policies.)

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CLASSIFICATIONS LIMITED TO SEPARATE BUSINESSES
In the discussion of general inclusions earlier in this material, it was noted that some operations of the insured, which appeared to be separate businesses, were actually contemplated in the scope of all classifications. However, some classifications are limited to separate and distinct businesses by the phraseology used in the classification footnotes. These notes describe operations which are usually an integral part of a business described by another classification.

The Manual contains the following example:

Code 4511 - Analytical Chemist

Includes laboratory and outside employees. Shall not be assigned to a risk engaged in operations described by another classification unless the operations subject to Code 4511 are conducted as a separate and distinct business.

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STANDARD EXCEPTION AND GENERAL EXCLUSION OPERATIONS
As was mentioned in our prior analysis of these topics, the operations of the insured that fall under the standard exception and general exclusion terminologies are to be separately classified unless they are specifically included in the classification phraseology assigned to a business. Again, it is important to note that phrases such as "All Employees" or "All Operations" do not prohibit the use of standard exception and general exclusion classifications if they apply to the business being classified.

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BUSINESS DESCRIBED BY A STANDARD EXCEPTION CLASSIFICATION
If the principal business is described by a standard exception classification, the operations of all employees not included in the definition of the standard exception classification shall be assigned to the separate basic classification that most closely describes their operations, as is shown in the following example from the Basic Manual:

Example:  
The insured is a bank:  

Employees

Assignment

Clerical Office

Code 8810 - Clerical Office Employees

Maintenance and Night Watch Guards

Code 9015 - Buildings - operation by owner or lessee

Cafeteria or Restaurant

Appropriate Restaurant Classification

 

This example is further clarified in the Manual in the Classification section under Banks and Trust Companies. All employees not specifically included in the definition of clerical office employees shall be separately rated.

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CONSTRUCTION OR ERECTION OPERATIONS
Since audits of construction or erection operations are among the most complicated and time-consuming tasks an auditor must perform, it is important that this rule be understood.

The Manual notes that: "Each distinct type of construction or erection operation at a job or location shall be assigned to the classification that specifically describes such operation provided separate payroll records are maintained for each operation." It is important to note that payrolls can be assigned to each distinct type of operation only when separate payroll records are maintained for each operation. When these separate payroll records are not maintained, the payroll for any such operation will be assigned to the highest rated classification applicable to the job or the location where the operation is performed.

Lastly, the Manual points out that "any operation that is within the scope of another classification assigned to such a job or location" cannot be assigned to a separate classification. An example is a carpenter’s work in setting up or taking down forms in connection with concrete construction. As these forms are necessary to the operation being conducted, the carpenter’s work in this instance is an integral part of the concrete construction operation. As such, the carpenter’s payroll would be included in the applicable concrete construction classification.

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CONTRACTING CLASSIFICATIONS - INSURED SUBCONTRACTORS
A subcontractor who performs a single type of work on a construction project or job shall be classified on the basis of the classification describing the particular type of work involved. Additionally, all operations in conjunction with concrete construction including making and erecting forms, placing reinforcing steel and stripping forms, when done by subcontractors, is assigned to the appropriate concrete construction classification.

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CONTRACTING CLASSIFICATIONS - UNINSURED SUBCONTRACTORS
Uninsured subcontractors, covered under the principal contractor’s policy, are classified on the basis of the classifications that would apply if the work were performed by the principal’s own employees.

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EMPLOYEE LEASING, LABOR CONTRACTORS AND TEMPORARY LABOR SERVICES
Employee leasing is a staffing method in which all or part of a client company’s staff is provided by a leasing company. A common practice is for the client company to terminate all of its employees. These same employees are then hired by the leasing company and through a leasing agreement are leased back to the client company.

Both parities realize benefits in this type of arrangement. The client company no longer incurs the overhead cost of clerical positions, the space required, or the problems associate with handling employees’ benefits and payroll. Most important to many small businesses is that the quality of employee benefits can be improved at no increase in cost due to the large number of employees in the leasing company. For example, insurance benefits that could not be provided by the client company due to high cost or small size can now be provided by the leasing company.

In typical employee leasing arrangements, the labor contractor claims the present and future employees of many client companies as its own employees for certain purposes. During the term of the contract between the labor contractor and the client company the labor contractor may calculate and issue paychecks, file the required payroll tax reports, pay the payroll taxes and obtain insurance coverage for affected workers. The client companies thus remain the actual source of funds used to meet payroll expenses: the funds are simply being channeled through the labor contractor, which charges a fee for handling.

Employee leasing arrangements may cause problems in the insurance market. Some of the problems may be the understatement of payrolls, improper classifications or experience modifications, and the relaxing of safety rules by the client company. State variations in the regulations further complicate matters.

Definitions
Employee leasing means an arrangement where an entity utilizes the service of another entity to maintain all or some of its workers. The entity providing the services is known as the labor contractor and the entity receiving services is known as the client.

Law on Labor Contractors and Clients
Laws and regulations designating who is the employer of leased workers for Workers’ Compensation vary. To determine the employer of a leased worker that is required to furnish Workers’ Compensation coverage, the controlling jurisdiction’s laws and regulations must be reviewed. The majority view under a traditional common law analysis holds that the leased workers are the employees of the client entity absent contrary statutory or regulatory actions.

Coverage
The statutory obligation of the employer to retain Workers’ Compensation coverage for their leased employees is automatically insured by the Standard Policy. Endorsements attached to the policy determine whether the employer is the client or the leasing contractor.

Classification Procedures - Labor Contractor
Each client company is classified as a separate business and assigned the appropriate basic classification(s). The classification captions, notes, words, and phrases would apply to the business of the client company. Clients engaged in construction or erection would follow the rules applicable to these risks as identified in the Basic Manual.

The administrative operations of the leasing company would be audited as a separate business. Assign the appropriate classifications to the leasing company’s business and not the business of the client companies.

Premium for Leased Employees - Client as Policyholder
If the client is the employer, premium is charged on the client’s policy for employees leased to the client from each labor contractor. The client will provide a complete payroll record of the employees leased to it from the labor contractor. The premium is based on the classifications and rates which would have applied if the employees leased had been direct employees of the client and includes an established experience modification. If the client does not supply the payroll records, 100% of the full leasing arrangement cost is considered payroll. However, if the arrangement discloses a definite amount of payroll, this amount is considered payroll. If the client is not the employer, the client must furnish satisfactory evidence that the labor contractor has Workers’ Compensation insurance in force covering the employees leased from the labor contractor, otherwise a premium charge is made as detailed above. If the client does not have any employees performing the same duties as the leased employees, classify the leased employees as if they were direct employees of the client entity.

Premium for Leased Employees - Labor Contractor as Policyholder
If the labor contractor is the employer, premium is charged on the labor contractor’s policy for employees leased to each client. The labor contractor will provide a complete payroll record of the employees leased to each client. The premium is based on the classifications and rates which would have applied if the employees leased had been direct employees of the client and includes an established experience modification. If the labor contractor does not supply the payroll records, 100% of the full leasing arrangement cost is considered payroll. However, if the arrangement discloses a definite amount of payroll, this amount is considered payroll. If the labor contractor is not the employer, the labor contractor must furnish satisfactory evidence that the client has Workers’ Compensation insurance in force covering the employees leased from the labor contractor, otherwise a premium charge is made as detailed above, subject to state exceptions.

Temporary Employment Agencies
Unlike employee leasing, temporary help companies recruit and train their own employees and then assign them to specific customers for limited periods. Temporary employees fill in during vacations and illnesses, meet temporary skill shortages, handle seasonal or other special workloads and help staff with a variety of special projects. Their wages, benefits, payroll deductions and insurance are, of course, all taken care of by the temporary help company.

Temporary help thus not only has a different business purpose from employee leasing, but operates in a fundamentally different way. Unlike leasing, temporary help involves furnishing employees of one firm as a temporary supplement to the work force of other companies. It does not involve staffing other companies’ full-time operations or assigning employees on a permanent basis.

The temporary labor business consists largely of furnishing employees to others, frequently to solve short-term staffing problems. The temporary labor service usually contracts to fill a job, but not to supply a particular person to fill that job. In the temporary labor business, the workers are usually hired initially by the temporary labor company and sent out regularly on short-term assignments to various clients of the temporary labor business. The most common examples of temporary labor contractors are Kelly Girls and Manpower type operations. Most temporary labor workers work for a relatively short duration of time in various successive locations for various clients of the temporary labor business. In short, a temporary labor contractor hires its own employees and assigns them to clients for a finite time period to support or supplement the client’s work force in special work situations such as employee absences, temporary skill shortages and seasonal workloads.

Classification Procedures - Temporary Employment Agency
Classify workers assigned to clients the same as direct employees of the client.

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FARM OPERATIONS
The assignment of classifications for farm operations is explained in Rule 1-D-3.e - Classifications: Farm in the Basic Manual. A division of payroll may be allowed for each separate and distinct type of commercial farm operation as described by the manual classifications, provided separate payroll records are maintained. If the payroll records do not reflect an accurate segregation, the entire payroll must be segregated on the basis of proportionate acreage. Each classification includes all employees except inside domestics.

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MERCANTILE BUSINESSES
For mercantile operations such as stores or dealers, the classification is determined separately for each location. This exception is especially pertinent for a risk that operates numerous store locations in a state. Each store location will be classified independent of any of the other locations.

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REPAIR OPERATIONS
Shop operations that involve the repair of a product for which there is no repair classification are to be assigned to the classification that applies to the manufacture of the product unless the contemplated repair work is specifically referred to by another classification phraseology, footnote, or definition.

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RECYCLING OPERATIONS
Insureds who collect, sort, and handle recyclable materials for resale to others are assigned to the appropriate store or dealer classification. However, if the recycling operations are part of a manufacturing process, assign the appropriate manufacturing classification unless such work is specifically referred to by another clarification phraseology, footnote, or definition in the manual.

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PAYROLL ASSIGNMENT - MULTIPLE CLASSIFICATIONS
MISCELLANEOUS EMPLOYEES
The existence of miscellaneous employees is dependent on an insured having more than one business operation and, consequently, more than one basic Workers’ Compensation classification. If only one business operation exists, then the auditor need not be concerned about miscellaneous employees. Assuming that more than one business operation exists, the auditor must then determine if there are any miscellaneous employees and, if so, to which classification to assign their payrolls.

"Miscellaneous Employees" are defined in Rule 1-E.1 of the Basic Manual as "... those who perform duties conducted in common for separate operations that are subject to more than one basic classification." This includes general superintendents, maintenance employees, power plant employees, elevator operators, shipping or receiving clerks, and yard workers. Miscellaneous employees are assigned to the governing classification (the classification with the most payroll, other than a standard exception classification). Miscellaneous employees are not assigned to the highest rated classification unless it is also the governing classification.

Example:
Four story factory - two floors general job machine shop and two floors - plastic goods manufacturing:

Code 3632 - Machine Shop NOC applies to machine shop and Code 4452 - Plastic Mfg. applies to plastic goods manufacturing.

The elevator operators, porters and cleaners serving all four floors shall be assigned to the governing classification.

It would be beneficial to review the sections on "Standard Exception and General Exclusion Operations" and the section on "Businesses Described by a Standard Exception Classification" discussed earlier in this chapter when classifying the payroll of Miscellaneous Employees.

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INTERCHANGE OF LABOR
From time to time, auditors will run across an employee who interchanges between operations subject to more than one basic classification. This will occur when an employee, who is not a miscellaneous employee, performs duties directly related to more than one basic classification.

The assignment of the remuneration for employees who interchange between classifications may be divided between two or more basic classifications provided that:

  1. The classifications may be properly assigned to the employer according to the rules of the classification system, and
  2. The employer maintains proper payroll records which disclose the actual payroll by classification, by employee. Records must indicate the actual time spent working within each job classification and an average hourly wage comparable to the wage rates in the employer’s industry. An estimate or percentage allocation of remuneration is not acceptable. If proper records are not maintained, the entire payroll of an individual employee is correctly assigned to the classification that carries the highest rate representing any part of their work.

The Interchange of Labor rule does not apply for code 8810 - Clerical Office Employees, 8871 - Clerical Telecommuter or Telecommuting Drafting Employees, code 8742 - Salespersons, and 8748 - Automobile Salespersons.

Example 1:
A man was hired by a delicatessen as a chauffeur. This required him to spend only about 25% of his time making deliveries. The remainder of his time (75%) was spent in the store. The entire amount of this man’s payroll would be assigned to the higher rated of the two classes if the payrolls are not properly segregated.

Example 2:
An employee who is normally a clerk spends 75% of the time at clerical duties and 25% of the time in transporting executives from place to place in the company station wagon or taking mail to the post office. In this case, the clerk’s payroll would be assigned to the Drivers classification. The fact that the majority of the employee’s time was spent as a clerk would not be the determining factor as to the classification to be used.

The NCCI Basic Manual addresses the allocation of payroll for holiday, vacation, sick pay, and overtime as follows:

"When a division of payroll exists for an individual employee, payroll for holiday, vacation, sick pay, overtime and all other forms of remuneration not directly attributable to a specific classification code shall be allocated to the classification code with the greatest amount of payroll applicable to the individual employee. If no one classification code applicable to the employee has the greatest amount of payroll, the payroll for holiday, vacation, sick pay, overtime and all other forms of remuneration not directly attributable to a specific classification code shall be allocated to the highest rated classification code applicable to the employee."

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CLARIFYING THE DIFFERENCE BETWEEN A MISCELLANEOUS EMPLOYEE
AND INTERCHANGE OF LABOR
The key to distinguishing whether an employee is a "miscellaneous employee" is to review the duties and responsibilities. If the work being performed by an employee benefits more than one operation (such as cleanup, maintenance, superintendents, etc.), they are to be considered a miscellaneous employee. When an employee’s duties at any one time are related to one classification and then that employee spends part of his time performing duties related to another classification, you will then consider the interchange of labor rule.

Example:
An insured is classified under code 2731 - Planing or Molding Mill. This class has phraseology which assigns yard operations, drivers and driver helpers to code 8232.

Employees working only in the mill, and having no other duties, are assigned to code 2731. Yard employees, drivers and their helpers, having no other duties, are assigned to code 8232.

Employees who spend part of their time in the mill and part of their time either in the yard, or driving a truck, can have their remuneration divided between code 2731 and code 8232, provided separate payroll records are maintained. (Interchange of Labor rule applies.)

The plant general superintendent, the crew that cleans the mill and yard, and the night watchman guarding the whole operation are "Miscellaneous Employees" and are assigned to the governing classification, the Basic classification with the most payroll. (Miscellaneous Employee rule applies.)

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CHANGES OR CORRECTIONS IN CLASSIFICATIONS
For many years, auditors, underwriters and producers have wrestled with the question: when is it permissible to change a classification on an existing policy? The question was answered by the addition of part F to Rule 1, "Classifications" in the NCCI Basic Manual, effective July 1, 2001. The following will explain the limitations imposed by the Rule 1-F Following is the text of the addition as it appears in the NCCI Basic Manual:

G. CHANGES OR CORRECTIONS IN CLASSIFICATIONS

1. Changes in Classifications
Changes in classifications due to changes in insured’s operations will be applied pro rata as of the date of change in insured’s operations.

2. Corrections in Classifications
Corrections in classifications that result in a decrease in premium, whether determined during the life of the policy or upon audit, shall be applied retroactive to the inception of the policy.

Corrections in classifications that result in an increase in premium shall be applied as follows:

The effective date of a change for purposes of the time periods in a., b. and c. below is the date a carrier determines that it is necessary to effect a classification(s) change.

a. During the first 120 days of the coverage term, retroactively to the inception of the coverage.

b. After the first 120 days of the coverage term, but before the final 90 days, pro rata as of the date the company discovers the cause for such change.

c. During the last 90 days of the coverage, corrections in classifications will not be effected except upon a renewal policy, if any.

3. Misrepresentations or Omissions
Notwithstanding anything above to the contrary, any correction in classifications arising from discovery of a misrepresentation or omission by the insured, its agent, employees, officers or directors, shall be applied pro rata from the date upon which it would have applied had such misrepresentation or omission not been made.

4. Construction or Erection, Labor Contractors, and Employee Leasing
The manual rules applicable to construction or erection risks and to temporary labor contractors or employee leasing firms will continue to apply.

5. Reallocation of Payroll
The reallocation of payroll among classifications on the policy does not constitute a change or correction in classification(s).

Note that there are many state exceptions to this rule.

Part One, Changes in Classifications, applies when an insured has a change in the operations that are insured by the policy. The actual date the change in operations occurred will be the date that the classification change will take effect.

Part Two, Corrections in Classifications, contains four scenarios: one where the correction results in lower premium, three where the correction results in higher premium.

In the first scenario, if the correction will result in a lower premium, the classification change is to be applied back to the policy inception. This gives the insured the benefit of the doubt - the insured will not be penalized for the error of the insurer.

For the next three scenarios, the assumption is that the correction in classifications will increase the policyholder’s premium. If, during the first 120 days of the policy term, the carrier discovers the error, the correct classification may be applied back to the policy inception. If, however, the error is discovered after the first 120 days, the correction may be applied starting with the date it is discovered, provided it is not within the final 90 days of the period. When the error is discovered during the final 90 days of the policy period (or later), the current policy may not be corrected, only the renewal may be.

It is this third scenario that has a major impact upon premium audit. If a preliminary audit is performed during the first 120 days, the policy may be corrected for the full term. If a preliminary audit is delayed until after the first 120 days, the correction may be made only from the date of discovery. The real problem arises when no preliminary audit is performed, and the final audit is delayed to the point that more than 120 days have lapsed in the renewal policy’s term. As stated earlier, no change may be made to the expired policy that is being audited. Additionally, since more than 120 days have lapsed in the term of the renewal policy, you are again restricted in that the correction to the renewal policy may be applied only from the date of discovery. This serves to emphasize the importance of both a timely preliminary audit and a timely final audit.

Part Three A Exceptions: deals with misrepresentations and omissions in classification. In the case of a misrepresentation or omission on behalf of the insured, a correction may be made back to the date that should have applied if there were no misrepresentation or omission. Of course, the real difficulty here would be proving that the insured or their representative was at fault.

Part Three B simply states that the normal classification procedures shall apply to construction, erection, labor contractors and employee leasing risks. The nature of these types of risks would make it difficult to apply the restrictions of Rule IV.G. Restricting changes for these types of risks would be unfair to both the insured and the insurer.

Part Four allows for a reallocation of payroll among the classifications that are already on the policy. This means that if a policy contains a shop classification and a clerical office classification, with payrolls too heavily weighted into the clerical classification, a final audit which redistributes the payrolls properly is not in violation of this rule.

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EXAMPLE OF GOVERNING CLASSIFICATION
An insured has two stores: one sells jewelry and the other sells hardware. Besides direct store employees, there is a janitor (payroll is $5,000) who cleans both. This janitor is not a direct employee of either store, but rather he works in both stores performing the same job at each. Thus, he is a miscellaneous employee and the janitor’s payroll would be assigned to the governing class.

Same insured as above. The payroll for the risk is as follows:

Jewelry Store $25,000

Hardware Store $20,000

The payroll for the jewelry store is the governing classification because it has the largest amount of payroll. Thus, the payroll for the janitor (the miscellaneous employee) goes to this classification. Payrolls for the audit would be as follows:

Jewelry Store $30,000

Hardware Store $20,000

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EXAMPLE OF MISCELLANEOUS EMPLOYEE
An insured, who is a contractor, has two business locations. At one he sells Contractor’s Equipment. The other is a Contractor’s Permanent Yard where he stores and maintains his own contractor’s equipment and supplies.

Payroll is as follows:

Contractor’s Machinery Dealers, code 8107 - $25,000
Contractor’s Permanent Yard, code 8227 - $10,000

The insured has an employee, Hiram A. Beef, who acts as a night watchman. Mr. Beef divides his time between both of our insured’s places of business, performing the same job of patrolling and inspection of doors, windows and gates at each one.

Mr. Beef is a Miscellaneous Employee and his payroll is assigned to the governing class which, in this case is Contractor’s Machinery Dealers, since that class has the highest amount of payroll.

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EXAMPLE OF SINGLE EMPLOYEE’S PAYROLL ASSIGNED TO HIGHEST RATED CLASS
The A.B.C. Corporation manufactures shoes and hats in the same plant. There is no physical separation between departments and there is not interchange of labor between the two operations except for Pete Smith and Abe Cohen who interchange between hat and shoe manufacturing. The shoe manufacturing class is the lowest rated class but is the governing class.

Class
Payroll
CodeRate
Hat Mfg. $100,000 2538 1.85
Shoe Mfg. 150,000 2660 1.39

The payroll of Smith and Cohen must be assigned to the highest rated classification. In this case, Hat Manufacturing, code 2538, provided the insured does not have a payroll breakdown.

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